News Updates - August
15th August 2019
Housing in a 'No deal' Brexit scenario
Britain’s drifting property market would probably take a hit from a disorderly Brexit, with average prices slipping about 3% nationally in the ensuing six months and as much as 10% in London, a Reuters poll of housing experts found. Roughly 85% of respondents said both UK and London house prices would fall in the six months subsequent to leaving the European Union without an agreement. But if Britain departs the EU with a transition deal - the scheduled leave date is Oct. 31 - house prices are due a mild 1.5% lift over the following two quarters. They would rise 1.4% in the capital. Results from the August 13-20 survey show an otherwise tepid outlook for national price rises in coming years, at rates not far off an already-mild consumer price inflation rate and despite the recent sharp fall in sterling. Indeed, the results suggest that foreign demand for property will be weaker than in previous years where declines in the pound have spurred buying, particularly in London, as it makes housing cheaper for those holding stronger currencies. The survey also indicates in the near-term at least that housing, the bedrock of British household wealth, is not likely to give a lift to the economy, which contracted for the first time in 6-1/2 years in the second quarter.
Sterling's slump and the best response for investors
The end of July may usually be a fairly sleepy time on financial markets, as investors head out on holiday, but this summer is already gearing up to be a nail-biter as the UK gears up for a no-deal Brexit. Sterling had its worst day since March, giving the new government under Boris Johnson a taste of what would happen if the UK leaves the EU without a deal. The pound traded at a low of $1.2243 against the US dollar, a fall of 1.1% today. Over July the pound has lost 3.6%. No one is under any illusion that politics should remain the key negative for sterling in the months to come. This has raised the question, “is it time to sell European and US assets?” Some commentators certainly believe it could be the moment to take profits on homes and shares. A weak pound is supercharging a strong start to the year for markets. At the moment your overseas holdings look plump and the suggestion is that it may be time to take some profits and recycle that back into your UK allocation.
Stamp duty changes investigated
The new Chancellor, Sajid Javid, has dismissed a front page story run by The Times that he is considering a change to Stamp Duty by switching the payment from buyers to sellers. The Times reported at the weekend that it is one of several tax changes that the former Secretary of State for Housing is considering. The Times, known as the paper of record, ran the story under a strong headline, which more than suggested that the change to Stamp Duty was a given: “Sellers to pay Stamp Duty under Javid tax shake-up.” However, the front page story and accompanying interview did not seem to back up the headline, with Javid only saying, apparently of Stamp Duty: “I’m looking at various options. I’m a low tax guy. I want to see simpler taxes.” The story led to a huge amount of discussion and speculation on social media, including on Javid’s own twitter account. Over the weekend Javid tweeted in response: “More speculation about Stamp Duty this morning. To be clear, I never said to @thetimes I was planning to put it on sellers. I wouldn’t support that. I know from @mhclg that we need bold measures on housing – but this isn’t one of them.” Javid was appointed to the post by new prime minister Boris Johnson who said during the Tory leadership campaign that he would cut the highest rate of Stamp Duty from 12% to 7%, hinting that he might cut it altogether for properties under £500,000, and would consider reversing the tax burden from buyers to sellers. However a switch now seems to have been decisively ruled out by the Chancellor.
Will you have to wait until 75 for your state pension?
The state pension age for men and women in the UK is in the process of increasing from 65 to 66, with further rises to be implemented over the coming decades. It’s a controversial topic with many older people unhappy about having to work later than expected. Making the subject even more contentious, a think tank has now recommended for the increases to be accelerated – with the state pension age moving to 75 in just over 15 years’ time. The Centre for Social Justice (CSJ), a centre-right, independent think tank founded by former work and pensions secretary Iain Duncan Smith, has recommended the threshold for the state pension move to 70 by 2028 and then to 75 by 2035 for both men and women. The CSJ highlights that the first state pension schemes, with eligibility thresholds of 65 to 70 years, launched at the end of the 19th century and beginning of the 20th century when the life expectancy was about 50 years. Today the life expectancy is 81 and the current eligibility threshold is much the same. The CSJ says the state pension scheme still operates within the age thresholds set for the pioneer pension schemes over 100 years ago, revealing what they believe to be a disconnect between contemporary life expectancies and the state pension age. This raises the question of whether the state pension age is fit for the 21st century.
