Wishes, forecasts & worries

Here is another great piece I came across by David Booth, Founder of Dimensional Investors. David is one of the genuine sage’s of investing and I have great respect for him and his business. So I thought I’d share this piece which is timely.

When I was growing up, our local newspaper, the Kansas City Star, was full of news and had one page for opinion. After decades of cable news and nonstop digital postings, I see more opinions these days than news. That’s not a bad thing. But when it comes to investing, it’s crucial to remember the difference between news and opinion, and how they are sometimes used to forecast the future.

Any time the government releases new data on unemployment or inflation or interest rate changes, people start claiming they can forecast the future. That’s not necessarily a bad thing either. But most of what I hear people say isn’t what I would call “forecasting.”

Forecasting is when you have a high degree of confidence in an outcome based on well-proven models. The weather forecast for a few days from now is a lot better than anything I read in the Kansas City Star about investing. The weather forecast is pretty darn accurate. I’d sure call that kind of forecast the right use of the word. That’s different from someone issuing a “forecast” for when the Dow will hit a certain number. Or when inflation will reach a certain level. Or which five stocks will rise the most over the next year.

So when people say they forecast that something will be at this level at that time, I don’t call that a forecast.

That’s a wish.

And when people forecast that something will go down at a certain time?

That’s a worry.

DON’T BASE YOUR PLAN ON WISHFUL THINKING

Do you really want to invest your hard-earned savings—the money you’ll need for your kids’ college or your own retirement—based on someone’s hunch or wish?

The good news is you can have a good experience without having to do any forecasting—I believe you just need to be a long-term investor with a truly diversified portfolio.

Over the last 100 years or so, the average return of the market has been about 10% a year.1 I won’t call it a forecast, but my best guess is that over the next 100 years the average annual return will be about 10%. Of course, there may be large fluctuations, just like we have experienced for the last 100 years (and like we have experienced in the last six months).

Instead of forecasting, focus on the power of what I think has been behind the stock returns of the last 100 years: human ingenuity. Millions of people at thousands of companies working to improve their product, enhance their service, and lower their costs—and all adapting in real time to a changing world. We witnessed the power of human ingenuity over the course of the pandemic. I’m seeing it again as companies adjust to deal with inflation.

The world has changed in so many ways since I was a kid reading the Kansas City Star. I still occasionally read it on my phone now. (It makes me chuckle when I imagine trying to explain to my grandparents that I read the newspaper on the phone.) While I expect the world to keep changing—I’m not forecasting when or how—I am confident that human ingenuity will be a constant. Whether in good times or bad, that’s reason to be optimistic.

DAVID BOOTH

DIMENSIONAL Executive Chairman and Founder

Footnotes

1 In US dollars. S&P 500 Index annual returns 1926–2021. S&P data © 2022 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Indices are not available for direct investment, therefore their performance does not reflect the expenses associated with the management of an actual portfolio.

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

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Wishes, forecasts & worriesDominic2023-12-01T12:12:44+00:00

INFLATION, INTEREST – THE NUMBERS ARE STARTING TO HURT

TODAY’S BLOG

THE NUMBERS ARE STARTING TO HURT…

If you are a car driver as I know most of you are, the current price of petrol will almost certainly have caused a gulp of disbelief as you fill up your “pride and joy”. The rate of inflation may be a testing 9% or 10% (next release from the ONS is next week) but the price of fuel is rising much faster than that. Indeed, I have noticed the price at a station change within the space of a return trip to a local garden centre.

Today, 16th June 2022 unleaded petrol is around £1.87 a litre or £1.93 for diesel. In June 2020 it was £1.07 and £1.11 respectively. That’s an increase of 74% in a year. If only I could tell you that investments had fared as well, they haven’t. Markets have been very difficult lately, largely since November. Global equities are down 1.48% over 12 months and global bonds are down 12.01%. When the numbers go in opposite directions to our daily reality of the cost of living it becomes alarming.

