The World In A Week - Start Of Something New?
It has been 28 days since Boris Johnson delivered his address announcing that the UK will be placed in a state of lockdown. On Thursday, the Foreign Secretary, Dominic Raab, declared that the lockdown would be extended for at least another 3 weeks. It seems like we have settled into our social distancing routine. We have adapted to our working life and we have discovered new hobbies to replace our commutes. Our new lifestyle has encouraged greater reading, home-exercise and cooking which could spark a new healthier way of life. We have already experimented with the idea of operating remotely from home and this could result in a more permanent shift. With the much-improved workplace software now available, employers are weighing up their need for office space and we could be approaching the start of a drastic change in the workplace environment.
The UK’s first quarter GDP data is set to be released at the end of April; however, Q2 GDP data is expected to capture the largest proportion of the economic downturn. Markets were largely flat last week except for the S&P 500 which was up 2.76% in Sterling terms. Most notably MSCI China was up 2.28% last week in Sterling terms and its year-to-date return reached 0%.
Last week also marked the start of increased M&A activity with the Competition and Markets Authority provisionally approving Amazon’s investment in Deliveroo who had stated that, without an injection of funds, they would face exit from the market. Deliveroo has been hit hard by the closure of restaurants and hence, would not survive the pandemic. Despite concerns that the investment would reduce the potential for new competition, it was decided that business continuity and availability of food override competition concerns. Predatory buying behaviour from larger companies is expected to continue as they operate larger cash reserves and greater market power. However, this period of change may also encourage new market entrants as seen with Zoom’s rapid expansion in the video communications sector. Zoom was trading at $76 in mid-January and is now trading at $150 as of mid-April following their speedy uptake. Unemployment has understandably spiked since the lockdown measures were introduced with 1.4M unemployment claims being made. However, employers should aim to seek alternatives such as furloughing staff or reducing working hours rather than resort to redundancies, to mitigate the negative effect on the economy.
Bank Of England Interest Rate Cut: What Does It Mean For Finances?
Over the last few months, speculation that the Bank of England would increase its base interest rate has been mounting. However, the impact of Covid-19 has changed that, leading to the central bank making two cuts to the interest rate in quick succession.
Coinciding with the 2020 Budget, the base rate was cut from 0.75%, where it’s been since August 2018, to 0.25% on Wednesday 11th March. Just a week later, the rate was cut again on Thursday 19th March to just 0.1%. The latest cut represents a historic low, and it could have an impact on your finances.
The Bank of England base rate is the official borrowing rate of the central bank, affecting what it charges other banks and lenders when they borrow money. This then has a knock-on effect on personal finances.
Why has the Bank of England cut interest rates?
The rate cuts have been in direct response to the coronavirus pandemic.
As the virus has spread globally, it’s had a significant impact on economies. In the UK, non-key workers have been urged to work from home, pubs and other leisure facilities have been temporarily ordered to close, and many other businesses have taken the decisions to either reduce operations or suspend them. These are steps that are hoped to stem the spread and relieve pressure on the healthcare system but come at an economic cost.
The latest interest rate cut has increased its quantitative easing stimulus package and pumped more money into the UK economy. The aim of this is to calm the financial markets, which have experienced volatility over the last few weeks, and stabilise the economy.
In a statement, the Bank of England said: “Over recent days, and in common with a number of other advanced economy bond markets, conditions in the UK gilt markets have deteriorated as investors sought shorter-dated instruments that are closer substitutes for highly liquid central bank reserves. As a consequence, the UK and global financial conditions have tightened.”
The Monetary Policy Committee, which is responsible for setting the base rate, voted unanimously to increase the Bank of England’s holding of UK government bonds and sterling non-financial-grade corporate bonds by £200 billion, bringing the total to £645 billion.
But what does this mean for your finances? The impact will depend on whether you’re looking at borrowing or saving.
Borrowers
For some borrowers, the lower interest rate is good news. This is due to the cut lowering the cost of borrowing.
The area where you’re likely to see the most immediate impact is your mortgage if you have a tracker or variable rate one. A tracker mortgage, for example, tracks the Bank of England base rate, so your mortgage repayments should drop before your next payment. A variable mortgage tracks your lender’s interest rate, this will follow the trend of the Bank of England, and most borrowers will benefit from the full 0.65% drop, but it does vary. It’s worth checking with your lender about how your mortgage repayments will change if they haven’t already contacted you.
