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Category — UK Economy and Economic Policy

A Savings Revolution to follow the Pensions Revolution

18 March 2015

We had the Pensions Revolution last year, now comes the Savings Revolution

  • 95% of savers will pay no tax on their savings – will be popular
  • 5m will be allowed to sell their annuity – that’s great news
  • But cutting Lifetime Allowance for pensions is really bad policy
  • Lifetime limit should only apply to DB, but abolished for DC

So there we have it.  The last Budget before the General Election.  A mix of moves to please as many of the electorate as possible, but without committing massive amounts of extra spending.  There is help for savers, help for first-time housebuyers, but nothing to help with the social care crisis.

The main news this time is the help for savers.  This is unquestionably good news for ordinary savers with 17million people benefiting from the decision to scrap basic rate tax on the first £1000 of savings income each year.  This will be popular, as 95% of savers will not pay any tax on their savings income.  Savers have paid tax on their income when they earned the money, so allowing them to earn interest on it free of tax makes sense.

What might this mean for savers?

People with £50,000 savings may not pay any income tax on their savings:  If we assume savers earn 2% interest on their money, then they can have £50,000 in a savings account and will still pay no tax on their income from those savings.  Even if they earn 4% interest (those days seem like a distant memory but who knows they may return) then someone with £25,000 of savings would still pay not tax on their interest.

Non-taxpayers won’t have to reclaim the 20% tax deducted from their income:  At the moment, banks and building societies have to deduct 20% tax from all interest income before it is paid out and non-taxpayers have to reclaim the tax withheld.  In many cases, this money is never actually claimed as the recipients do not know they have to do so.  Pensioners are one of the groups least likely to reclaim the tax, so this will be of benefit to them.

Higher rate taxpayers will have to pay the additional tax above basic rate and the top 5% of savers will still be able to shelter money in ISAs to receive tax free savings income.

ISA savings will also become more flexible:  At the moment, if you invest the full £15,240 into an ISA at the start of the year and then take some money out, you cannot put more back again that year.  In future, the Government plans to allow you to put money in, then take it out again if you need to and reinvest back up to the full annual ISA allowance later in the same tax year.  It is not clear how this will be tracked and I can foresee some administration issues, but the principle is a good one.

So what about pensions – some good news, some not good news:  After last year’s bombshell, we could not possibly expect a similar scale of change.  Building on the pensions revolution started in last year’s Budget, the Chancellor wants to extend the new idea of freedom and choice much more widely.  However, to pay for the giveaway to savers, the lifetime limit on pensions has been cut sharply again.

Undoing unwanted annuities:  The pensions revolution that proved so popular last year has been extended to try to include those who had already bought annuities before the rules forcing most pension savers to buy annuities were scrapped.  The Chancellor intends to offer those who were previously forced to lock their pension funds into irreversible annuities, the chance to sell them again.  Many never actually wanted, to annuitise or bought unsuitable products and understandably felt most aggrieved that future pension savers had freedoms they were denied.  So a consultation has been launched https://www.gov.uk/government/consultations/creating-a-secondary-annuity-market-call-for-evidence that proposes allowing people to sell their annuities.  They will receive a cash lump sum that they can either spend – but will be taxed on as income – or can reinvest into a pension drawdown fund and then only pay tax when they withdraw their money.  This is a fair and sensible policy.

Regulatory protection and advice crucial:  Of course there are dangers that people will be ripped off if companies buying their annuities offer a poor deal.  Many annuitants paid high charges when buying the annuity in the first place or received poor value, so that would be adding insult to injury.  Therefore, we need careful regulatory oversight of the second-hand annuity market, perhaps with controls on charges and making sure people get proper independent advice before trading in their annuity.  The Pension Wise guidance service is likely to be extended to offer help and information with the decision, but advice and regulatory protection are really needed.  Of course, nobody will be forced to sell their annuity.  It will be their choice, but one which they would not otherwise have.

There are circumstances in which allowing people to sell their annuity will be sensible: Those with small pension funds and plenty of other retirement income may welcome the chance to take the cash for urgent expenses or debt repayment.  Others may need to provide a pension for a partner which was not included in their annuity.  Those with guaranteed annuity rates that only offered single life products will have a chance to cover their partner and those who prefer to leave their pension money invested for a few more years will be able to do so, whereas under the old rules they would have needed huge sums (around £100,000 or more) to be able to use drawdown.  Controls on charges or other customer protection might be needed, but at least people will not be stuck for life in an unsuitable product.

However, the other big change to pensions is far less welcome:  Cutting the lifetime limit from £1.25m to £1m is very disappointing.  Indeed, in 2014 the lifetime limit was still £1.5m, it is now £1.25m and cutting it down to £1m is a draconian change.  Cutting the lifetime allowance so sharply makes it much harder for people to plan their pension savings over the long-term.  This is expected to raise £600m in extra tax revenue and will hit many people in final salary or defined benefit pension schemes, as well as those in defined contribution pensions.  The Government suggests that only around 4% of pension pots are above £1million and that it will offer protection for those already near or over the limit, however it is really a shame that this policy has been introduced.

Lowering LTA adds more complexity and penalises investment success – both are bad for pensions: Firstly, it makes pensions still more complicated by adding yet another layer of protection into the rules.  Secondly, it is a penalty on investment success.  Surely the point of pension saving is to benefit from long-term investment returns.  That means it makes sense to limit the amount people can put in with the help of tax relief, but does not make sense to then try to punish them if their fund grows sharply.

Lifetime limit far more generous for DB schemes than DC:  The lifetime limit of £1m will allow members of defined benefit (final salary/career average) schemes to have a pension of up to £50,000 a year within the limit.  However, members of defined contribution pension schemes (which is the  majority of workers outside the public sector) could only buy a pension worth around £25,000 for £1m (with inflation linking and spouse protection), so the lifetime limit is unfair in this respect due to the calculation methodology of the rules.

A lifetime limit for DB schemes makes more sense, but should be abolished for DC: For members of defined benefit pension schemes, who do not have an actual pot of money but are promised a specific level of pension, perhaps the lifetime limit makes more sense, since they have no control over the investments and the contributions are harder to measure due to fluctuations that occur depending on the scheme’s assessed funding levels.  With defined contribution schemes, the better policy would be to control the amount put in each year but then allow the pot to grow as well as it can, without penalising it if it rises strongly.  Therefore, I would like to see the Lifetime allowance abolished for DC schemes.

Nothing for long-term care:  It is disappointing that there are no new measures to help or encourage or incentivise people to put money aside for funding long-term care needs.  Families are not prepared for care, nor is the Government, yet there is a crisis looming which could eat up the resources of many families who might have been able to put some funds away if they had known about it – and could also bankrupt the NHS.  The next Government will have to get to grips with this crisis urgently, time is running out.

Help for younger first time housebuyers with a pension-style ISA plan:  The new ‘HelptoBuySA’ effectively turns the savings of young people preparing for their first house purchase into house pension plans, by offering the equivalent of basic rate tax relief on their savings.  If they need a house deposit of £15,000 for their first home, they will only need to actually save £12,000 and the Government adds the additional £3,000 they require.