I am not going to pretend to you that this is easy or that inflation will quickly disappear as the Bank of England appears to believe (returning to around 2.4% in 2024). We could be in for inflation that lasts rather longer than that. Sadly, we are in short supply of good politicians around the world, those that we have seem intent on destroying any sense of self-respect. The “unexpected” war in Ukraine is certainly lasting longer than most expected… which does leave me wondering, who on earth is doing this “expecting”? most of the hard-nosed realists I know do not have much faith in politicians to resolve much at all, other than their own salaries and second jobs.

THE JUBILEE, 1977 AND A 67% MARKET DECLINE

If the Jubilee parties didn’t remind you of 1977, the impending rail strikes and some of the economic data may soon help you to do so. Still, we have learned lessons from the past haven’t we! I imagine that you appreciate that I am being a little sarcastic. Sadly, you and I cannot control very much of what is going on. We can control how we respond. All the lessons of history are that successful investing means riding out the peaks and troughs of the global market cycles. Some of these are very deep and “hurt”. For some context, the average bear market since 1926 fell by -35% and lasted 18 months. Some were worse, some better (hence average). The worst fall was in June 1972, markets collapsed -67% and the bear market lasted 2 years 7 months. £100,000 in 1972 would have fallen to around £33,000 however for those that held their nerve that same £100,000 became £1,207,159 when considered over 154 months (12 years 10 months). That is amazing isn’t it… but so few investors had the patience, confidence or perhaps ability to stay the course. This is not easy, hindsight is easy, the present and an unknown future are “difficult” yet that is the reality of our daily lives. Complex, unknown and full of conflicting messages and competing media.

Today the Bank of England raised its base rate to 1.25%. Let me get ahead of the “news services” and spin this in different ways. Interest rates have increased 25% overnight. The highest for over a decade. This is true, but in the context of interest rates they are half as much as they were in November 2008 (3%). When I started the firm in 1999, rates were 5% (some 333% higher). When I started in this game, they were 10.88% and I have a very real experience of them at 14.88%.

Life changes, your plans may need updating, but your main priorities and principles are unlikely to alter at all. Do get in touch with me if you are concerned. As I may have said, investing is a long-term, a lifelong process. Remember your money should serve you, not the other way around.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

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INFLATION, INTEREST – THE NUMBERS ARE STARTING TO HURTDominic2023-12-01T12:12:49+00:00

ARE YOU MISUSING YOUR CASH ISA?

TODAY’S BLOG

ARE YOU MISUSING YOUR CASH ISA?

You may have gathered that I am not a fan of the Cash ISA. If you really must have one, then you need to be clear that you are getting a top rate of interest (less than 1% at the moment) and that you are not locked in for too long. If you expect rates to rise, why on earth would you lock in to one?

We all have a personal savings allowance. That’s £1000, £500 or nothing depending on your highest rate of tax. Basic rate (20%) taxpayers have a £1000 savings allowance (interest from savings) and those that are higher rate (40%) have a £500 allowance. Therefore, majority of people will have at least £500 of interest that they can earn tax free. Today that means holding around £50,000 of cash, which is a little under twice the average national income. According to ONS data to the end of the 2019/20 tax year, that’s £29,900 (median household income).

As I have said before, I am a great believer in holding cash. It provides for projects and emergency. Good planning – which is something that you already do better than most because you are here today, means getting a realistic estimate for something you intend to do and setting that aside prior to starting the project. This is therefore based on your research, quotes, and prudence to allow a sensible margin for error, or builder maths.

CASH FOR EMERGENCIES

Then there is your emergency fund. This is entirely subjective. It is an amount that enables you to sleep at night knowing that if something disastrous happened by the time you woke, you and your family would be able to cope financially. Things like loss of your job, the boiler breaking down, your car being vandalised or stolen, perhaps even a quick getaway fund from an abusive relationship. You might relate this number to how much you normally spend each month and hold a multiple of that.

