e-Update Spring 2012
Greece's latest bailout comes with strings attached Share prices appreciated across much of Europe during February as equity investors appeared a little more optimistic about the future. In Germany, the DAX index rose 6.1% over the month while in France, the CAC 40 index posted a monthly increase of 4.7%, having risen 9.3% since the beginning of the year. In Greece, however, the Athens General index fell 6.6% during February.
Welcome to the latest edition of our newsletter, our update on developments in the world of financial services. If you have any questions about the issues raised in this issue, please do not hesitate to contact us.
Another bailout for Greece – worth around €130bn (£109bn) – was finally agreed towards the end of February. In return, Greece has to bring down its deficit to
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120.5% of GDP within the next eight years and will be forced to accept the presence of a permanent European Union monitor in the country. According to Jose Manuel Barroso, the president of the European Commission, the agreement is an “essential step forward”. Nevertheless, following the news of the agreement, ratings agency Standard & Poor’s announced that Greece’s debt had been downgraded to the status of “selective default”. Meanwhile, its counterpart Moody’s downgraded the credit ratings of Spain, Portugal, Italy, Malta, Slovakia and Slovenia during February, and placed the ratings of France and Austria on “negative outlook”. Leaders in the eurozone signed a new treaty to create a European Stability Mechanism that is intended to support financial stability within the euro area. However, finance ministers at the recent G20 summit warned that the eurozone’s member countries would have to continue to assess the strength of their support facilities if the grouping of 20 richest nations is to intervene with assistance in
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The long-term effects of quantitative easing Although inflationary pressures in the UK have shown signs of moderating, the rate of inflation continues to run well ahead of the Bank of England’s (BoE’s) rolling target of 2%. Consumer price inflation fell to 3.6% in January compared with 4.2% in December; although the decline was partly attributable to the fact that the rise in VAT from 17.5% to 20% – which took place in January 2011 – no longer featured in the calculation. BoE Governor Sir Mervyn King expects inflation to continue its fall, but warned, “Growth remains weak and unemployment is high”. Prices are still rising significantly faster than average earnings and savers are suffering the long-term consequences of low interest rates. In the BoE’s most recent quarterly inflation report, King acknowledged that savers are feeling the pressure from low interest rates but added that higher rates would have an adverse effect on the UK’s feeble economic recovery. Meanwhile, at its February meeting, the BoE’s Monetary Policy Committee voted in favour of increasing its programme of quantitative easing measures by an additional £50bn to £325bn. However, according to the National Association of Pension Funds (NAPF), annuity rates are being “squashed” by quantitative easing measures and the BoE’s actions risk leaving pensioners “out of pocket for the rest of their lives.” The NAPF urged the industry regulator to set out a strategy to help pension funds to cope with the effects of quantitative easing.
Considering protection Life assurance can be an important safeguard, but not everyone needs it: it pays out a lump sum on death so if you are a single person with no dependants then it may well be a waste of time. Afterall, unless you are in significant debt, you are leaving no financial burden. For the main breadwinner in a family with small children, however, the need is very obvious. Take away that main income unexpectedly and the financial stability of the family could be seriously affected, adding to the worries at an already stressful time. It is therefore important to carefully consider your own situation. And not just life cover but also what effect it might have if you were unable to work for a period of time.
Best of the bunch There are over 2,000 UK domiciled funds available to investors so how do you choose the ones which will continue to perform? Using a good multi-manager to make the selections for you can reassure as your portfolio will be managed by an expert. There are two types: fund of funds managers select individual funds based on research and will then buy or sell them as performance prospects and markets change. Manager of managers invest pre-agreed allocations of a portfolio with individual managers and give them specific guidelines on how to run it. Either approach can help form the ‘core’ for your wider portfolio or work as a first step into the world of market investment.