March 18, 2015   2 Comments

Older workers are essential for economic success

22 February 2015

  • Having more over 50s in work is not a threat to younger people’s wages or employment – it is essential for economic progress
  • Studies suggest more older people in employment improves employment and wages for the young
  • In our ageing population, we should welcome higher employment levels for over 50s – if they shift to part-time that may depress average wages but is not a concern long-term
  • Concerns about rising labour force participation by older workers being a threat to younger people are misguided – it is essential for economic progress
  • Failure to encourage longer working lives will imply a larger tax burden on future generations, especially with the aging demographics and rising life expectancy
  • More older workers leads to higher national income, higher national output and more jobs for younger generations
  • We should welcome the rise in part-time workers in later life, which allows an extension of working life that can boost future individual and national income

Keeping more over 50s in employment does not mean fewer jobs for the young: There is extensive evidence showing that having more over 50s in work, is actually associated with both lower unemployment and higher wages for the young. A summary is in a Eurofound study by Rene Boheim [ http://wol.iza.org/articles/effect-of-early-retirement-schemes-on-youth-employment.pdf ] ‘The effect of early retirement schemes on youth employment’ which concludes that increasing retirement age leads to an increase in the wages and employment of younger workers. So it is in the interests of all of us to enable more older people to stay in work.

More over 50s staying in work is a major boost to our economic prospects:  Concerns that later retirement has caused slow wage growth in the post-2008 recovery, despite sharply falling unemployment and the massive job creation of recent years, are misguided. Such simplistic analysis fails to factor in the impact of an aging population and the trend to flexible or part-time work as an alternative to traditional retirement. In fact, these trends are hugely beneficial to our economy and should be celebrated.

The demographics suggest we need to ensure older people are employed for longer: The statistics are startling. Over the next few years, there will be 3.7million more people aged between 50 and state pension age, but 0.7million fewer people aged 16 to 49. Put another way, estimates suggest there will be 13.5million more job vacancies in the UK, but only 7million school-leavers. This net shortfall of workers cannot be filled by immigration of 200,000 a year. With our aging population, business urgently needs to recognise the demographic inevitability – either more over-50s will work longer, or we face declining economic growth.

The contention that early retirement leads to more employment opportunities for young people depends on two assumptions, both of which are flawed: For example, this argument assumes older and younger workers are easily substituted for each other. In fact, the skills of older people such as life and job-specific experience, are generally different from those of younger people who have not yet experienced working life. Therefore, younger and older workers are not normally good substitutes for each other – indeed their roles are often complementary.

There is not a fixed number of jobs in the economy:  It is not true that each older worker in a job denies employment to a younger person. This is not how economies work. There is not a fixed number of jobs. The more spending power in the economy, the more jobs can be created. If companies and individuals earn more, economic activity and employment can increase. In an individual company there may be a fixed number of positions, but only over the short-term. If business is good, the company can create more jobs – but if demand for the company’s goods or services declines, it will reduce the number of jobs. This also applies to the economy as a whole. So keeping more older people in work, means increasing national output, higher lifetime incomes and more money to spend in our aging population. Conversely, if more older people stop work, they will have lower spending power and ultimately there will be fewer jobs for younger people.

Having older people active and productive benefits people of all ages and ensures that more jobs are created:  Younger people’s wages rise as employment rates of older people increase [see Kalwij, Kepteyn and deVos, ‘Retirement of Older workers and employment of the young’] and as the number of workers age 55 and over increases, overall employment and wage levels rise and unemployment falls [see, Munnel and Wu ‘Will delayed retirement by baby boomers lead to higher unemployment among younger workers’].

Historical analysis both in the UK and elsewhere supports this conclusion: For example, after World War II, the dramatic increase in labour force participation by women did not mean fewer jobs for men. Instead, it boosted economic growth as there were more two-earner families with higher disposable income, which created more new jobs as spending power in the economy increased.

UK 1970s’ ‘Job Release Scheme’ failed:  In the 1970s, the UK Government tried to use ‘early retirement’ as a means of addressing youth employment. Its ‘Job Release Scheme’ aimed to encourage older people to leave work and ‘release’ jobs for the young, but the policy failed. Rising early retirement was accompanied by higher unemployment for younger people. Economists subsequently concluded that encouraging more older people to retire is not a way to increase employment prospects for young people over time.  It can actually have the opposite effect.

France has historically tried reducing retirement ages as a policy tool to reduce youth unemployment: From 1971 to 1993 the Government encouraged early retirement, but this led to a fall in employment of both older and younger workers. In contrast, from 1993 to 2005 more older people stayed in work and youth employment rates increased.

There are other examples too: In Germany in the early 1970s, employment of older workers fell by 7 percentage points, but employment for younger workers decreased by 2 percentage points. However, in 1992 the German Government introduced new incentives for older workers to stay in work, leading to a fall in youth unemployment.

February 22, 2015   No Comments

My comments on the Autumn statement

3 December 2014

So what has happened in the Autumn statement?

Summary

  • No change to pensions tax relief but extra tax breaks for joint life annuities
  • Levelling the playing field between annuities and drawdown inherited benefits
  • New tax breaks for ISAs – will be inherited tax free between spouses
  • Tax breaks for carers and careworkers
  • Bigger rise in Pension Credit
  • More generous means-testing calculation for pensioners with pension funds
  • Promise of a pilot back-to-work scheme for older people on benefits
  • Stamp Duty reform to help 98% of housebuyers

What’s missing

  • Measures to incentivise training and employment of older jobseekers
  • Incentives to save for care
  • Incentives for pension funds to invest in infrastructure
  • The name for the Guidance Guarantee service
  • Protection for annuity and pension customers
  • The interest rates that will be paid on pensioner bonds

After the Chancellor’s Budget last March, which was such fantastic news for pensions and ISAs, but a painful shock for many insurers, I assume most of the financial services industry listened anxiously to the Autumn Statement.  They needn’t have worried.

It was, of course, impossible to upstage the Budget’s impact on pensions and the over 50s, but there were some announcements worthy of note.

Pensions tax relief – no change

The Chancellor has decided not to make any changes to pensions tax relief, despite some speculation that this was on the cards.  The pensions tax relief limits remain unchanged and people will still be able to contribute to pensions up to age 75.  After so much upheaval, it is important to allow the system to settle down so that individuals can make serious long-term financial plans in the knowledge that the goalposts won’t be moved.

The new pensions landscape will require significant changes in products and processes and If the government wants the industry to reform, we need a period of stability to allow this to happen.  We need to see interesting innovations from financial services firms, but it does mean that the industry needs time to change technologies and products properly and provide better outcomes for consumers, without fearing further radical overhauls.

Widows and widowers can inherit joint life annuity income tax free and any nominated beneficiary will be allowed to inherit an annuity in future products

New rules about inheriting pensions have been announced – although they were widely leaked before the Chancellor’s Statement.  Under previous rules, those who inherited pensions would pay 55% tax on remaining pension assets in drawdown funds, but that penal tax has now been abolished.  In order to level the playing field between drawdown and annuities somewhat, the Chancellor has announced that the income inherited by widows or widowers from their partner’s ‘joint life’ annuity, as well as beneficiaries of guaranteed term annuities, will also receive the money tax-free if the person passed away before age 75.  Having scrapped the 55% tax on inherited pension drawdown funds and allowing remaining pension assets at death to be passed on as a pension, tax free, it seems right that inherited annuity income should enjoy the same privilege.  Anyone who has already bought joint-life annuity (which is a minority of people, but nevertheless significant) could be better off as a result of this change.  The majority of past annuity purchases, however, were single life products which will not benefit.