RISKS CHANGE AS YOU AGE

Those that have a guaranteed income (people that are retired and living on State Pensions, annuities, or final salary pension benefits) arguably don’t need to worry about the loss of a job or their income. Its more likely that, if that’s you, you think of the extra income sources – from your investments or perhaps a holiday home that is let during a pandemic.

Most people will probably not need more than £50,000 (in 2021) but I did say it was subjective and personal to you. Cash doesn’t really work for you; it works for a bank who lend your money out at a rate that makes them rather more than they offer you to “store” it with them. If this drags on for months and years, you will undoubtedly see the spending power of your money reduce due to inflation. It needs to do some heavy lifting, which means investment. This comes at the price of market volatility in the short term, but if done properly, will deliver greater yields.

PARABLES ABOUT BARNS AND GRAIN

To my mind, it’s like an arable farmer keeping all their seed (cash crop) in a barn and not sowing enough. At some point, the barn will run out as its consumed or rots, missing out on all that multiplication and future harvests.

Anyway, given that most people don’t need to hold much more that £50,000 and would get the interest on it tax free anyway, there is no point using your valuable ISA allowance to give you something you already have.

Of course, this is what a plan will help determine and why understanding what the money is for and the reasons for your anxieties about money. Do get in touch.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

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The Old Mill Cobham Park Road, COBHAM Surrey, KT11 3NE

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ARE YOU MISUSING YOUR CASH ISA?Dominic2023-12-01T12:13:02+00:00

IT COULD BE YOU… BUT ITS UNLIKELY

TODAY’S BLOG

IT COULD BE YOU… BUT ITS UNLIKELY

If you have been a client for more than a week, you will have gathered that I like, want and encourage clients to hold some cash. The key word is some. This will be different for everyone and depend on several things. Your planned projects over the next 36 months and the emergency buffer you believe is appropriate should your employed (or self-employed) income cease. If you draw a pension from an annuity, the State or an old final salary pension, those are guaranteed and won’t stop until you do.

10 YEARS ON

Cash rates as we all know have been very low for a decade or so now. Holding cash in a world of rising costs over the “long-term” isn’t good for your wealth. By way of comparison 10 years ago a first-class stamp was 46p, today it is 85p…. ah you sensibly plan ahead and use second class, 36p has become 66p.

If I am generous about cash deposit rates, using a Cash ISA rate, a typical “decent” rate in 2011 was 2.75% today its about 0.4%. Remember, costs have gone up, the interest you have been getting has reduced. Holding cash for 10 years… that warrants a discussion, but let’s just assume it’s the same emergency “help me sleep at night” reserve. In June 2011 the rate of inflation in the UK was 4.2% today (data from May 2021) it’s around 2.1% and you will have likely heard some noise about it rising having jumped from 0.5% in February.

FEAR IS EATING YOUR WEALTH

There is no way that I would attempt to encourage you to place all of your money into investments, but unless you are preparing for Armageddon, I cannot see much logic in holding large sums. We can help get better rates for those with sums over £100,000 but its still peanuts, even using a decent cash management platform.

PREMIUM BONDS

Some of you like NS&I Premium Bonds. They are a bit of fun, the Government’s way of raising money without raising taxes, borrowing from taxpayers. Whilst NS&I are not backed by the FSCS cover of £85,000, they are backed by HM Treasury, so… pretty safe. Premium Bonds are really a lottery without loss of your stake money. The chance of your Bond winning even the smallest prize is now 34,500:1…. Rather less than your chance of contracting covid or going on holiday. So to have a reasonable chance you need at least £34,500 in Premium Bonds and preferably £50,000 (the maximum).

We are a small firm, so the sample size may not be terribly helpful, but in the 30 years or so (over 360 draws) that I have been doing this, not a single client has won more than £1,000 from a single Premium Bond. None of our clients have won prizes in the high value band (£5,000 to the two £1m jackpots each month).

