31st December 2012
Mindful Money presents an alphabetical lists of issues, reforms, concerns, risks and maybe, just maybe, the occasional silver lining to watch out for in the year 2013.
A is for the Auto-enrolment pension reform
Little by little and employer by employer, throughout 2013, more people will be auto-enrolled into a workplace pension. This means that for most people in most earnings brackets, unless you actively choose to opt out of the pension provided by your employer, you will be signed up automatically. Your employer must provide access to a pension and a contribution starting at one per cent then increasing to a minimum of three per cent though some employers may contribute more. The bigger your employer, the sooner the reform will reach you. There are a host of issues to consider from an investment point of view. For example do you reduce contributions elsewhere and what are your investment options (with your employer’s choice of pension provider a significant factor that is out of your hands). Here is the explanation of the reform on the Government website.
B is for Banks
In this case, we mean the High Street variety, the financial institutions that theoretically lend to you and to business and give you a home for your savings. It looks like the Government will press ahead with plans to ring fence investment banking from utility banking which should help ease concerns that tax payers will have to bail out reckless banks in future. However just before Christmas, the MPs and Lords on the Parliamentary Banking Commission recommended a more formidable ‘electrified’ ringfence. They argued that if any bank was found to be trying to breach the ringfence, then it should be split up completely. As a result, the extent of capital and structural reforms that banks face remains uncertain. Banks have been arguing that too heavy handed a regime will ultimately restrict the amount they can lend. It could also prevent taxpayers getting as much for the huge stakes they own in Royal Bank of Scotland and Lloyds Banking Group. The Spectator Coffee House blog argues that neither Chancellor George Osborne nor Business Secretary Vince Cable will want to unpick and then beef up the current plan but it will become clearer in the next few weeks. In addition can banks finally shake off the legacy of misselling and market manipulation scandals? Expect more bad news before things get better. Most banks remain unsuitable investments – at least for widows and orphans.
C is for Commission ban
From January 1, pension companies, fund managers and insurers will no longer be allowed to pay commission to independent financial advisers on sales of mutual funds and pensions. A new system of adviser charging will see advisers agree what they are paid for their advice with you the client and investors. The aim is to bring more transparency to the market and end bias. Financial watchdog, the FSA’s guide to the reform is available here.
C is also for China and Commodities
Most commentators now say that China has secured a soft landing for its somewhat overheated economy. One big issue for investors is whether the stock market, which has performed quite poorly compared with other emerging markets is now starting to offer value. But whether you are invested in China or not, China’s economic prospects are now hugely significant for the rest of the planet including the UK. It also has big implications for commodities as Cherry Reynard reported for Mindful Money late last year.
C is finally for Carney
Mark Carney, the governor of the Canadian central bank, was the surprise choice as governor of the Bank of England. He takes up his role later in the year. He does appear to be reasonably free thinking for a central banker and he has helped steer Canada through the financial crisis. Of course, it is a little easier in a resource rich country where commodities provided a significant economic and financial cushion and the banks did not leverage themselves as much as those elsewhere in the world.
D is for Deficit
The latest figures from the Office for Budget Responsibility suggest that the deficit will stand at 6.1 per cent of GDP by the end of 2013-2014 financial year. Many commentators suggest that the cuts will only really begin to bite in 2013 especially at a local level. Mindful Money’s economist Shaun Richards has his own views about the OBR illustrated by this post about the public finances from just before Christmas.
E is for Eurozone crisis
This is a huge issue for investors because if we are out of the woods, it may cut volatility in markets and make investment in riskier assets, particularly equities, much more promising. Not everyone is convinced but the big interventions by the European Central Bank to bring down the cost of borrowing in the periphery countries by buying their bonds seems to be working for now. Schroders head of European equities Rory Bateman tells Citywire the risk of a disorderly break up of the euro has all but vanished.
E is also for Emerging Markets
The amount of money and percentage of assets you should have invested in emerging markets is a huge question. There is certainly no single answer. Increasingly when it comes to government debt, the ratings agencies are giving higher ratings to what were once developing economies. Emerging market government debt is therefore an increasingly favoured asset class as Cherry Reynard reported on Mindful Money in December. There are no easy definitions and distinctions any more. In terms of corporate governance for companies, they generally remain behind the standards in Europe and the US, but even here rapid progress is being made.Relying on old assumptions is inadvisable.