Most importantly though, these new rules, coupled with the new Pension Guidance, should help ensure more people cover their partner as well as themselves when buying a lifelong pension income.  The annuity tax rules are also being amended so that joint-life annuities in future can cover any nominated beneficiary, not just a spouse or civil partner.

New tax breaks for ISAs

The new ISA limit for next year will rise in line with cpi to £15,240 from current level of £15,000 (and Junior ISAs to £4,080).  There are also new tax breaks for the 150,000 married ISA savers who die each year.  Currently, when they die, their ISA just goes into their estate and the ISA tax advantages are lost.  However, the Chancellor is proposing that those who die can pass on their ISA accounts to their spouse or civil partner free of tax.  So ISAs will pass on as ISAs, to increase savings income for widows or widowers.  The Treasury is also considering allowing ISAs to invest in crowdfunding debt.

Help for Carers

One of the biggest problems facing families in future is likely to be the cost (both in time and money) of caring for older loved ones.  As the population ages and life expectancy rises, the numbers needing care will rise sharply in future years.  The Chancellor has announced a little extra help for people who are caring for loved ones.  The Carer’s Allowance earnings limit will increase to £110a week next April (it is currently £102pw), which could help more people work part-time without losing Carer’s Allowance.

In addition, the Chancellor is going to extend the £2000 rebate on National Insurance Contributions to cover careworkers.  The Employment Allowance will mean a family who directly employ a careworker earning up to £22,500 a year will not pay any National Insurance.  In addition, careworkers will not be affected by removing the £8,5000 threshold applying to tax on benefits in kind.  The care industry desperately needs more workers and any relief on tax or NI can help the affordability of care for families and improve the poor pay of care staff.

Notional income calculation for means-tested benefits – assume annuity income is received even if not annuitized, so poorest will not lose out by not buying annuities

There has been significant concern that the changes to pension rules could unfairly hit those on lowest incomes, but the Chancellor has addressed this.  There were fears that those on means-tested benefits who did not buy an annuity would be penalised.  Under the previous system, if you had bought an annuity, only the annuity income itself would be included in your income.  However, for those who had a pension fund which was in drawdown, the means-testing benefit calculation would use an estimate of the income you could have received and that ‘notional income’ would be included in your income assessment.  If there had been no change, this would have assumed that the income you received from your pension fund was actually 150% of the amount you could have received from an annuity (rather than just 100% of the annuity which is what you would have had if you’d actually bought one).  This would have meant lower income households were penalised for choosing not to annuitise, which is not the Chancellor’s intention.  So, in order to create a level playing field between annuities and leaving the money invested in your pension fund instead, the notional income calculation for means-testing is being changed from next April.  (The 150% of the equivalent annuity rate was assumed under the old rules because this was the upper limit for capped drawdown and was based on the Government Actuary’s Department estimate of market annuity rates, known as the GAD rate).  It is good news that the lowest income pension savers will not find themselves significantly worse off if they want to keep their money invested in their pension fund.  It will be important for the Guidance to help them realise that they need to keep the money inside their pension fund in order to benefit from these rules.  If they move it to another type of savings account, they lose tax benefits and may find their income is assumed to be higher.  Of course, they could also just spend the money or use it to repay debt, rather than buying an annuity which could also help their long-term financial future.

It is interesting to note that, in fact, the means testing calculation for social care, which was announced in October, had already adopted this new approach, but this does not seem to have been picked up.  The Autumn Statement is another opportunity to highlight this change that will help the poorest older people.  There is no change to the tariff income assumed from savings other than pensions.

Pension Credit uprating

The DWP has decided it will uprate the Pension Credit level in line with the rise in the Basic State Pension, even though this is above inflation.  The Basic State Pension is set to increase by 2.5% next April, a rise of £2.85 to £115.95 a week (from the current level of £113.10).  Pension credit, however, was only due to rise in line with inflation which was 1.2% (and the additional parts of the state pension such as State Second Pension S2P will rise by 1.2%).  However, in order to retain the differential between Basic State Pension and Pension Credit, the Pension Credit Guarantee Credit will increase by the same cash amount as the Basic State Pension i.e. to £151.20 a week for a single pensioner (from £148.35 a week at the moment).  This is slightly more than it otherwise would have increased (about £1-78 a week extra) and will be of help to the poorest pensioners. This move also has implications for the level of the new State Pension that will be introduced from April 2016, since the new single tier state pension will be set to exceed the level of Pension Credit Guarantee Credit, so by increasing this, the new State Pension will also be able to start at a higher level.  It will thus have to be more than £151.20 a week – it will be at least £151.25 at the full rate from April 2016. ,

Part of the extra cost of uprating the Pension Credit Guarantee level will be recouped from pensioners with savings, as the Savings Credit threshold will be increased by 5.1%, so the poorest pensioners who have some savings will lose out on some extra income.  Savings credit gives extra money to people who have saved, but you only receive this credit if your income is above the Savings Credit threshold of £120.35 a week for a single person).  The Savings Credit threshold will be increased by 5.1%, so more people will fall below the new threshold and lose out on savings credit income.  For every £1 by which your income exceeds the threshold, the Government pays you 60p, but this is one of the most complex calculations and most people simply do not understand it.  The maximum savings credit anyone can get is £16-80 a week and many of those entitled never actually claim because it is so complicated.  Nevertheless, some people will lose out when the Savings Credit is increased.

Stamp Duty reform

This is great news for most housebuyers.  98% of home buyers will pay lower stamp duty as a result of the reforms that have been announced.  Many older people have houses larger than they really need, but the costs of moving have put them off downsizing.  The reform of stamp duty should help free up more movement in the housing market.  There also needs to be a construction programme to build homes that older people might want to aspire to downsize to, which will further help them move on to more suitable housing.

Stamp duty has long been a most unfair tax. This ‘slab’ tax creates distortions around the threshold levels and reform has been long overdue – under the current system imposes, tax is paid on the whole property value, not just the marginal extra slice as with income tax at the rates shown in the table below. As an example of the unfairness, if you buy a home worth just under £250,000 you pay 1% tax, or £2,500.  But if you buy a home for £251,000, then you pay 3% which is £7,530.  This creates significant distortions around the tax rate thresholds which interfere with a free market.

Current Stamp Duty Tax Rates

Up to £125000 no stamp duty

to 250,000                   1%

to £500,000                 3%

to £1m                         4%

to £2m                         5%

>£2m                           7%

Scotland has already decided to change its own stamp duty rules from next April.  The Scottish Parliament wants the most expensive homes to bear a higher burden of the tax, and now the Chancellor is following Scotland’s lead.  Scotland’s measures have zero stamp duty on the first £135,000, then 2% duty on the extra up to £250,000, 10% on the amount between £250,000 up to £1m and 12% on the balance over £1m.  The Treasury has used different rates and thresholds, but the same principle as Scotland, so the new system will have the following rates.

New Stamp Duty system

Up to £125000                       0

£125,001 – 250,001                 2%

£250,001 – £925,000               5%

£925,001- £1.5m                     10%

>£1.5m                                    12%

Under the new rules, someone buying a house worth £251,000 will pay £2520 in stamp duty (rather than the £7530 under the old system.).  Those who have already exchanged contracts but not completed will be able to choose whether to use the old or new tax systems.

What’s still missing?