I do understand that there is a charm about Premium Bonds, but the maths just doesn’t stack up for you. There are 25million NS&I customers – that’s getting towards half of the UK. The draw for June saw the usual 2 jackpot winners and a further 190 people that won £5,000 or more. The bulk of “winners” some 3,101,040 of them won £25 (97.89% of winners win £25). The total winnings (all prizes) was £91m.. which sounds a lot until you realise that £77.5m is those £25 payments. There were, wait for it.. 109,286million entries (qualifying £1 Premium Bonds). The chance of winning anything is certainly 3.1m in 109,286 million… that is a very small chance of winning. Most think of the big £1m jackpot, the chance in June was effectively 1 in 54,643,229,674, yes you get a bite at the same pie each month, but so does everyone else. So to put this in context you are 1 in 67,081,000 as a member of the UK population and you might be picked for a gong or almost anything.

The other thing that people forget is that £1m, which for most of us would be nice to have! isn’t the same value as £1m in 2011. It buys you rather less because of the decade of inflation, yet the prizes don’t really increase, because they are nice, neat, round numbers. Its a bit like the TV gameshow “Who Wants To Be A Millionnaire?” which first aired on 4 September 1998… thats now nearly 23 years ago! A million isn’t what it was, yet all of us were brought up to believe that it was a vast sum of money, which when we were children, it was. In fact £1m in 1998 is about the same as £1,840,000 now, but that doesn’t make a good strap-line for a TV show does it. To put it another way £543,478 now (roughly) was £1m in 1998.

The truth (remember I promised you that) however uncomfortable it is, is that holding cash will provide the sense of security but you will experience your spending power reduce each year. Admittedly not all the things we buy rise at the rate of Royal Mail, but have your basic costs really reduced or stood still? I suspect not.

You need to use your money in assets that grow and generate wealth. Talk to me.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

GET IN TOUCH

Solomon’s Independent Financial Advisers
The Old Mill Cobham Park Road, COBHAM Surrey, KT11 3NE

Email – info@solomonsifa.co.uk
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IT COULD BE YOU… BUT ITS UNLIKELYDominic2023-12-01T12:13:06+00:00

ITS IN YOUR INTEREST

TODAY’S BLOG

IT IS IN YOUR INTEREST

You may have noticed a press release by National Savings or more accurately, NS&I – of for most of us “the post office”. Sadly, we all know that cash savings rates have been in the doldrums since the financial crash and took yet another nosedive (who would have thought it possible?) in March once Covid became something that the Government actively noticed.

Over the last few months, I have been suggesting various cash deposit solutions and NS&I has been one of them. Now that rates are at rock bottom (hopefully they cannot get worse) it is a good time to review where your cash is and what rate you are receiving.

MORE HIGHLY RATED

As you may have gathered from previous posts, we can provide access to online cash management solutions, these are designed to achieve two things. Firstly, to get a better rate, secondly to keep funds within the £85,000 FSCS protection limit. An additional benefit is that you only need to apply once, as rates come to an end you simply reselect the best from those available via the service. There is no additional paperwork or hassle trawling to find the new “best buy” only to discover it has ended or is about to.

Get in touch if you wish to know more about this, it is a service relevant to individuals, business owners, Trusts and Charities (so pretty much everyone).

Anyway, here are the changes announced by NS&I this week.

PRODUCT	RATE NOW	RATE FROM 24/11/2020
Direct Saver	1.00%	0.15%
Investment Account	0.80%	0.01%
Income Bonds	1.15%	0.01%
Direct Cash ISA	0.90%	0.10%
Junior ISA	3.25%	1.50%

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

GET IN TOUCH

Solomon’s Independent Financial Advisers
The Old Mill Cobham Park Road, COBHAM Surrey, KT11 3NE

Email – info@solomonsifa.co.uk
Call – 020 8542 8084

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ITS IN YOUR INTERESTDominic2023-12-01T12:13:12+00:00

THE TROUBLE WITH CASH ISAs

TODAY’S BLOG

THE TROUBLE WITH ISAS

HMRC have published their data about ISAs to the end of the 2018/19 tax year. Their data is reliable or should be because you will recall that each ISA requires your unique National Insurance number. As a result, it is possible to provide accurate data about income, age, gender, and employment.

