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News Updates - September

17th September 2020

News Updates - September

Premium bond cuts   

There are fears that a recent recovery in savings rates could be thrown into reverse after National Savings & Investments today took a wrecking ball to its accounts, with 'absolutely savage' cuts to come into force in November. The Treasury-backed bank this morning announced that from December the odds of winning anything in the Premium Bonds draw will go from 24,500 to one to 34,500 to one, and the estimated number of total prizes won reduced by 1million. NS&I will also take the knife to its other market-leading accounts from 24 November, with its Income Bonds to go from paying 1.15 monthly interest to just 0.01%, the same pitiful rate paid by Britain's biggest banks. It comes after billions of pounds have poured into NS&I during the pandemic.  Its Direct Saver will pay just 0.15%, down from 1% now, and its Direct Isa 0.1%, down from 0.9%. Its fixed-rate accounts will be also be cut further, as those cuts did go ahead as planned in May, but this will not affect savers until their terms come to an end. Savings analysts have long kept one eye on NS&I's next move, with the bank, which helps to fund the Government's spending, having to balance the rate paid to savers with the cost to the Treasury. Its decision in mid-April to reverse cuts to many of its accounts which it planned to implement in May to support savers amid the coronavirus pandemic, helped to stabilise savings rates and provide a safe haven for billions of pounds of lockdown savings. But the cuts announced today are far more brutal than originally planned. The previous move, which was followed three months later by the decision to massively increase the amount it needed to raise from savers, from £6billion to £35billion, laid the foundation for a recovery in the savings market over the last two months. Smaller banks have launched best buy fixed-rate bonds and Isas, having needed to leapfrog NS&I's best buy rates to attract savers, while in the last week two building societies have launched easy-access accounts, albeit ones with withdrawal restrictions or bonus rates, paying more than its Income Bonds for the first time since mid-May. But analysts have speculated for weeks as to whether the Treasury-backed bank would cut its savings rates, especially as the Government looks to mark the end of other aspects of its coronavirus response programme like the furlough scheme, having been deluged with savers' deposits since April. NS&I said a net £14.5billion had been deposited with it between April and June, and that 'demand for NS&I products has remained at similarly high levels between July and September'. NS&I's cuts mean that far fewer Premium Bond prizes will be won despite there being more Bonds in the draw than ever before, reversing a recent trend where NS&I has had to add the number of non-£1million prizes to keep the effective prize fund rate at 1.4%

HMRC to gain more powers over disclosure of assets   

HM Revenue & Customs (HMRC) will be given new powers that will allow it to force financial institutions to provide information about people’s assets. The firms will be required to pass on customer information if served with a “financial institution notice” by HMRC under new measures proposed in the next finance bill. It will mean a court or the individual’s approval is no longer required. Currently consent is provided by the individual or a tax tribunal must approve the request. The financial institutions covered include banks, investment advisers, fund managers, credit unions, insurance companies and credit card issuers. The government’s proposal could come into effect as soon as next year. The thinking behind the idea is that it will make it quicker and easier for HMRC to share information with foreign tax authorities as part of a global crackdown on tax evasion. However, the move has caused concern in some quarters. The Chartered Institute of Taxation said it was “concerned about the loss of independent tribunal oversight, particularly in cases which involve requests for information about UK taxpayers”. Meanwhile, UK Finance said the measures signified a “watering down [of] safeguards”. HMRC said it was important in the battle against tax evasion and avoidance and would help them deal with it in “an appropriate and effective way”. “The new notice will contain numerous safeguards for taxpayers, in line with practice in all other G20 countries, and the power can only be used in specific circumstances where the information is reasonably required for the purposes of checking a taxpayer’s tax position,” the tax authority said.

Asking prices on the rise for larger homes 

According to Rightmove, the average asking price for “second-stepper homes” - three- or four-bed - has soared to £291,618. The strongest sector is “top of the ladder”, which includes four-bed detached homes and larger, with the number of sales agreed in August up by 104% year-on-year.  