Measures to incentivise employers to train and employ older people

The Chancellor has, quite understandably, focussed on getting young people into work and subsidised apprenticeships.  Paying employers to take on young people is obviously beneficial, but has had the knock on effect of stopping employers from taking on older people as apprentices.  The over 50s are the group most likely to be long-term unemployed and need urgent help to get back into work.  The two biggest problems they face are ageism at work and lack of skills – these two factors combine to product a loss of confidence.  The Chancellor has promised (see page 89 of the Green Book) that from April 2015 there will be some back to work support for older people, with the Government piloting career change work experience and training schemes for older benefit claimants who are out of work.  This could help them achieve the training and experience they need to re-skill and move back into work.  I would like to see the Government go much further than this and fund proper over 50s training schemes.  It is so important to help the unemployed over50s find work.  We have had tremendous success in reducing unemployment for younger people, which has rightly been a significant policy focus, however there are serious problems for older people who face age discrimination in the labour market.

By ensuring more older people find work, the long-term growth of the economy will be boosted.  In our aging population, with so many more over 50s in coming years, failing to ensure as many as possible can find work is a recipe for economic decline and a real waste of talent.  I am so pleased that the Government has understood the need to intervene to help overcome the problems faced by older jobseekers.  Having met a number of out-of-work older people recently, I hear time and again that they feel they are not taken seriously when looking for work.  They lack up to date skills and experience, but having a chance of training and work experience gives them the opportunity to show what they can do.  Rather than being written off as ‘too old’ or ‘past it’, these new initiatives can help restore their confidence and self-esteem by moving back into work.

We need to do more to ensure older people’s skills are kept up to date, they have the chance to change careers if necessary, they can combine work with caring responsibilities and return to work after caring if they wish to.  Flexible working and even apprenticeships, returnships or mentoring are all important to help the employment prospects for over 50s.  Just one year delay in average retirement age can add 1% to economic growth and will increase lifetime incomes and national spending.

Specific incentives to save for social care

The Chancellor has not yet announced specific new incentives to help people save for later life care.  The numbers needing expensive old age care will grow significantly in future and almost nobody is saving to prepare for this.  A new Care ISA allowance would enable people to save in a tax-free environment to provide for long-term care if needed and, if the ISA could be passed on free of Inheritance Tax if not spent on care, then many people might start earmarking their ISA savings for care.  The new pension freedoms can also encourage people to leave money in their pension funds to pay for care in later life, however further incentives may also be necessary.  A specific tax break for care savings would help focus people’s attention on this vital issue.

Pensioner Bonds – what interest rate? We will know on 12 December

The Government says it will announce the interest rates for the new Pensioner bonds on 12 December 2014.  It has promised two different fixed rate market leading interest rate bonds to be available to people over age 65 from January 2015.  The original announcement was for each person to be able to buy up to £10,000 of a 2 year and a 5 year bond with interest rates of 2.8% or 4% respectively – let’s hope those plans haven’t changed.

Incentives for pension funds to invest in infrastructure

I am hoping that, sooner or later, the Government will wake up to the power of pension funds to invest in productive projects that can both help the economy and improve scheme funding. Infrastructure is an ideal asset to add to pension portfolios, as they offer the benefit of diversification which can reduce risk and potential inflation linked long term income streams.  If the Government were to underpin such investments, perhaps investments it would otherwise undertake itself by borrowing in the gilt market, then it could avoid worsening the deficit by only having to pay if the pension fund did not make sufficient returns to exceed gilt yields.  By offering at least gilt yields as a contingent payment in the event that a new infrastructure project did not deliver better returns in, say, 5 or 10 years’ time, the Chancellor could save the initial outlay and may never have to fund the project, but the economy would benefit from job creation in the meantime.  And if the project did succeed, the improved infrastructure would provide additional economic benefits and the funding of UK pensions would improve.  Offering meaningful incentives to UK pension funds to encourage them to use their assets to take construction risk on infrastructure projects, organised by trusted third parties, could boost the UK economy but the Pensions Infrastructure Project that was set up does not have such incentives in place.  That has failed to attract sufficient funding and has focussed on investing in existing projects or infrastructure secondary market debt, which does not have the same economic benefits or potential rewards as new projects.  Obviously these investments do carry greater risk, which is why a Government underpin that promises at least gilt yield returns if projects do not perform well enough could attract more money.  That way, the taxpayer would not need to commit money upfront while the public finances are so stretched, but domestic savings could be used to boost both the economy and pension fund returns.

Guaranteed Guidance for pension savers– what will the brand name be?

We need to know what the name of the guidance will be.  It is supposed to help individuals with their pension decisions and guide them to the information they need to assess what they should do.  The government must now urgently start to promote this service, to build up a strong brand recognition.  The more people who take up the guidance, the more likely they are to understand the important issues they need to consider when reaching their scheme pension age.  It will be very important to explain that this is not ‘advice’ and those giving the information are ‘Guides’ not ‘Advisers’.  If people want individual, tailored expert help to know what is the best decision for their own circumstances, and someone to take responsibility for it, they need to pay for independent financial advice.

Force pension companies to treat annuity customers fairly – reform sales process

It is disappointing that we did not see any new measures to reform the annuity market.  There are many ways in which the annuity sales process is failing to ensure customers are treated fairly by their providers.  Reforms are urgently required to revamp the way annuities are sold, including the following measures:

  • Introduce standard forms written in plain English, to explain annuity products
  • Providers must ask basic questions to establish suitability before selling an annuity.  For example, if the annuity assumes the customer is in good health, then this must be made clear and the company must ask about their health
  • Providers must explain the risks of annuities – for example that there is no inflation protection and no partner’s pension if the customer dies early
  • The FCA should ban hidden commission and require anyone selling or facilitating annuity sales to declare upfront how much money the customer will pay if buying an annuity and whether independent advice is being given.

December 3, 2014   2 Comments

Over 50s find it harder to get back into work as labour market improves

14th August 2014

  • Unemployment has fallen far less for over 50s than for younger workers as ageism in workplace remains
  • Under the coalition, unemployment for 16-49 year-olds has fallen 19%, but only 5% for over 50s

The latest ONS employment figures show that the UK unemployment rate has fallen far faster than previously expected and now stands at 6.4%, the lowest level since Q4 2008.

The figures also show that, under the Coalition Government, rising numbers of older people are remaining in work, with record employment levels for over 65s – a 291,000 increase since May 2010, up 36% over that period.

However, unemployment among those aged 50-64 has fallen much more slowly than for younger workers, suggesting that the over 50s are finding it far more difficult to get back into work and suggesting a need for further action to help re-employment for older workers.  Employers and recruitment agencies are often focussed on hiring young people and overlook the older jobseekers.  However, these groups have valuable experience and life-skills which can add value to many businesses, alongside younger workers.  I hope to be able to identify any significant barriers and help more over 50s stay in or return to work if they wish to.