The deeply disturbing news is that the vast bulk of ISAs are cash ISAs. Cash ISAs are glorified deposit accounts, cash is not a sensible long-term investment strategy, it is a perfect short-term spending strategy. As cash rates have declined from not very much to virtually nothing over the last 20 years, Cash ISAs have basically failed to keep pace with inflation.

“BUT CASH ISAs ARE LOW RISK”

“But Cash ISAs are low risk” you cry, well… what you really mean is that the value doesn’t go up and down (volatility) your assertion would be right, but when you factor inflation into the actual real world, then Cash ISAs are pretty much basically always guaranteed to go down. The risk you run is one of running out of money and the power of your pound shrinks.

There may of course be good reasons for holding Cash ISAs, but based on income range, people over £30,000 generally have more stocks and shares ISAs than Cash ISAs – though its still a fairly close-run thing.

“BUT AT LEAST CASH ISAs ARE TAX FREE”

Cash ISAs are tax free, that is certainly true. What that means is that the interest paid to you on your deposit is tax free. All good… well, it was. Since 6 April 2016 there has been a personal savings allowance. Basic Rate (20%) taxpayers are able to earn interest of £1,000 without it being taxed. Higher Rate taxpayers have a £500 allowance and Additional Rate – well, of course we know that it is politically expedient to be seen to punish anyone earning £150,000 or more, so no tax-free savings for you!

WHY LOCK INTO A DEPRECIATING ASSET?

Taking a basic rate taxpayer with interest rates at something like 1.5% at best, then you would need more than £66,000 in your cash ISA before any tax would be applied to the interest. At 1% it would require £100,000. Higher rate taxpayers simply halve the numbers. As for the tax that would be applied on interest above that – well no more than a round of drinks for most people.

A quick trawl of Cash ISA rates today (30/06/2020) and the very best rate I can find is 1.25% if you want to lock your cash up for 7 years… why anyone would do this is beyond me. Then there is the aggravation of regularly looking for a better rate and the hassle of moving your really rather duff Cash ISA into a different one. Life is too short for this nonsense isn’t it?

Similarly, junior ISAs – why bother holding cash for a child for 18 years and missing out on investment growth over nearly 2 decades. It is madness. Investors and savers really must understand what risk really means.

The value of ISAs to the end of the data was £584billion, of which cash ISAs account for 46% yet make up 76% of all ISAs. The chart below (from the HMRC bulletin – so labelled Chart 4) shows the fluctuating but growing value of shares in ISAs. Remember all are being added to each tax year, but the vast majority of the money each year goes into Cash ISAs.

CONFESSIONS OF A CASH ADDICT

OK – so you have some cash ISAs. I am not saying you shouldn’t have them, but only do so if you intend to spend the money fairly soon (within 3-5 years tops). Otherwise you are missing out on a lot of growth and the ability to keep the power of your £ working for you. If you would like a review, do some of the legwork, compile a list of your Cash ISAs, the balances, the Banks or Building Societies that they are with and the current rate of interest you earn. If there is a fixed rate, confirm when that ends. Then send me the information.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

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Solomon’s Independent Financial Advisers
The Old Mill Cobham Park Road, COBHAM Surrey, KT11 3NE

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THE TROUBLE WITH CASH ISAsDominic2023-12-01T12:13:16+00:00

970 BOTTLES OF BEER ON THE WALL

TODAY’S BLOG

970 BOTTLES OF BEER ON THE WALL…

I’ve been trying to think of ways to explain the benefit of long-term investing. I’m not a big beer drinker, but given that when I do go to a pub, I’m always shocked at how much a pint of beer is. According to the ONS, the average pint of beer in the UK was £3.67 in January this year. Clearly a national average, because that wouldn’t buy much in London.