F is Fiscal cliff
The fiscal cliff has been avoided – just – with tax rises for the rich agreed and some Bush-era cuts retained. Falling off the cliff might have cut as much as 4 per cent from US GDP. Decisions on spending cuts have been postponed until February. Some commentators have updated the metaphor saying America must scale a fiscal mountain range. Clearly the arguing isn't over.
G is for Gender pricing for annuities
Translating your investment pot into a pension income is one part of the investing and retirement process where many people do not spend enough time or pay enough attention. A new European court ruling means that insurers cannot price all sorts of financial products for gender. Much of the press attention has focused on car insurance premiums. We think the cost of a pension is much more important. As pension journalist John Greenwood wrote late last year in Mindful Money, many experts believe that while the cost of buying an annuity for men has gone up, the price for women hasn’t got significantly cheaper. If you are considering taking the annuity route to funding your retirement, it
is even more important than ever that you shop around for the best rate.
H is for that most British of obsessions House prices
The consensus verdict is that prices will remain subdued in 2013, though relatively high employment – at least relatively high given the state of the economy – means that prices do seem to have some support as Mindful Money noted just last week.
I is for Income drawdown
The maximum you can withdraw from a capped income drawdown plan in any one year is being raised by around 20 per cent. Arguments continue to rage about whether this is a good thing i.e. is there a chance that people will exhaust their pension cash before they die or has the Government set the figure about right. Now that the decision has been made, however, Mindful Money is asking for the regulations and legislation to be changed quickly.
I is for Inflation
With relatively low growth prospects and low interest rates on many savings accounts, inflation remains a significant risk to your savings and investment portfolio. Many experts say quantitative easing has not helped. The Consumer Price Index stood at 2.7 per cent in year to November with the website of the Office for National Statistics explaining things in more detail. A few things to look out for include the fact that the Government is increasingly using CPI not the typically higher Retail Price Index to upgrade benefits and pensions. It is also changing the components making up RPI so it will look more like CPI meaing those rises that are still RPI dependent will also be less generous. Finally, if commodity and energy prices spike, it can fuel inflation but interest rate policy from the Bank of England will have only a very limited impact. If you are an income investor, you may decide to adjust your portfolio to mitigate the impact of inflation but this can also adjust your risk profile. In 2013, Mindful Money will be debating the pros, cons and risk of such inflation proofing.
I is also for Interest-only mortgages
Mindful Money believes this segment of the mortgage market is one to watch. The financial regulator very nearly banned the products. Lenders are reluctant to lend with Santander, for example, reducing the amount it will lend on this basis to just 50 per cent of the value of the property. Measures are being put in place by many banks not trap those who already have the product into unaffordable rates. But as regulators demand that lenders see proof of repayment vehicles, there are certainly worries concerning the fact many people are not accumulating the means to pay off the rest of the loan at the end of the mortgage term . Many people have relied on rising prices as a rough and ready sort of insurance, but certainly outside of London and the Southeast prices are certainly not rising. The BBC summed up the issues early in December.
I is also for Income investing
We believe the search for income will be a big theme for 2013 and many fund managers agree. In particular, many investment strategists say that ‘safe haven’ government bonds will fail to beat to inflation as HSBC warned late in the autumn. Investors may be wise to look elsewhere to invest for income, but as always with one eye on risk.
J is for Japan
The victory for Japan’s Liberal Democratic Party in the recent election has increased hope of a Japanese economic recovery on a back of weaker yen. The market is up around 10 per cent. Some fund managers are not so bullish. JP Morgan’s global strategist Dam Morris says: “The equity and currency market reactions may not be a good predictor of future returns. While Japanese equities have recently outperformed, they had not participated in the global equity market rally that began in June and so may just be retaking some lost ground.” So no return to the spectacular 1980s for Japanese equities just yet.
K is for Kitemarked products
The Treasury is to encourage banks and insurers to launch a range of kitemarked simple, easy to understand financial products for saving and insuring as the Telegraph reported earlier this year. The idea is always appealing but this is, on our reckoning, the third attempt to get these products off the ground in the last decade. The proof always comes when the products are launched. Mindful Money will review them, when we see them.
L is for Lending
The heat appears to be on the Government’s £4.4bn Funding for Lending initiative which was meant to have freed up credit helping boost business and mortgage lending. Thisismoney.co.uk remained unimpressed just a few days ago in this report about a big fall in lending to business. The Bank of England said in early December that the initiative would take full effect next year though consumer group Which? said FoL may even have depressed savings rates because lenders needed to attract less cash from savers. The jury is still very much out on this one.