Summary Table:

Category

Q2 2014, latest data

May 2010

Change since 2010 %

Change since 2010 number

Employees Age 16-49

21.56m

20.84m

+3.5%

+722,000

Employees Age 50+

9.03m

8.09m

+11.6%

+945,000

Employees age 50-64

7.94m

7.29m

+9%

+654,000

Employees age 65+

1.09m

0.8m

+36.4%

+291,000

 

Unemployed age 16 – 49

1.71m

2.1m

-18.8%

-390,000

Unemployed age 50-64

0.35m

0.37m

-5.3%

-19,000

  • Over 50s have not been squeezing young people out of the job market. Rising numbers of older workers are also associated with rising numbers of younger workers.
  • The number of over 50s in employment has been steadily rising. The total number of workers in the UK rose 5.8% between May 2010 and Q2 2014, with employment for the over 50s increasing faster than for younger workers
  • The number of unemployed over 50s has not declined at a rate comparable with the number of younger unemployed.  Unemployed people aged 16-49 fell 18.8%, while for those aged 50-64 it fell by only 5.3%.
  • Economic activity for 50-64-year-olds has been gradually rising compared to economic activity for 18-24-year-olds, which has been relatively stable. In Q2 2014:
    • 71.4% of 50-64-year-olds were economically active.
    • 71.0% of 18-24-year-olds were economically active.
    • 85.9% of 25-34-year-olds were economically active.
    • 87.1% of 35-49-year-olds were economically active.

 

August 15, 2014   1 Comment

Budget wishlist for pensions and savings

17 March 2014

A Budget wishlist for pensions and savings

  • Exempt savings interest from tax for two years
  • Or allow full ISA allowance in cash
  • Allow small pension funds to be taken as cash
  • Relax restrictions in capped drawdown to allow for ill-health
  • Introduce new incentives to save for long-term care – ISA savings set aside for care could pass on free of inheritance tax if not spent
  • Stop meddling with pension rules

What might the Chancellor do to address the crisis in our pension system and restore some faith in the value of saving?  After five years of rock-bottom interest rates, as the economy is recovering, will this finally be the Budget that restores some hope to savers?

For the past few years, policy has focused on encouraging more borrowing, increasing bank lending and helping mortgage borrowers, in an effort to revive the economy.

Continued ultra-low interest rates and ever-cheaper mortgages have been great news for the one-third of households who have a mortgage, but the other two thirds have hardly benefited.  Indeed, these policies have left many older people facing plummeting savings income or feeling forced to take on more risk by investing in stocks and bonds, or both. Company pension schemes deficits have risen sharply as low interest rates have taken their toll and anyone buying an annuity has seen a permanent reduction in their income.

Here are some ideas of what the Chancellor could do to help.

  1. Exempt savings income from tax for the next two years:  As interest rates have been kept artificially low, it would be great news for savers if they were allowed to receive their interest income tax-free.  A temporary tax break would cost the Chancellor very little while rates are so low, but would at least give a small boost to savers’ net income.
  2. Relax the restrictions on ISAs:  The Chancellor could allow ISA savers to choose whether to put their whole ISA allowance into cash or stocks and shares, and be able to transfer freely between the two.  Young people saving for a house deposit, or retirees needing to live on their savings, cannot afford to gamble on the markets, but then they can only put half the annual ISA allowance into Cash.  Improving ISA flexibility would help offset at least a small part of the damage done by falling savings interest rates, by enabling savers to receive a bit more income tax-free.
  3. Relax the rules for annuity purchase to allow £10,000 or even £18,000 to be taken as a lump sum:  The financial services regulator, FCA, recently highlighted what terrible value current annuity purchasers often receive and this applies particularly to smaller pension funds.  Currently, unless total pension savings are worth under £18,000, or an individual pension pot is valued below £2,000, the funds have to be turned into an income, which normally means buying an annuity.  However, annuity companies offer very poor value for smaller annuities and if the Chancellor were to allow funds up to, say, £10,000 or even £18,000, to be taken as a taxable lump sum, people would not have to buy an annuity but could invest the money as they wish to.  This would also bring in more revenue to the Exchequer, since many people who receive only a few extra pounds a week from a small annuity will not pay tax on that income, whereas receiving a lump sum may result in pensioners paying basic rate tax on their fund.
  4. Introduce fairer rules for capped income drawdown – particularly to recognise ill-health:  Some form of ‘enhanced’ or ‘impaired life’ drawdown, allowing those with poorer health to withdraw more each year.
  5. Introduce new incentives to help people save for care:  The Chancellor could announce new incentives to help people save for later life care needs.  The numbers needing expensive old age care will grow significantly in future and almost nobody is saving to prepare for this.  A new Care ISA allowance would enable people to save in a tax-free environment to provide for long-term care.  If the ISA could be passed on free of Inheritance Tax if it is not spent on care, then many people might start earmarking their ISA savings for care.  Such an incentive would also help focus people’s attention on the need for care savings.
  6. Stop meddling with pension rules: This could allow some stability for people to plan their later life finances.

The last few years have done dreadful damage to savings incentives.  No economy can survive and thrive without long-term savings and it is important that policymakers encourage more people to save for their own future needs.  Let’s hope this Budget will finally produce some long overdue good news for savers.

ENDS

March 18, 2014   No Comments

What’s the verdict on 5 years of record low rates and QE?

  • Brilliant for powerful groups but has caused economic distortions and increased inequalities
  • Each £100,000 mortgage now costs £3300 a year less, saving borrowers about £19,000 since 2008
  • Savers with £100,000 in Cash ISAs lost £4000pa income and lost total of £18,500 since 2008

What happened 5 years ago?  On March 5th 2009, the Bank of England cut interest rates to 0.5% and started creating billions of pounds of new money from thin air (calling this ‘Quantitative Easing’ or QE) which it spent on buying government bonds (gilts).

Why did this happen?  It seemed that the economy was heading for depression and deflation as banks stopped lending to each other and markets were in turmoil.  These policies were supposed to be short-term emergency measures to stave off a depression, with the aim of encouraging banks to kick-start lending and consumer spending to promote economic recovery.

But the economy has recovered, so why are rates still so low?  These policies have benefited many powerful vested interest groups, so they have remained in place even as the economy has recovered and no longer needs such ‘life-support’.

Who benefits from QE and low interest rates?  Some very powerful vested interest groups – when you look at those who have benefited, it is clear why the policies have such support:

  • Government – The Treasury has been able to borrow much more cheaply as the Bank of England’s £375billion of gilt purchases reduced bond yields
  •  Banking sector – has benefited from the financial flows of QE new money and much of the new money has bolstered their balance sheets and boosted bankers’ pay
  • Wealthiest groups – have profited as financial markets have risen
  • Highest earners  – especially in the financial sector – have benefited as markets rose
  • Big corporations – have borrowed very cheaply as QE brought corporate bond yields down and large firms now have record high cash to spend if they want to
  • Homeowners in the most prosperous areas – as house prices rose sharply boosted by more mortgage lending
  • Those with mortgages – the larger your mortgage, the more you have benefited.

So QE and low rates are good, what’s the problem?  Many less powerful groups are hurt or have failed to benefit from these policies.

  • Small firms who still cannot borrow on decent terms despite low rates – Bank of England figures just released show bank lending to small firms still falling
  • Youngsters struggling to pay increasing rents and cannot afford to buy a home as house prices are boosted by low interest rates
  • Older generations whose pensions and savings income are much lower
  • Savers whose income has been cut dramatically
  • Less well-off who have struggled with the cost of living, do not benefit from strong financial markets and cannot borrow cheaply despite low official rates
  • Annuity-purchasers whose pension income will be permanently lower
  • Defined benefit pension schemes whose liabilities have increased by far more than their assets (sometimes bankrupting their sponsors).