Unfortunately, those with a fixed-rate mortgage won’t benefit from the rate cut.
Savers
The years since the financial crisis have been difficult for savers. Low-interest rates over the last decade have meant savings aren’t working as hard as they may have done before 2008.
Interest rates on savings accounts are now likely to fall even further. When you factor in the pace of inflation, this means that many savings are likely to be losing value in real terms. This has a particular effect if you’re saving for medium and long-term goals. Inflation rising by a couple of percentage points each year can have a large impact when you assess the impact over ten or 20 years, for instance.
If you have a fixed-rate account, your interest rate and savings will be protected for the time being. However, if you have savings in other types of accounts, it’s likely the amount they earn will fall eventually. Banks must give existing customers at least two months’ notice of a cut, for current accounts and instant-access savings accounts.
For long-term saving goals, investing can help savings match the pace of inflation, maintaining your spending power. However, it’s important to note that investment values can fall and experience volatility, with the pandemic having an impact on markets too. As a result, it’s important to assess your financial goals and risk profile before making any investment decisions.
If you’re unsure what the base rate change means for you, please contact us. We’re here to help you adjust financial plans and goals as circumstances change, whether they’re within your control or not.
Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
What Does Coronavirus Mean For My Pension And Retirement?
As the coronavirus pandemic continues to dominate world headlines, here’s what it might mean for your pension and retirement plans.
The pandemic has created uncertainty in economies around the globe. As a result, stock markets have experienced shocks and over the last few weeks have seen significant falls. Fears of a recession following the pandemic have sparked even more concern. It’s natural to be worried about what the impact on financial markets means for your future. Understanding what the change means, and where adjustments may need to be made, can help you plan for retirement with confidence.
What impact has coronavirus had on pensions?
For most people, pensions will be invested. This gives your pension an opportunity to grow over the several decades you’re likely to be paying into a pension. However, it does mean your retirement savings are exposed to market volatility. In the last few weeks, this will mean pension values are likely to have fallen.
The full impact will depend on where your pension is invested. It’s important to keep in mind that a pension doesn’t just hold stocks and shares, other assets are used to create balanced portfolios. So, whilst news updates may say the stock market has fallen 20%, it’s unlikely your pension will have suffered a fall on the same scale.
If you’re worried about your pension, it’s worth checking the value. However, keep in mind that short-term volatility is to be expected at the best of times. Keep the bigger picture in mind and look at the value of your pension with your retirement plans in mind.
The impact coronavirus will have on retirement plans will depend on what stage you’re at.
- Your retirement is still several years away
If retirement is still some way off, the current market activity shouldn’t affect your retirement plans.
You should always invest with a long-term goal in mind, this provides an opportunity for peaks and troughs to smooth out to deliver gradual investment gains when you look at the bigger picture. Whilst past performance isn’t a reliable indicator of the future, previous market corrections and crashes have always been followed by a period of recovery.
So, whilst it’s natural to worry if your pension value has fallen, stick with your long-term plan.
- You hope to retire soon
If retirement is nearing, it’s natural to worry about your pension in any circumstances. It’s a life milestone that means we often have to change the way we view income and finances. As a result, a stock market crash just before the date can be worrisome.
The first thing to do here is to put the stock market falls into perspective. You’ve likely been saving into a pension for many decades. No one likes investment values to fall, but when you look at it in comparison to the gains made, you’ve probably done well financially.
You also need to look at your pension value in the context of your retirement plans: Will the current value of your pension provide you with the income needed throughout retirement? If not, what is the shortfall?
This can be difficult to weigh up, as there are numerous factors to take into consideration. Working with a financial planner can help you understand how the pension figure translates to a retirement lifestyle. If there is a shortfall, there are often steps you can take to bridge the gap, from delaying retirement to using other assets.
It’s also worth noting that, depending on your goals and desired retirement lifestyle, your adviser may have ‘lifestyled’ your pension already. This is where your savings are switched to a lower risk profile that aims to preserve the savings you already have as you near retirement. If this is the case, it’s likely the impact on your pension is lower as you’ll be less exposed.