30 Years Ago… 1989

Anyway, let’s suppose I am someone that likes to buy the occasional pint of beer. As I get older, like most people I tend to remember elements of the past fondly. Particularly this time of year as students return to University. 30 years ago, perhaps you were at University or had long since left. 1989 – the time when Nigel Lawson was replaced as Chancellor by John Major. Simply Red had a hit album “A New Flame”; Challenge Anneka had aired for the first time and Nick Faldo won the Open. A pint of beer back then was £1.03.

YOUR ANXIETY

Let’s suppose you had £1000 you wanted to do something with. The memory of Michael Fish and the great storm closely followed by Black Monday was fairly fresh in your memory. You didn’t fancy the stock market. So you found a decent deposit account, rates were high causing problems for borrowers but great for savers at 14%.

Thirty years later that £1000 had risen to £2,080 by January this year. You had forgotten about it except for when you sighed with relief as economic recessions came, Y2K, Dotcom bubble, Korean crisis, 9/11, credit crunch – you had avoided them all.

Yet there is a problem. In 1989 your £1000 would have bought a 30-year younger you 970 pints of beer. Today your £2,080 would only stretch to 566 pints.

Your Uni Friend John had a PEP

Your good friend John from University had put his money into the UK stock market, he put £1,000 into a Personal Equity Plan, some quirky idea brought in by Nigel Lawson. He bought a FTSE100 tracker fund (ok, maybe not, but stay with me). He had to live with the same economic stresses and saw the topsy turvy workings of the stock market. However, at the end of 30 years his £1000 was worth £11,494. He hadn’t touched it (neither had his adviser) and so all dividends were reinvested. This sort of money enables John to buy 3,131 pints of beer. That’s 5 times more than your 556 pints.

Julia also had a PEP

John is fairly happy, but his girlfriend Julia at the time also put £1,000 into a PEP, but she put it all into the FTSE250 tracker. She figured that slightly smaller companies might do a bit better than bigger ones. Lo and behold, Julia’s £1,000 has turned into £20,818. Julia can buy 5,672 pints of beer, that’s ten times (10x) TEN TIMES as much as your 556 pints.

OK – Smallprint (or not) Caveat Emptor…

Admittedly I have taken some liberties with costs, charges and the available funds in 1989. The biggest liberty I really took was suggesting that people leave their money alone. They/we don’t. We all tend to fiddle around, attempting to find a slightly or perhaps considerably “better” option.

Long story short, when considering investment for decades, what on earth does “risk” really mean? The risk of the power of the money in your pocket being worth less (or worthless) due to rising prices? The risk of seeing your money stagnate in cash? The risk of seeing the value of investments rise then fall?

Monsters grow

What ought to be blindingly clear…. don’t let your anxiety dictate your financial planning and investment strategy. It is a dreadful guide to future performance. The monster at your door is inflation, however small it seems today, feed it for 30 years and it’s still hungry and likely to eat you alive.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

GET IN TOUCH

Solomon’s Independent Financial Advisers
The Old Mill Cobham Park Road, COBHAM Surrey, KT11 3NE

Email – info@solomonsifa.co.uk
Call – 020 8542 8084

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Email – info@solomonsifa.co.uk Call – 020 8542 8084

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PRIVACY POLICY | DATA PROTECTION

970 BOTTLES OF BEER ON THE WALLDominic2023-12-01T12:17:12+00:00

SURPRISED? BASE RATE NOW 0.75%

Solomons-financial-advisor-wimbledon-blogger

Surprised? Base Rate now 0.75%

The Bank of England have announced today that they have increased the base rate from 0.50% to 0.75%. This will be welcome to anyone peddingly news for the next 24 – 48 hours. It will not however mean that you get much more interest on any cash deposits that you hold. It also is not likely to have a huge impact on mortgages or loans (it will have no impact immediately if you are on a fixed rate loan of any type). The decision to raise the rate was unaminous and part of the attempt to keep inflation at 2%.