Why have these negative impacts been ignored?  The negative effects of low rates and QE impact sectors with lower political leverage.   The worst impacts are likely to come over the longer term – indeed we may be building a giant financial bubble, but it will be future Governments that have to deal with the legacy of market distortions, inequalities and unrealistic expectations that are being built up by keeping rates too low for too long.

But financial markets have done well, isn’t that good for all of us?  Nobody knows what the ultimate effect of the Bank of England buying one third of all government bonds will be.  It is unprecedented to have such artificial distortion of the supposed-to-be risk-free asset.  Government bonds underpin the prices of other assets too, which may mean all assets are much more risky than before.  When the Bank sells the gilts it has bought, investors seeking safe assets are at risk of losses.  Even before this happens, investors in the supposedly safest bonds have lost over 10% of their capital since 2012 as markets feared the end of QE.

But mortgage borrowers are much better off isn’t that good for all of us? Only one third of households actually has a mortgage, while the other two thirds either own their home outright or pay rent.  The interests of those with mortgages have been driving the policy agenda but rising house prices lead to rising rents, which are particularly problematic for the young.

How significant have the effects of low rates been?  For mortgagees, the impact has been enormous.  For example, someone with a £100,000 Standard Variable Rate mortgage could have saved over £19,000 in lower interest payments since rates started falling.  Their mortgage repayments could now be around £3300 a year lower than in December 2007.  But keeping rates so low is merely prolonging an illusion of affordability and there are fears that many will not be able to afford even a small rate rise.  This could damage growth in future years.

And what about savers?  For many people, especially those in or near retirement, the effect of low interest rates has decimated their income leaving many facing severe income shortfalls.  Savers have little voice or power to alleviate their losses, or are being forced to take much more investment risk.  The policy stance has rewarded borrowers and punished savers – the message being sent is ‘you’re a mug to save’.  Those with £100,000 in Cash ISAs will generally have lost income totalling around £18,500  since 2008 and their interest income could be more than £4,000 a year less.  The following table summarises the income effects.

Interest saved on £100,000 mortgage vs. interest lost on £100,000 savings

 

Annual interest

Dec 2007

Annual interest

Dec 2013

Difference in annual interest

Total gained/lost since Dec 2007

BORROWERS

£100,000 SVR mortgage

£7680

£4390

 £3290pa gain

£19,000 better off

SAVERS

 

 

£100,000 savings in Cash ISA

£5350

£1090

 £4260pa less

£18,500 worse off

Source:  Bank of England statistics, Table G.13 – (using closest comparable figures)

Has QE boosted growth? QE money has helped the financial economy rather than directly benefiting the real economy, and it is not clear that QE actually helped growth.  The authorities failed to ensure the newly created money was actually lent on to small firms or used to boost investment and infrastructure spending – using it buy gilts did not ensure the money reached the parts of the economy that needed it.  Small companies are still starved of credit by the banks – in fact Bank of England figures released yesterday show small firm lending still falling.  The main driver of growth has actually been consumer and housing spending, boosted by low interest rates and government schemes to bolster mortgage borrowing.   In addition, QE has damaged annuity rates and will leave millions of pensioners permanently poorer as, once bought, their annuities are for life.

But even if QE and low rates have helped a bit, aren’t they good?  Of course, it is true that these policies were better than not doing anything at all to boost the economy.  However, the authorities could have tried other measures but chose not to.  The problem is that these policies have had regional, social and demographic effects which many may think are unjust.  Indeed, income and wealth have been redistributed to the wealthiest groups and those with largest houses, increasing regional and income disparities.  Those living in the south have benefited much more than those elsewhere.  Borrowing has been encouraged while saving has been penalised. The financial sector has been boosted by the newly created money and rising asset prices.  If the government had tried to achieve these outcomes by cutting taxes for the wealthiest groups and cutting pensions significantly, there would have been uproar.  But monetary policy has done this without any Parliamentary or democratic debate.

What else should be done then?  Rather than continuing to rely on helping mortgage borrowers afford debts that they will be unable to service at more normal interest rates, it would have been better to use the newly created money to support direct investment in infrastructure and corporate investment rather than just buying gilts.  It will be important for the Chancellor to introduce incentives to encourage firms to spend their cash piles, perhaps with temporary tax breaks for corporate capital spending, since this will improve long-term growth rather than relying on more borrowing for housing or consumer spending, which are less sustainable in future.

Rates have been kept far too low for far too long.  Too many powerful groups have vested interests in keeping the monetary taps open.  As the economy is clearly recovering, rates should already be rising.  A small rise in rates is long overdue and would send a helpful signal to borrowers to plan for more normal interest rate levels.  Monetary policy seems much more about politics than economics, as politicians want the short-term benefits and leave future governments to deal with the longer-term losses.

March 4, 2014   2 Comments

Why pit pensioners and youngsters against each other?

8 January 2014

Lost Generation fears are real but premature

Baby boomers also went through tough times but went on to thrive

We need to be very careful, coming out of a few years of recession and economic turnmoil, not to become too negative when discussing the plight of younger people today.  Of course, the level of unemployment among younger people is a cause of great concern, but this is not necessarily a ‘lost generation’, as is so often claimed.

Unemployment has been high among young people many times in the post-war period and, indeed, the very baby boomers who are said to have been so lucky all their lives and are envied now for having amassed some wealth to sustain themselves through retirement, also suffered periods of recession and dreadful unemployment during the 1970s, the 1980s and 1990s, yet went on to achieve their coveted status.

The statistics that are quoted, which indicate youth unemployment is at its worst levels ‘ever’ need to be considered in perspective.  The Labour Force Survey only started collecting continuous data in 1992, while from the early 1990s, until the 2008 crisis, the UK experienced its longest ever period of uninterrupted economic growth.  Therefore, the figures do not stretch back to the earlier recessions, which might help explain why today’s younger generations seem unaware of the difficulties faced by current older generations in their youth.

The recent trends are far more promising than is generally perceived – that is not to be complacent, but rather to offer more hope for the future.  In fact, unemployment among young people in the 18-24 age range is starting to fall and employment numbers are rising.  This suggests that, as the economy continues to recover, the unemployment issue should recede. Among graduates now, the unemployment rate six months after leaving university is 9%.  Of course that itself is not satisfactory, but it is a great deal lower than some of the scaremongering headlines have suggested.  Again, today’s older generations went through times like these and then benefited when the economy recovered.

Youth unemployment is falling and employment is rising since 2011

Latest ONS figs:                     Aug-Oct 2011                         Aug-Oct 2013        trend

18-24 yr olds unemployed   815,000                                   758,000                  down

18-24 yr olds employed        3.304m                                    3.319m                    up

16-17 yr olds unemployed   211,000                                   183,000                    down

16-17 yr olds employed        330,000                                   331,000                   up

Young people in their 20s today feel as if they are worse off than their parents were at their age is partly true, but is this a reason for despair?  I think not.

Firstly, previous generations left school and started working at much younger ages than is now the norm.  Most baby boomers left school at age 15 or 16 and had already been working for many years by the time they were in their 20s.  Nowadays, young people start working and earning later, which means they will have had less time to build up a career.