- You’re already retired
If you’re already retired and choose to access your pension flexibly using Flexi-Access Drawdown, the current activity may have an impact. This is because your pension savings remain invested with the goal of delivering returns whilst you’re retired. However, the flip side of this is that you’re exposed to market volatility.
The important thing to recognise here is how your withdrawals will have an impact in the long term. Making withdrawals whilst the market is low means you must sell more units to secure the same income. This can deplete your retirement savings quicker than expected. As a result, it’s worth reviewing how much you’re withdrawing.
If you’re able to reduce withdrawals or temporarily pause them, this can help to minimise the impact on your pension savings in the long term. You may have other assets, such as cash savings, that can be used to tide you over until the markets begin to recover. If you find yourself in this situation, please contact us. There are often solutions that will enable you to maintain your lifestyle and future.
Having confidence in your retirement aspirations
Whether you’re already retired or you’re still working towards that goal, it’s important to have confidence in your plans. This includes understanding the lifestyle your pension will provide and how market shocks would have an impact over the short and long term. This is where financial planning can help. If the recent volatility means you have concerns about pension investments, we’re here to help you. In some cases, it may simply be understanding how pensions will grow over the next ten years, in others, adjustments may be necessary, such as reassessing your risk profile or increasing contributions. Please contact us to discuss your pension and retirement goals.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
Is A SIPP The Right Investment Product For You?
The Self-Invested Personal Pension (SIPP) was first introduced over 30 years ago and large numbers of investors have opted for one since. Their greater flexibility and the amount of control they offer has led to them being branded ‘DIY pensions’ in some quarters.
If you’re confident about investing in the stock market and have a sizeable pension fund, or you’re looking to use a pension product to invest in commercial property, then a SIPP may well be the right option for you.
But they’re not for everyone. Greater control means greater responsibility and a potentially increased risk.
What is a SIPP?
A SIPP is a Self-Invested Personal Pension, open to anyone who meets the eligibility requirements of their chosen SIPP provider.
A minimum fund size may apply, and this might be comparatively high. This is because the costs of administering a SIPP can be larger than for a standard personal pension, due in part to the flexibility and control a SIPP offers.
A SIPP can give you greater control because you can choose from a wider range of investment options but you can also opt for a managed portfolio, based on your risk profile.
You can also use a SIPP to invest in commercial property.
Still, a SIPP is unlikely to be right for first-time or beginner investors.
Why might you choose a SIPP?
SIPPS can be a great investment choice in some circumstances and for a certain type of investor. You might choose to open a SIPP if:
- You have experience of investing
A SIPP gives you control over the investments you choose but this means greater responsibility too.
You’ll likely have complete flexibility and control over your investment portfolio, with a wide range of funds to choose from and different asset classes available.
This might increase the potential for investment growth but also means you’ll need to have a very definite understanding of your attitude to risk.
Your SIPP provider might offer a range of bespoke portfolios, tailored to different risk profiles.
- Your pension fund is large or you intend to invest a large amount
SIPPs can be more ‘hands-on’ for both you and your SIPP provider. This can lead to higher charges than with other pension products.
If your pot is large, you may be able to soak up these additional costs (your SIPP provider may have a limit on the minimum investment). Even if your initial investment is low, if you intend to significantly increase contributions once the SIPP is in place, this may offset the charges.
- You’re looking to hold commercial property in your SIPP
Commercial property could include business premises, factories or offices, and there are two main ways that these can be held in a SIPP.
- Use your pension fund to purchase the property, placing the premises directly in the SIPP
- Use equity release on a property you already own to effectively exchange a pre-existing pension pot for the property. This approach is considered extremely high risk and will only be appropriate in limited circumstances.
Holding commercial property in a SIPP has benefits, including:
- The rent you receive is paid directly into the SIPP, rather than counting as personal income, and therefore isn’t liable to Income Tax
- You won't pay any Capital Gains Tax on the sale of the property – because the property is held in the SIPP and any gains belong to the pension
- You can also use up to 50% of the SIPP value as a loan to purchase your commercial property, held against the value of the SIPP. Your personal (and professional) finances are protected if the property is repossessed.