M is for Membership of the European Union
We think that there is now a serious possibility that the UK could leave the EU as it seeks to renegotiate its conditions of membership in light of the deepening union between eurozone states. For the moment, we don’t think the investment and economic implications have been fully debated and we will seek to do so in the next twelve months. The anti-EU camp seems to winning many arguments, but the pro-EU camp may finally be waking up. We note that the Confederation of British Industry is strongly opposed to Britain leaving as even the eurosceptic Telegraph reported on New Year's Eve.
M is for Angela Merkel
The German Chancellor is after all Europe's most powerful politician and has slowly inched Germany towards paying to sort out at least some of the Eurozone's problems. This year she faces the verdict of the German electorate. Merkel's view on what concessions, if any, to offer the UK may be crucial to our continued membership – that is if Merkel and her Christian Democrat party remain in power. Website Breaking views has an interesting take on the electoral arithmetic. If Merkel's junior coalition partner, the liberal, pro-business party the FDP falls below 5 per cent of the national vote it will lose its representation and Merkel will have to seek other coalition partners – perhaps a grand coalition with the Social Democrats or even a link up with the Greens.
N is for Nudge
This is a system of political thinking that suggests people can be nudged into behaving in ways that suit their best interests, hence the new auto-enrolled pension system that relies on inertia to keep the workforce saving in a pension. This year may pose the biggest test for those who advoca
te this type of encouragement.
O is for the Office of Budget Responsibility
This new public body is meant to ensure that the UK's finances and financial policies are independently vetted so that the figures cannot be massaged. It is already playing a hugely significant role at Budget time in the UK. We would note however some scepticism from Mindful Money economic columnist Shaun Richards.
P is for Pensions
Last year the influential thinktank, the Centre for Policy Studies called for the Isa and pension tax regimes to be merged. That may not be on the cards just yet. Of more immediate concern for investors and certainly those at the wealthier end of the scale, is the fact that tax reliefs are being cut. The lifetime limit is being cut to £1.25m from £1.5m while the new annual limit will be £40,000 down from £50,000. It may be advisable to use those reliefs while you still can.
P is also for Planning
This is planning as in financial planning. At Mindful Money we are big fans of people taking control of their finances with or without the help of a financial adviser and we gave a lot of coverage to Financial Planning Week late last year.
Q is for Quantitative easing
Has the UK reached the limit of quantitative easing or, to put it another way, is QE losing its usefulness as a monetary policy tool? As the Spectator reported earlier this year, even Bank of England governor Mervyn King has been wondering out loud about its effectiveness. There are several controversial debates surrounding the strategy. First does it punish pensioners – the bank argues no, pension advocates such as Ros Altmann of Saga say yes. In fact she believes it's a disaster, as she told the BBC earlier this year. Others believe QE is storing up inflation and we'll pay the price – literally – a few years hence. Finally will the UK economy have withdrawal symptoms if QE stops? We will, no doubt, be debating these issues again in 2013.
R is for Restricted adviser
This is a new concept in terms of financial advice and we think it is quite an important one. If you have an IFA, he or she will either have to demonstrate that they are researching a much larger spread of investments including investment trusts and exchange traded funds to call themselves independent or they will have to accept ‘restricted' status. Your adviser firm may link up with a single fund platform or with a smaller number of fund firms and insurers. This offer may be more restrictive as the name suggests. This may not matter if your restricted adviser is sure they can service all your needs with the investments at their disposal. But if your adviser is changing from independent to restricted, we think you should ask the question ‘is this a wide enough spread of investments?' We also think it will be very interesting to see if the regulatory changes boost the number of investment trusts and ETFs sold and advised upon in the UK.
R is also for Regulators
This has to be plural these days. Sometime in early 2013, the financial watchdogs will include the Financial Conduct Authority which will regulate how financial firms and advisers behave towards you and the Prudential Regulatory Authority which will aim to ensure that firms which are systemically important do not go off the financial rails. You will still be able to complain to the Financial Ombudsman Service and in most cases you should be covered for compensation by the Financial Compensation Scheme if your fund firm or adviser does go bust. Your employer may also be regulated for pension purposes by the Pension Regulator. You may have noticed this is a lot of regulators and that's before we consider other Bank of England committees and overarching bodies in Europe. The big question is can they keep you safe from misselling and the economy safe from reckless behaviour. We have to say that the new system remains untested. The old system failed quite spectacularly.