Concerns are also often expressed about the inability of younger people to afford to buy a home.  Again, these concerns are partly valid but are not a reason for despair in the long-run, albeit a shorter term concern that is partly caused by policies designed to overcome the crisis.  House prices have increased too much and more housebuilding is urgently required. to increase housing supply.  The rise in house prices – largely encouraged by official policies such as Funding for Lending, Quantitative Easing and Help to Buy – has had a serious impact on the cost of renting as well, which again causes problems for younger generations.  A fall in house prices would be better for many but seems politically unacceptable.  The housing market is certainly a problem for younger people, but those that are able to buy are benefitting from record low mortgage rates, which certainly were not available to the baby boomers.  In the 1980s mortgage rates were well over 10% and reached 15% or more.

The average age at which people start to buy a home has also been increasing sharply in recent years, but that trend pre-dates the 2008 crisis.  As people have been marrying or having children later in life, the age at which they buy a home has risen.  Therefore, younger people should not panic if they cannot afford to buy a house in their twenties.

First-time buyers

                                                                                     1984        1994        2004

Average purchase price, £                                   20,238     42,500     117,000

Average advance, £                                              18,616     40,109     101,186

Average income, £                                                9,028       16,120     29,270

Average interest rate, %                                        11.88          6.25         4.99

Average loan to value ratio, %                             94              95             87

Average income multiple                                      1.99           2.34          3.03

Initial interest payments as % of income           16.80         11.95       15.0

Average age of first time buyer                               31               32            34

 

Source: Survey of Mortgage Lenders

Note: Incomes reflect those supporting the mortgage in each household

Finally, on the issue of taxes, today’s older generations paid much higher rates of tax when they were young than is the case now.  Basic rate taxes were far higher, at least 30%, often 50%, 60% and even more, while the income tax threshold was much lower than now.  By the time they reached their twenties, today’s baby boomers had already paid far more tax than current twenty-somethings.  Much of the progress that has been made in working practices, health and safety and mechanical advances are due to the efforts of older generations.   Most pensioners are not on high incomes, with only about 2% of pensioners paying higher rate tax.  Only the top 20% of pensioner couples would be considered to have high incomes in retirement and much of their income is from earnings, rather than pensions.

In summary, it is destructive for inter-generational envy or strife to be blighting society as seems too often to happen.  Younger people should not despair, they have opportunities in future to shape their own success, without the need to take money from pensioners or older people.  It will take time and hard work, but it has been done before and can be done again.  During tough times, it is often hard to imagine the brighter future, but it will come.  Let us all stay together and focus on building a cohesive society, rather than pitting old against young in a battle than nobody can win.

January 8, 2014   No Comments

Boom time for UK economy in 2014 – 5% growth!

131223chart

23 December 2013

  • Boom time for UK economy in 2014 – 5% growth
  • Positive surprises – higher growth, lower inflation, rising earnings, falling unemployment
  • Economic and political cycle brilliantly aligned – by accident or design?

My forecasts for UK economy by end-2014:
Growth – 5%
Inflation – 2%
Earnings growth – 3%
Unemployment – 7%
– a boom with low inflation, rising earnings and falling unemployment


Leading indicators show
UK set for a pre-election boom:  The leading economic indicators have been strong for months now and are getting stronger.  Mainstream forecasters and commentators have ignored the strength and breadth of this recovery and have instead focussed on lagging indicators, or have become so used to bad news that they are finding it difficult to see the boom coming.  The all-sector PMI lead indicators recently reached their strongest level since records began in 1998.  The employment lead indicator is also at its high, while construction and investment indicators are soaring.  As house prices continue to pick up and companies have huge amounts of cash to spend, rising economic activity is likely next year in a pre-election ‘boomlet’.  I do not see much sign of weakness.

Are politics driving economic policy? A recovery starting in 2013 and accelerating into 2014 is good timing politically.  Has George Osborne, renowned political strategist, been playing a very clever game?  Could the economy have been carefully timed by the Chancellor to align the economic cycle with the electoral cycle? The Chancellor seems to have delivered the traditional UK growth profile via rising consumer borrowing and the housing market – with Funding For Lending to be followed by Help to Buy.  His initial professed desire to rebalance the economy towards exports and investment did not materialise, but the old stalwarts have come to the rescue.  The Tories know that housing and debt drive growth short term and, although that is not the best way to achieve a sustainable recovery, it is politically expedient.

Labour wrong-footed on austerity and growth:  The economic upturn so far has wrong-footed Labour, who failed to forecast the growth of the economy this year, despite the rising leading indicators.  By over-playing the impact of austerity, and by failing to spot the signs of recovery, the Opposition has enabled the Chancellor to restore some of his economic credibility as the economy recovers.

Continued reliance on housing to deliver feel-good factor and growth:  Construction sector leading indicators are soaring and, as house prices continue to rise, while the dangers of a housing bubble are ignored.

131223graphSource: Markit

Investment spending set to pick up:  The Autumn Statement figures in the table below show a 7.3% rise in Government investment in 2014, after a 6.9% fall in 2013 and a 26.2% cut in 2011.  Government consumption shows little austerity so far, which has prevented a steeper downturn.  The figures indicate that business investment will rise as economic recovery persists.

131223table

 Strong downward pressure on inflation to ensure cost of living issues abate: Labour has now changed its attacks on Government policy to focus on the cost of living.  It may be that the Chancellor is one step ahead on this one too.  Given the strength of growth, one would normally expected a pick-up in the inflation rate, however there are reasons to suggest inflation will turn out much lower than expected.  The Chancellor is manipulating the cost of living somewhat, by holding down energy price increases and rail fare rises, keeping a lid on council tax and perhaps other administered prices as well.  In addition, there are strong deflationary forces coming from Europe and the 5% trade-weighted rise in sterling will depress price rises.  The base effect from this year is also likely to flatter the inflation figures for next year.  I am predicting reasonably subdued inflation perhaps even being below the Bank of England’s target at 1.9% in Q1, then the rest of the year remaining around the 2% target level.

Real earnings will rise at last as unemployment falls:  During 2014, I forecast average earnings are likely to rise by nearly 3%, with inflation around 2%.  Unemployment is also likely to fall towards or even below the 7% level by end-year.

When will interest rates rise – a small rate rise is hardly likely to bring borrowers to their knees:  The big question is whether the Bank of England will finally start to increase interest rates back towards more normal levels from the current emergency 0.5% rate which was set to avoid depression.  Rates are currently much too low.  There are dire warnings that a rise in rates would lead to major problems for borrowers, defaults and repossessions, which would derail the economic recovery.  I find those arguments difficult to accept.  A small rise in rates from 0.5% is hardly likely to bring borrowers to their knees and would be a welcome sign of the start of a return to normality, giving also a sign of increased economic confidence.  Let’s face it, if people could not afford to repay their debts with an increase in base rates from 0.5% to, say, 1%, then surely those debts are going to be defaulted on sooner or later and need to be rescheduled.  I am predicting rates will start to rise in the second half of 2014.  The continued encouragement of borrowing at such unsustainably low interest rates is setting up dangers for the future.  If people cannot afford to repay debts when interest rates rise from 0.5% to, say, 1% then surely those debts are simply unaffordable and will sooner or later default.

Monetary policy missing long-term dangers:  Encouraging too much debt caused the crisis in the first place and keeping interest rates too low for too long risks misleading more borrowers into taking on more debt than they should.  Unfortunately, however, low rates are popular with policymakers who are frightened of pushing debtors into default.  I have significant concerns that monetary policy is continuing to focus far too much on the short-term, while missing the longer term dangers.