When wouldn’t you choose a SIPP?
A SIPP isn’t a mass-market product but was instead intended for a very selective market. Its move into the mass-market has led to some people being invested in SIPPS who shouldn’t be – paying higher fees when they would be better off in a personal pension.
Consider an alternative to a SIPP if:
- Your pension pot is relatively small
SIPPs can have high charges compared to other pension products. Whereas a high fund value can help to soak up these charges, if you have a relatively small fund, you could see a large portion of it eaten up.
Consider whether other pension products might be right for you and if you’re still unsure, speak to us.
- You are a first-time, or relatively inexperienced, investor
SIPPs are complex products that offer a lot of choices.
They also offer the potential for increased risk. Although they might be suitable for experienced investors, consider other products if you are new to investing or still relatively inexperienced.
- You are risk-averse
The control and flexibility that SIPPs offer is great if you’re an experienced investor, but less so if you are new to investing. If you are risk-averse there are other pension products available – get in touch with us if you’d like to discuss your investment options.
Coronavirus, Life Insurance And Critical Illness Cover: What Will And Won’t Pay Out?
With more than 1.8 million confirmed cases of coronavirus worldwide and fears that up 80% of the UK population will fall ill as a result of the global pandemic, many people are looking to their insurance providers to clarify what will and won’t be covered.
If you have not received any clarification directly from your insurer, then here are a few facts that may help you understand your current position.
What does life insurance cover?
Whilst there are many different types of life insurance, strictly speaking, they should all do one important job – pay out if you die during the term of the policy. This relies on you having kept up to date with your premiums, answered all the application questions honestly, and, if you have a term life insurance policy, that you are within the covered period.
All life insurance policies will contain some special circumstances under which they will not pay. These, however, will vary from policy to policy. To be sure exactly which exemptions apply to your policy, you must take a detailed read through your policy documents or contact your provider for clarification. Some, for example, will not pay out if you are deemed culpable for your own death in some way.
However, the life insurance companies who have so far issued statements have all made it clear that they will be honouring all policies where death occurs due to the coronavirus pandemic.
What do the life insurance companies say about coronavirus?
In common with other major insurance providers, Zurich say that if a customer holding a Zurich life insurance policy dies of coronavirus, they will pay out following their “normal claims process and assessment”.
Aviva are also clear they will be paying out.
“With the news that Covid-19, more commonly known as coronavirus, is spreading across the UK we want to give you clarification around our claims and underwriting position.
We're continuing to pay all valid claims and committed to giving you access to valuable protection insurance. We remain a market-leading protection insurer for claim paid amounts.”
Vitality state that “Covid-19 or any other infectious disease which results in the plan holder dying, will be covered.” Beagle Street have stated the same.
While some insurers have not yet issued any statement regarding the Covid-19 outbreak, those who have make it clear that there is no pandemic or epidemic exclusion for life insurance.
This means if you have a current life insurance policy and you have continued to pay your premiums, your beneficiaries should receive a pay out if you die from Covid-19 or related complications.
What about Critical Illness cover?
When it comes to Critical Illness cover, however, things become a bit less straightforward.
Generally, insurers have been saying that they will not pay out on Critical Illness cover as a result of coronavirus because it is not a specified illness under the terms of their policy.
They also state that most people who contract it go on to make a full recovery which is, thankfully, true. However, around 5% of those infected face critical illness as a result of contracting the virus, including respiratory failure, septic shock and multiple organ failure.
Additionally, medical professionals are now saying that some of those who are infected with Covid-19 and who do not die from it, do suffer from what are most likely to be lasting lung conditions. Under these circumstances, you may be able to make a claim, but this will depend on the exact wording of your policy.
Zurich, in answer to enquiries on this question, have stated that:
“Coronavirus is not a specified ‘Critical Illness’ on Zurich’s policy.
Under our ‘Respiratory Failure – Of Specified Severity’ definition, it is possible a claim might be presented but the opinion of our Claims and Medical Officer is that the coronavirus is unlikely to produce the permanent symptoms or impairment to lung function required to meet this definition.
We will consider any such claims presented on the basis of the individual circumstances”
In response to enquiries from members of the public who are understandably confused and worried, the Association of British Insurers (ABI) have attempted to bring some clarity.