Transfer or not? Most people switch jobs several times during their working life; however, when you change employers, it is worth thinking about the pension pot that you have accrued. You might wish to consider combining your pensions into one pot. It is easier to keep an eye on fund performance if your pensions are all under one umbrella; moreover, a single pension pot will incur less paperwork and administration, and could also generate lower costs and better overall performance. Sounds like a no-brainer? In theory yes, however, there are some important issues to consider before taking the plunge. Most occupational pension schemes and private schemes can be transferred, but there are restrictions and potential pitfalls. It is not usually worth transferring final-salary or public-sector pension schemes; the benefits are too good to lose. You should only transfer if you have actually left a company: if your current employer contributes to your existing occupational pension scheme, you should not switch. Also it is worth noting that the money in your pension can only be transferred from one pension scheme to another (until you have retired), and not every new pension scheme accepts inward transfers. If your pension pot is very small, it may not be worthwhile switching: you will have to pay charges when you transfer, and some providers impose harsh penalties if you leave their scheme. And, if you are relatively close to retirement, you might not have sufficient time to recover the costs incurred by transferring. According to the Pensions Advisory Service, the Department of Work & Pensions (DWP) is set to publish a consultation paper examining the consolidation of small pension pots. Possible approaches could see your pension pot moving with you when you change your employer; alternatively, when you change your job, your pension pot could be left behind and – unless you decide to opt out – the cash would automatically be transferred to a central aggregator fund. The DWP believes the changes would increase the visibility of pensions saving: instead of seeing several small figures, each individual would be able to view one larger, consolidated figure. Transferring and aggregating your pension pots might generate significant long-term benefits; however, any decision to do so should be taken for the right reasons. Tread carefully and, above all, take expert advice before making an irreversible decision. Your financial adviser is well-placed to help you with this.
The benefit of advice The mortgage market is highly competitive and lenders constantly bring out new deals. They are required to provide Key Facts and illustrations, but many can only provide information – they cannot give advice on whether their loan or another provider's is best for you. In the UK, residential mortgage advice is regulated by the Financial Services Authority. Advisers use their research skills and sourcing systems to keep up to date with details of all the latest mortgage products so they can find the best rates and deals - and explain which one will best suit your requirements. So, if you want someone to do the hard work, ask an independent expert. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
Issued by Wells Financial which is authorised and regulated by the Financial Services Authority. The contents of this newsletter do not constitute advice and should not be taken as a recommendation to purchase or invest in any of the products mentioned. Before taking any decisions, we suggest you seek advice from a professional financial adviser.
Getting the right exposure Asset allocation is a very individual science and it is difficult to say how much you should invest in equities by just looking at a table or punching figures into a computer. There are a number of different considerations – your age, your attitude to risk and your objectives, your family set-up, your immediate plans and the current conditions in the market - all of which need a bit of thought. However, there are some guidelines which might at least help to get you started. At its most simple, for example, some experts start with 100 minus your age. So if you were 40, you might aim to have 60% in equities - and at 60, aim for 40%. Certainly it is true that a lower allocation is more appropriate as you get older - it takes you a long time to build up a pension and it would be a serious waste to have the whole lot eroded by a last minute downturn, just as you were about to retire. However, if you are younger, having too little in equities could mean you miss out on the longer-term growth opportunities which they can offer. The type of equities is important too. Larger companies tend to work globally and are therefore not limited to the fortunes of one economy. Smaller companies, on the other hand, may concentrate on one particular sector or be based in an emerging market, and could move against the trend of global markets. However, all equities can go down as well as up and smaller companies carry an even higher risk. Make sure you are fully informed before you make any decision.
Getting into buy-to-let Buy-to-let mortgages are no longer as available as they once were, making research all the more important to make sure you find an appropriate deal. Recent developments mean you now need a large deposit - generally at least 25% - and lenders have significantly tightened the criteria on which they will lend. For example, they will ask for your salary details, existing debt levels and about any other properties you own and will also look for an ability to cover the mortgage should you find yourself without a tenant. However, for those with the means, it is still possible to enter this market - and depending on where you are, if you take a long term view, there are some very attractively priced properties to be had.