Pensions warning for women
Women are likely to struggle in old age as a “part-time pensions penalty’ means they will be £106,000 worse off than men at retirement, a report has warned. Working fewer hours, either to raise a family or care for elderly parents, results in a 47% reduction in women's pension wealth compared with men by their late 50s. This has a bigger impact than the gender pay gap, which cuts women's pension savings by 28%, it was revealed. But worryingly, three in 10 part-time women workers do not believe that their hours will affect their pension pots. Failure to face up to this could see millions cast into poverty in retirement, experts warn. By their 60s, women typically have £51,100 – just a third of the average man's £156,500 pot. Yet women live on average 3.7 more years than men, meaning their pension needs to last longer. For women to draw the same pension income throughout their retired lifetime, they would need to have saved between five and seven percent more by retirement age. It has been suggested that if we introduced a carer's top-up for pension contributions and lowered the [workplace pension auto-enrolment] threshold so that more low-paid women in part-time work could benefit, that could make a real difference.
Does Sterling's dive tell the truth about Brexit?
Sterling tumbled towards $1.21 last week as growing concerns about the chances of a disorderly Brexit spurred investors to hedge or slash their exposure to British assets. The pound, its fortunes tied to the years-long process of negotiating Britain’s exit from the European Union, is suffering from signals of panic among investors that the UK is headed for a no-deal Brexit under new Prime Minister Boris Johnson. Financial markets had regarded that eventuality, which many economists believe would severely damage the British economy, as relatively unlikely. The British currency has now shed around 2.4% of its value since Johnson took over last week and is headed for its worst monthly performance since October 2016, not long after the country voted to leave the EU. Sterling traded as high as $1.32 in May. And anecdotally (but no less alarmingly) the pound is already being treated like a volatile emerging markets currency. Last week Edinburgh festival artists refused to be paid in sterling, demanding euros and dollars. Is the the “debauching” of the pound is fully under way?
HMRC's pension tax trap
Pension savers are being overtaxed at record levels when they dip into their retirement pots. More than 200,000 over-55s have clawed back nearly £500 million since pension freedoms were introduced in 2015. But the taxman is pocketing on average £2,355 too much when retirees make their first withdrawal. This is because HM Revenue & Customs (HMRC) charges them a so-called emergency rate of tax. To get their money back, savers must then fill in a complex, nine-page form, or wait up to a year for a rebate. The amount of tax being reclaimed is at its highest level since the pension freedoms were brought in to allow savers access to their retirement funds without having to buy an annuity (a guaranteed regular income). Latest HMRC figures show around 17,000 people clawed back nearly £47 million in tax between April and June this year alone. This is compared to £29 million claimed by 14,000 savers in the same three-month period last year. And this does not include the tens of thousands of people who could still be waiting for a rebate. Figures from City watchdog the Financial Conduct Authority (FCA) suggest more than 200,000 people a year risk being overtaxed when making withdrawals from pension savings for the first time.
Pensions schemes slammed for opaqueness
A new report by the Work and Pensions Select Committee, chaired by Frank Field MP, has called on pension schemes to be forced to publish charges in full, including transaction costs. At present, new rules ushered in last April recommend pension schemes publish this information, but disclosing was made voluntary rather than mandatory. In light of this, the Work and Pensions Select Committee is concerned that take-up will not be high and has called for disclosure of all charges to be made mandatory. The hard-hitting report states that the government and regulators should not wait for the industry to fail to act voluntarily, as they have been done so many times in the past. The report notes: “We fully recognise that value for money is not solely about costs, but costs inevitably form an important part of the equation. Complexity and layers of intermediaries mean that many trustees do not have access to suitable information to make judgements about the costs of managing their schemes.” In addition, the report called on the Financial Conduct Authority to cap pension charges at 0.75% for its proposed four ready-made investment solutions, so-called investment pathways. At present, there is no charge cap in place.