Their advice is that customers should expect insurers to treat any claim for coronavirus in the same way they would treat other claims for Critical Illness cover. They also advise customers to note that Critical Illness cover is only paid out where it falls under the specific set of criteria laid down in the ABI Guide to Minimum Standards for Critical Illness Cover.
All Critical Illness policies are required under these minimum requirements to cover heart attack, stroke and cancer, but beyond that, policies can and do vary. It may be that one policy covers for coma, respiratory failure and kidney failure – which may come about in the most serious Covid-19 cases – while others will not.
In other words, the only way to be sure what your Critical Illness policy will cover you or your loved ones for is to read your policy terms and conditions or check directly with your insurer. It may be that while coronavirus infection itself is not a covered condition on any Critical Illness policy, the complications that can arise from it, are.
Contacting your insurer
If you have any further questions about your policy cover, then you should in the first instance consult your insurer. Be warned, however, that their phone lines may be very busy at the moment, so it may be better to check their website for information. Most providers have updated their websites to include answers to specific questions about Covid-19 for worried customers.
The ABI provides some reassurance that while this is a particularly difficult time for claimants and insurers alike, they are doing everything in their power to keep their operations running as efficiently as possible and to offer clear and up-to-date information to their customers.
If you have any questions about the life or Critical Illness cover you have in place, please get in touch with us.
Please note
All details are correct as of 24th March 2020 and are taken from each insurance company’s website.
The World In A Week - Interim Update
We previously wrote, just two weeks ago, about the risk of economic forecasts during this period of uncertainty. The unreliability of data during the lockdowns will, in turn, make the forecasts equally unreliable. Although there is some consensus around how long economies will take to get back to pre-crisis levels, the range of forecasts for how much damage will be done is historically wide.
The one forecast that did hit the headlines was from the Office of Budget Responsibility (OBR), who caveated their forecast by stressing it was not a forecast at all. Their ‘illustration’ of the potential fiscal effects of a three-month lockdown gave us a 35% reduction in output and unemployment of two million. The silver lining beyond the headlines that the media ran with was OBR’s assumption of “no lasting economic damage” beyond a short downturn.
Naturally, focus is starting to centre around what an exit-strategy from lockdown will look like, however, not all economies will have the same experience of dealing with different phases of the virus. Reinvigorating a weak economy from a lockdown will depend on having sufficient stimulus in place and a consumer base willing to consume. That means keeping unemployment as low as possible.
The Federal Reserve announced this week that it will expand the size and scope of its lending facilities to provide up to $2.3 trillion in loans, in support of the US economy. This is to provide business with much needed liquidity to ensure that as many jobs as possible remain open when the furloughing ends.
We must also remember that this slowdown is not due to structural imbalances around the globe; but a deliberate policy-induced slowdown, which may not echo previous slowdowns. It is about keeping an open mind to the range of possible outcomes and not jumping to conclusions too early.
The World In A Week - A Rally From Awful To Bad
The last week before the Easter break saw risk assets rally strongly as investors left the haven of cash and re-entered the market. While High Quality Bonds rallied +0.3%, the greatest moves were seen in the riskier segments of the Fixed Income markets, as High Yield Bonds gained +4.7% and Local Emerging Market Debt rallied +4.6%. In Equities, Global Equities as measured by MSCI ACWI rose +8.6% in GBP terms, while the S&P 500 Index of US Equities rallied +10.3% - its strongest weekly performance since 1974.
While we expect markets to remain volatile to the upside and downside for the remainder of the year, the returns highlighted above illustrate the critical importance of remaining invested throughput the market cycle – no matter how painful the prior drawdown may have been.
Market performance has been driven by a number of factors, which of course all centre around the ongoing Coronavirus pandemic. Chinese trade and economic data has been better than expected as the Middle Kingdom begins to lift restrictions, awakening dormant companies. As with all Chinese data, this should be treated with caution, however. It has been reported that over 70 vaccines are being developed globally, with some about to begin human testing. In addition, some European countries are beginning to contemplate re-opening their economies – although the situation remains bad in the UK.
The economic damage caused by the virus will likely have ramifications for some time, and pockets of infection or re-infection may arise around the globe sporadically. This informs our view that market volatility will persist.