The next Monetary Policy Committee (MPC) meeting will be after the summer break, on 13 September 2018. If you wish to know more, simply click this link to the Bank’s website.

SURPRISED? BASE RATE NOW 0.75%Dominic2023-12-01T12:17:54+00:00

The Future of Pensions

I am currently at my annual conference in Wales – the Chartered Institute for Securities and Investments (CISI) with whom the IFP – Institute of Financial Planning merged last year. Yesterday we covered a number of valuable topics, but the talk that resonated most with me was from former Pensions Minister MP Steve Webb, who talked about the future of pensions – amongst other things.

I had to admit that my BS radar is usually on hyperdrive when listening to any politician these days, which is probably a sad reflection on me, however I was very impressed by what he had to say, albeit he did not paint a terribly pleasant picture of the future. Of course, only time will tell if his predictions come about and in fairness, he was quick to remind us of the problems with predicting the future, particularly in a climate where since the last general election all of the major political parties have changed their leaders and the country has voted to leave the EU.

Book cover of Yes Minister - A Very Courageous Decision

Play it again Sam…(or Phil)

Webb was clear that changing pensions is pretty difficult and appears to be a low priority to either the Government of Civil Service. He gave an insight into the slow turning wheels of Whitehall, sounding much like an episode from Yes Minister. Given all the change that we have had (State Pension, Auto Enrolment, Pension Freedoms, Annual Allowance Taper, Lifetime Allowance…) he suspects and urges a period of quiet inaction from the Chancellor, Philip Hammond. This is particularly pertinent to those concerned about the loss or reductions of tax relief on pension contributions or changes to the tax free cash entitlement. He made the case that the public and financial planners could not plan ahead in confidence if the rules are changed every year, yet warned at Chancellors are easily tempted by ideas to collect more tax, however short-sighted.

Whilst on the subject of tax he made it clear that the Treasury are naturally inclined to taxing now rather than in the years ahead, so there is a very real pressure to take the view that tax relief reductions in the short-term outweigh the advantages of taxed incomes in the future, so by inference, a system of loss of tax relief and no taxation of pension income is a genuine prospect. He argued that this was evidenced by the Treasury’s love for ISAs and obvious contempt for pensions with the Lifetime Allowance reductions (and associated tax penalties) and the new tapered annual allowance. Personally he would scrap the LTA but retain a cap on annual pension contributions (which I certainly agree with). He did point out that of course putting trust in future Chancellors to honour a commitment not to tax pension income in the future required a high degree of faith, which deliberately provoked some mirth from the audience.

Turning to Brexit, he simply outlined his view that interest rates are likely to be very low for a long time, which would place pressure on people to look for better returns than the puny sums they achieve from their savings. He argued that this would likely lead to yet more scams as people fall for yet more illusory promises of high returns. He also warned of the impact on final salary pension schemes which, because of the assets that they hold and the way calculations are performed, would have larger deficits in their pensions (due to low interest rates) probably leading to some, or perhaps a majority of companies trimming their dividend payments.. which in turn makes the task of achieving investment income harder still.

He seemed to have little regard for our regulator of whom he said was “not fit for purpose” and thought the new LISA was perhaps the most badly constructed investment idea for years. If you follow me on social media, you will know my thoughts on this already.

So, whilst Steve Webb found a receptive audience, I was left with the sinking feeling that there was little hope for common sense to return to the Treasury… but who knows… we all get to find out in a few weeks time for the Autumn Statement.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

The Future of PensionsDominic2023-12-01T12:19:06+00:00

Help to Buy ISA… well, not that much help..