R is finally for Remuneration
2012 was the year that investors bit back a little to restrain what were seen as unjustifiable pay and packages for top executives. Those firms which saw their pay plans voted down by investors and investor groups included the very different firms Xstrata, WPP and Aviva. At Mindful Money we thought fund firms and insurers did quite well at restraining pay. Campaign group Fair Pensions thought otherwise. We think there will be much more investor action on remuneration in 2013.
S is for Savings
This actually is one of the relatively easy things you can do to improve how your money is working for you. We all know that banks and building societies can offer generous interest rates in year one but then cut them back subsequently. This can lead to your savings being substantially eroded by inflation. That is why we like sites such as Savingschampion.co.uk which can help you monitor the rates you get on your cash. A good financial adviser may also offer this sort of service these days. We also expect campaign groups such as Moveyourmoney which urges people to punish badly behaving banks by shifting their accounts to gain even more traction in 2013.
T is for trust
Will trust ever return? Many of our established institutions are facing intense and unprecedented scrutiny. At Mindful Money our main concern is whether you, the public, should trust financial services companies. Actually we know of many firms that do their best for customers and clients. But it is pretty easy to see why suspicions remain. We will aim to explore ways in which trust can be established on a broad basis. It won't happen overnight and has to be earned, but without it we think there is a risk people will remain underinsured, under-saved and underinvested.
T is also for Tax
One issue that does tend to unite those on the left and right of the political spectrum is taxation. Companies are facing increasing reputational damage where they have minimised their tax bills – sometimes to zero – and many firms, though not all, are scrambling to offer compromises. It is one to watch in economic terms but also for shareholders to keep an eye on too.
U is for US politics
It is a big worry that the USA not only remains so politically polarised but that it has got in the habit of dividing power, often electing a President of one party and at least one house of Congress with a majority for the other. The result unfortunately can be political paralysis particularly with taxation being such a sensitive issue. The problem for the rest of us is that in a time of crisis, this spreads economic uncertainty and knocks confidence.
U is also for Unregulated Collective Investment Schemes
The old regulator, the Financial Services Authority has banned the promotion of these schemes to the general public, deeming these investments suitable only in a minority of cases. Several high profile UCIS have foundered in the last few years and the FSA has said many UCIS sales were the result uns
uitable recommendations. We suggest investors are extremely cautious before thinking of committing money in this way.
V is for VCTs and EIS
Venture Capital Trusts and Enterprise Investment Schemes are types of investment vehicles set up by the Government to encourage investment into new and growing companies with generous tax breaks on offer particularly to higher earners. These schemes are high risk, but they can be used to mitigate other tax changes, for example the pension relief changes, though you would be best seeking the help of a well qualified financial planner before investing.
W is for Wages
By wages, we also mean wage restraint. There is certainly some evidence to suggest that the UK has weathered the economic storm without very high unemployment because wages have remained low. This isn't good news for those on low pay and indeed for the 'squeezed middle' but it may have helped support house prices and kept many people out of poverty. It also means that households are feeling significantly less well off, while simply telling people, it could be worse, will not exactly lighten the mood. It is also cold comfort for the 2.51million who are unemployed.
X is for Generation X (and Y and the baby boomers)
We think there is a huge debate to be had about fairly sharing the burden between generations. So for example the cliché is that the generation born just after the war up to the end of 1960s secured many things for themselves such as free university education, benefited from a huge property boom, and are now charging the next generation for everything they got for free. That is an oversimplification, but we face huge challenges from demographics to pay for pensions, the NHS and long term care and in many ways the arguments are only starting. But one of the big differences between the baby boomers and generation X, the next cohort, is that boomers in one way or another saved and invested. Many of generation X have lost the habit if they ever had it. We want to understand why and see if this can be reversed. Perhaps generation Y will act differently.
Y is Youth Unemployment
Youth unemployment is predicted to top one million again as the Telegraph reported late last year with the left of centre Institute for Public Policy Research predicting a triple dip recession.
Z is for Zopa
Well, we had to get a Z from somewhere. Zopa is one of a number of peer to peer lenders aiming to connect lenders with individual borrowers and small businesses. It is still a relatively small market but if the bank lending logjam continues, we think they will play a bigger role. Incidentally so does Andy Haldane of the Bank of England as Mindful Money reported recently.