The World In A Week - Interim Update
The ebb and flow of sentiment is critical in the short term. The markets will overreact to both good news and bad. The problem is that data is going to be less reliable than it has ever been and that is the fuel that feeds sentiment. The extrapolation of data points amplifies the overreaction and a virtuous cycle quickly becomes a vicious one.
News of ‘lowest number of cases’ that permeates headlines can quickly change to a much darker narrative. Yesterday, the number of new infections in Germany rose to a three-week high and Italy announced that it was keeping schools closed until September. Hong Kong has extended its lockdowns until the end of April and expectations for a similar extension here in the UK are high.
However, we do know that for every piece of bad news, policy makers are looking to quell with announcements of new stimuli. Last night our Chancellor, Rishi Sunak, pledged £750 million of extra funding for our struggling charities and Congress in the US confirmed an additional $1 trillion stimulus package was currently being drawn up.
This is a reminder that temptation to gorge on the 24-hour news flow can lead to a rollercoaster of emotions; we wrote in our quarterly review in January of the perils of relying on particular media sources. We strive to provide balanced and relevant commentary, which we hope will become your mainstay in these difficult times.
The World In A Week - A Week Of Firsts
US jobless numbers surged from 3.3 million the week prior to 6.6 million last week, taking the total to almost 10 million people filing for benefits. Donald Trump responded to these record-breaking figures by signing an historic $2.2 trillion virus relief package into law. The package gives the unemployed $600 per person, in addition to their state benefits, for up to four months. This is a significant increase from the average benefits payment of c.$385 per person per month. It is expected that jobless numbers will continue to climb as workers and businesses alike access benefits; these stark numbers validate the consensus view that the US is already in recession.
Services PMI data shows a sedate return to the new normal for China and a somewhat grim picture for Europe. As China gets back to work, data sluggishly moved up from an historic low of 26.5 in February to 43 in March, a move in the right direction, but at a slower pace than expected. Europe, notably Spain and Italy, tells a very different story; both countries posted services data of 52.1 in February which collapsed to 23 and 17.4 respectively in March. While the Coronavirus continues to wreak havoc with the global economy, there are some tentative signs, in both Spain and Italy, that the infection rate is slowing.
Crude oil hit rock bottom last week tumbling to $25 a barrel having started 2020 at $66 a barrel. The slowing economy and excess supply have resulted in the collapse in oil price. In a move to stem further price falls, OPEC and others will meet this Thursday with a view to cutting supply. In an unprecedented move, which has not been witnessed before, Saudi Arabia will delay announcing its official oil selling price for May until after the meeting has taken place; prices were due on Sunday.
The World In A Week – Interim Update
Economic data is likely to become increasingly less reliable as a result of the COVID-19 lockdown. We know that the effect on the global economy will be bad, we just do not know how bad. That is why we are seeing significant stimulus packages from governments around the world and why they keep getting bigger. No sooner has the US announced stimulus package number three, at an impressive $2.2 trillion, there was expectation from politicians for stimulus package number four.
This dichotomy of knowing that the global economy is going to be damaged, but unable to accurately forecast to what extent, is why we have seen volatility in the markets and commitments to soften the blow increasing week-on-week.
Most economic data are survey based: industrial production, unemployment numbers, inflation numbers and various sentiment opinion polls need people to fill in the surveys. Filling in survey forms during a lockdown may not necessarily be representative of the whole. Social media spreads fear and affects sentiment and sentiment affects answers to surveys. Then you have issues such as consumer price inflation, which includes restaurant prices; how do you survey something that is not there?
It is likely that the data we will see coming out for the first quarter of 2020 will not be as reliable as it has been in the past. Interpolations of annualised numbers should be analysed with a fair degree of scepticism and investment decisions for the short term should not be made on this potentially soft foundation.
Although the extreme fear that was dominating much of March has slightly dissipated, we are still wary of the short-term outlook while in the midst of the virus crisis. Good news, such as the rumours that President Trump will cut taxes for US companies by suspending trade tariffs for 90 days, will elicit a good reaction from markets. While reports of increasing infection rates and deaths will provoke a negative reaction. Clear heads and predictable processes are needed in this phase of the crisis.