Help to Buy ISA…well not that much help

You may have heard of the Help to Buy ISAs. When this was announced by the then master of goalpost manoeuvers, Mr George Osborne, you would be forgiven for thinking that this was an innovative scheme to help savers get a bigger deposit for a house purchase. The Government will add 25% to whatever you save…. Well maybe not.. as ever, rarely do Governments make life easy, indeed one is often left to wonder if Government agenda is not precisely the opposite. So, let’s spell out a few of the issues. For the sake of simplicity, I will call the right to buy ISA “the plan” which will not help my search engine optimization, but will hopefully read a little better.

Maximum and Minimum

You can only save £200 a month into “the plan” with an initial deposit of £1000.The maximum that can be in the plan (from you is £12,000 – the minimum is £1,600). So the maximum £12,000 would get £3,000 (25%) from the Government, yes its better than nothing, but actually not that much help for a deposit. You have to be 16 or over for an account.

So then there is that mortgage…

Whilst it is possible to get a mortgage with a very small deposit (5%) the prevailing requirement is generally 15%-25% deposit. Of course this means being able to justify and afford the mortgage for the balance. So if the plan is 5% of the purchase price, that suggests a property valued at £300,000 and mortgage of £285,000… which in turn probably means an income of over £80,000. We don’t arrange mortgages, but generally borrowers can borrow up to about 3.5x their income. If you have found a property for £100,000 then of course this will be more useful, but one can only assume that the property is at least 100 miles from London.

The Hard Graft of Saving

As the plan is really a monthly saving scheme, that’s a total of 55 months or 4 and a half years of solid saving…. In the meantime, property prices are probably rising, at least in-line with inflation. Oh… just remind me how long is the typical Government lifetime? How time flies.. and policies change.

The Housing Problem

Another clause being that Government hand out only applies if the purchase price is up to £250,000 or £450,000 in London…. In which case for Londoners, clearly this would be just over a 3% deposit, so you will need other resources. The property must be in the UK (do not ask me what that would mean should either Scotland or Wales leave the UK). Naturally the plan cannot be used to purchase a second property, so if Mum and Dad have put your name of the deeds somewhere else… well, it’s not for you.

Meanwhile, as the Help to Buy ISA is really a Cash ISA, the savings earn interest, which today is about nothing. OK you can get some better deals, but not much better.

Snakes and Property Ladders

The Plan cannot be used for anything other than a deposit, not stamp duty, fees etc. It cannot form part of the deposit provided at Exchange of Contracts either…. which is quite daft! It must also be closed before you buy, which means obtaining a statement from the Bank to confirm that the account is closed (which may be easy in theory but hard in the stressful throws of purchasing a first home.. whilst the pressures mount from those higher in the chain.. It’s actually the conveyancing solicitor that claims the Government hand out for you between the Exchange and Completion… (I’m guessing a fee would apply to claim it)… what could possibly go wrong? (property falling through perhaps?).

Still, there’s no place like home….

So is it worth it? Launched nearly a year ago (December 2015) over 22,000 people have used the proceeds to buy a property, which presumably means that they had at the very most 10 months of £200 and £1000 initial deposit (£2000 in all) so a £500 help to buy. OK, ok… better than nothing, but is this really solving the housing crisis or simply providing a bit more cash to meet the inflated property prices? I think you can probably guess what I think.

However, this is money for nothing (well, there are some strings). In practice, perhaps try to use the account, fill it up to the maximum then forget about it in the hope that the offer remains valid for years to come. It does form part of your annual ISA allowance, but in practice only £2400 for most people, meaning that there is still a lot of ISA allowance left. If you move abroad or never end up buying a home, then you can easily get your money back, it simply will not be worth much more than you put in, due to poor rates of interest. Much like the Wizard of Oz, there are no magical solutions to resolve the housing crisis but if you make the effort and reflect on your own resourcefulness, its amazing what can be achieved… and you will have a bit more cash to play around with.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

Help to Buy ISA… well, not that much help..Dominic2023-12-01T12:19:09+00:00