Rightmove’s property data expert Tim Bannister says that while needing more space has always been the most popular reason for moving house, the coronavirus pandemic has resulted in a new urgency for extra space to be able to work from home, which means that there are different sets of buyers competing for the same type of property. With overall asking prices just a few hundred pounds shy of July’s record, and buyer demand at an all-time high, those currently looking for their next home are likely to find that only offers close to the asking price will be considered, especially for larger homes. Rightmove says that overall prices have remained steady since hitting a record high in July. The real-estate website’s House Price Index reveals that the average UK property asking price is now £319,996 - up by 0.2% from August and by 5% year-on-year.

The £20bn tax rise plan 

Tax hikes of up to £20 billion are reportedly being considered by the Treasury to deal with the cost of the coronavirus crisis. But the plans, potentially a "quintuple whammy" of tax rises, are being opposed by Number 10. Treasury officials are hoping the largest programme of tax increases, which could amount to £20bn a year, in a generation could plug holes in the public finances caused by the pandemic, the Sunday Telegraph reports. But Boris Johnson is reportedly on a collision course with Rishi Sunak over the plans, with Number 10 preferring cutbacks to Whitehall departments' spending. There are said to be fears of imposing taxes on Middle England amidst the already damaging pandemic, with Downing Street only willing to hit the very richest with tax rises. Ministers are looking at announcing hikes to capital gains tax and corporation tax as early as the November Budget. The money could be clawed back from pensions, businesses, the wealthy, and foreign aid. Chancellor Sunak is reportedly considering hiking corporation tax from 19% to 24% in order to boost revenue by £12 billion next year. Capital gains tax might also be paid at the same rate as income tax, under the ideas being looked at. Pension tax relief could be "slashed" under measures being considered by the Treasury to help pay for the Covid-19 crisis and raising fuel and other duties is also being looked at. A revamp of the inheritance tax system and the introduction of an online sales tax was also being considered. The international development budget could also be caught up in Treasury reappraisals due to the cost of the pandemic. The government had to raise billions to pay for the furlough scheme, while Britain's GDP plunged by more than 20% in the early stages of the crisis as businesses closed. Treasury sources said they do not comment on what may, or may not be, in the forthcoming Budget. Businesses are urging the government to concentrate on further support measures to aid the recovery and "invest in growth". 

Housing market – what does the future hold?  

Crises come and go but no matter what, house prices always rise, right? That’s just what they do in this country. According to data from Nationwide, house prices in the UK rose by 21 per cent on average during the 1990s and 33 per cent during the 2010s. This is why property, like gold, has been considered as a “safe” investment in recent decades. So safe that they even appear to be pandemic-proof. Since lockdown eased and Chancellor of the Exchequer cut stamp duty, various different house price indices have reported a housing market “boom”. This reached an apex last week when Nationwide reported that house prices had seen their highest monthly rise in more than 16 years, reaching an “all-time high”. Prices rose by two per cent in August, the lender said, taking the average price to £224,123. This news has evoked a frenzied response from homeowners excited to make money on their investment, would-be buyers who worry they will now have to pay above the odds and jaded perennial renters who fear this is yet another nail in the coffin of their homeownership hopes alike. However, all is not quite as it seems, and housing market experts are still advising caution and even tentatively predicting a fall in house prices when the economic impact of the pandemic on the economy is felt later this autumn. But commentators rightly point out that house price indices only reflect those who are able to buy. Lots of people were unable to afford to buy a home before the pandemic hit and even more will be unable to now. Job losses, pay cuts, and the ongoing mortgage crunch will all limit the ability of people, particularly young people, to buy a home. While the demand that pent up during lockdown – when the housing market was frozen – may be driving price increases, that’s only part of the picture. The market is currently in a strange state of stasis because it has effectively been protected from the immediate economic cost of the pandemic by low mortgage rates, the Government’s stamp duty cut, mortgage payment holidays and the furlough scheme. This means that we may not see exactly what effect this pandemic will have on the market for some time yet. As these end, the downwards pressure on the housing market will increase. There is also the uncertainty of what Brexit will bring. In the absence of a sustained and widespread economic recovery that would probably require a vaccine, 2021 could end up being the year the pandemic hits the housing market. 

Equity release used to pay off debts 

According to their findings, two-fifths (41%) of equity released in the first half of 2020 was used to pay off debts. Over 40% of the total amount of new equity released (which equates to around £588million) was used to clear some form of borrowing with mortgages (53%) followed by credit cards (47%) and loans (36%) being the most common repayments made. While using income to repay borrowing can be a better approach in certain circumstances, this is not always possible for some over-55s who find that they either need to repay a significant and unaffordable lump sum –in the case of an interest-only mortgage – or are unable to pay much more than the interest on other borrowing. With 56% of equity release plans allowing ad-hoc capital repayments and 38% facilitating regular payments to service interest and so avoid costly roll-up, customers can find that they are better able to manage their borrowing through appropriate use of these flexible product features. While most people want to reach retirement debt free, this is simply not the case for everyone – especially those who have taken out interest-only mortgages and now often face finding a substantial lump sum to repay the balance. In H1, over £500million worth of borrowing was repaid using housing equity – allowing people to retire with confidence, without the burden of needing to make regular monthly payments or facing the prospect of having to sell their home. With equity release rates starting from under 2.5% and many products allowing ad-hoc capital repayments or ongoing interest repayments, these flexible plans allow people to proactively manage their borrowing and shore up their finances. Something that is arguably more important than ever given the current economic uncertainty. Engaging with equity releases may seem like a good option for those who want or need some extra money but there are some important factors that should be considered before action is taken. Equity release can be more expensive in comparison to ordinary mortgages. If a person takes out a lifetime mortgage, which according to the Money Advice Service is the most common route for equity releases, they’ll likely be charged a higher rate of interest than they would have been charged on an ordinary mortgage. It should also be noted that for lifetime mortgages, there is no fixed “term” or date by which people are expected to repay their loan. The rate of interest that will be charged on a lifetime mortgage will not change throughout the life of the contract. Additionally, home reversion plans are unlikely to award the applicant anything near to the true market value of the home when compared to selling the property on the market according to the Money Advice Service. For retirees with limited resources, applying for an equity release may not allow them to rely on their home for money or support in their later years.

Pension tax rise to deal with Covid debt?  

The government should consider raising the amount of tax retirees pay on their pension withdrawals to help pay off the UK’s Covid-19 debt, the Institute for Fiscal Studies has said. Appearing at a Treasury Committee hearing on tax after coronavirus on September 1), Paul Johnson, director at the IFS, said pensioners were a feasible target as they had been protected from past tax rises and have received generous benefits from their pensions. Mr Johnson said the amount of tax paid on pension withdrawals could be increased marginally to bring in extra revenue, particularly on occupational pensions. Currently, when people take money from their pension 25% is tax free while the remaining 75% above the personal allowance is charged at the marginal rate of income tax. Pension tax relief restrictions have raised money over the last decade but there has been no tax increase on pension in payments. In that sense those who have already reached pension age have been protected from tax rises but there is a case for at least a modest increase in tax on occupational pension in payments given that they would have not had any national insurance paid on this in the past. Current retirees have been well tax relieved and that generation has done very well out of occupational schemes. However this would not raise the large amounts of revenue that the government would need. Another suggestion was to reduce the amount of tax relief for higher earners, which has previously been criticised by the industry. But Mr Johnson agreed this would dis-incentivise higher earners from paying into a pension and could instead see them move to Isas or other savings vehicles. Mr Johnson said the government was likely to look at substantial taxes such as national insurance contributions, income tax and VAT, as this is where two-thirds of tax and the majority of the Revenue's income came from.

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