Short-term feelgood but repeating past mistakes:  Building economic growth on the availability of cheap borrowing, low cost mortgages and rising house prices risks repeating the mistakes that led to the original crisis but, for now, it is likely to be successful in stimulating growth short-term, which is clearly a policy objective.

2014 – a good year for many:  If I am right, then 2014 should be a good year for growth as well as for borrowers.  It is also likely to be the first year for some time that sees real earnings rising.    Of course, the ongoing low interest rates will be yet more bad news for savers.

Pre-election boom:  By accident or by design, it seems the economy has been very conveniently timed to match the electoral cycle.

 

Some Notes

1. This is a link to my presentation at the Clash of the Titans event hosted by the Economic Research Council where I gave my 2014 outlook www.genesysdownload.co.uk/rosaltmann/Clash_of_the_Titans_econ_forecast_2014_Dec_2013.pdf.

2. This is a link to the event itself http://www.ercouncil.org/clash-of-the-titans-2013/ which was chaired by Andrew Sentance of PwC, former member of the Bank of England’s Monetary Policy Committee, and pitched three leading economists against each other, predicting the outlook for the year ahead.  Kevin Daly of Goldman Sachs represented Cambridge University, Stephen King of HSBC represented Oxford and I represented LSE.  We all produced forecasts, with mine being the most bullish.

3. Anyone can submit their own predictions between now and December 31st and possibly be in line to win the competition which will be judged next year.   You can enter here: http://www.ercouncil.org/cott2013-competition/ .

4. My detailed forecasts are in the header image.

December 23, 2013   No Comments

Boom time for economy in 2014

16 December 2013

  • Economic and political cycle brilliantly aligned – by accident or design?
  • Positive surprises – higher growth, lower inflation, rising earnings, falling unemployment

Last week I represented the London School of Economics at an Economics Research Council debate called the Clash of the Titans.  http://www.ercouncil.org/clash-of-the-titans-2013/

The event was chaired by Andrew Sentance of PwC, former member of the Bank of England’s Monetary Policy Committee, and saw Kevin Daly of Goldman Sachs – representing Cambridge University, Stephen King of HSBC – representing Oxford and myself – represented London School of Economics predicting the economic outlook for the year ahead.  We all produced forecasts and explained our rationale.  My expectations were the most optimistic.

If you want to see a transcript of my speech and my expectations for 2014, you can link to them here. www.genesysdownload.co.uk/rosaltmann/Clash_of_the_Titans_econ_forecast_2014_Dec_2013.pdf

Here are some of the main points I made:

Leading indicators show UK set for a pre-election boom:  The leading economic indicators have been strong for months now and are getting stronger.  Mainstream forecasters and commentators have ignored the strength and breadth and have instead focussed on lagging indicators, or have become so used to bad news that they are finding it difficult to see the boom coming.  I do not see much sign of weakness.

Are politics driving economic policy? Could the economy have been carefully timed by the Chancellor to align the economic cycle with the electoral cycle? Has George Osborne, renowned political strategist, been playing a very clever game?  If the aim is to ensure economic recovery for 2015, then a recovery starting in 2013 and accelerating into 2014 is good timing politically.

Investment spending set to pick up:  I expect investment spending to finally rise sharply in 2014, with both Government and business investment showing strength.  The Autumn Statement shows Government investment is planned to increase by over 7%.

Labour wrong-footed on austerity and growth:  The economic upturn so far has wrong-footed Labour, who failed to forecast the growth of the economy this year, despite the rising leading indicators.  By over-playing the impact of austerity, and by failing to spot the signs of recovery, the Opposition has enabled the Chancellor to restore his economic credibility to some degree as the economy recovers.  The Tories know that housing and debt drive growth short term and, although that is not the best way to achieve a sustainable recovery, it is politically expedient.

Labour cost of living challenge may be undermined by falling inflation in 2014:  Labour has now changed its attacks on Government policy to focus on the cost of living.  It may be that the Chancellor is one step ahead on this one too.  Given the strength of growth, one would normally expected a pick-up in the inflation rate, however there are reasons to suggest inflation will turn out much lower than expected.  The Chancellor is manipulating the cost of living somewhat, by holding down energy price increases and rail fare rises, keeping a lid on council tax and perhaps other administered prices as well.  In addition, there are strong deflationary forces coming from Europe and the 5% trade-weighted rise in sterling will depress price rises.  The base effect from this year is also likely to flatter the inflation figures for next year.  I am predicting reasonably subdued inflation perhaps even being below the Bank of England’s target at 1.9% in Q1, then the rest of the year remaining around the 2% target level.

Pre-election boom:  By accident or by design, it seems the economy has been very conveniently timed to match the electoral cycle.

Why don’t you submit your predictions too?  This is a competition open to anyone and you can enter between now and December 31st .  The competition which will be judged next year and a case of wine is up for grabs.   Don’t forget to enter, you have to be in it to win it. You can enter here: http://www.ercouncil.org/cott2013-competition/

 

December 16, 2013   No Comments

Autumn Statement – implications for pensions and savings

5 December 2013

Summary of Autumn Statement measures relating to pensions and savings

  1. People will be allowed to buy extra state pension:  People will be allowed to buy extra state pension with introduction of Class 3A National Insurance.  There are no details yet, but the plan is that those who reach state pension age before the new flat-rate state pension is introduced in April 2016.  Existing pensioners as well as those reaching state pension age soon, will be able to buy more state pension in the form of extra State Second Pension rights, to top up their entitlements.  This will allow the self-employed and many women without much state pension, to increase their weekly income.  The Government says that the cost of buying each extra £1 per week of state pension will be actuarially neutral.  Currently, purchasing extra state pension rights can be done on very favourable terms, but the new National Insurance Class 3A contributions will be more expensive than under the current rules.  Those who have some private pension, perhaps who trivially commute their pension rights but do want to buy extra lifetime pension, can use their money, or money from other sources, to buy an index-linked extra pension that also covers their partner.  This is likely to be much better value than using money to buy a standard annuity, which has no inflation or spouse protection and may offer very poor value.
  2. State pension age will rise further and faster:  The State pension age seems set to rise further and faster than previously proposed.  The Chancellor announced that the Government expects state pension age to rise faster than currently planned, in order to achieve the aim that one third of adult life should be spent in retirement.  As life expectancy keeps rising, this will require an increase in state pension age.  The Chancellor suggested this would probably mean the state pension age will reach 68 by 2038, rather than 2048 as is presently planned, so people in their forties will have a pension age of around 68, and further increases in state pension age to 69 by 2048 would mean people in their 30s now will not reach state pension age until they are 69.  The actual timetable for any future rises will be determined by reports from the Government Actuary’s Department and an independent commission that is going to be established after the next election, whose recommendations then have to be ratified by Parliament in primary legislation.
  3. State Pension to rise to £113-10pw:  Basic State Pension to go up by £2-95 a week from £110.15 to £113.10pw.  The Government will increase the Basic State Pension by 2.7% from April 2014, reflecting the increase in cpi.  There is a promise that the triple lock on state pensions will remain in place until at least 2015.
  4. No bad news for savers – no really good news either:  Despite the last few years of low interest rates, there was really no good news for savers.  Perhaps the good news is that there was no bad news.  Fears of a lifetime cap on ISAs have thankfully not materialised, and the annual ISA allowance will increase in line with inflation, rising to £11,880 a year (half of which can be in Cash ISAs).  The Junior ISA/Child Trust Fund limits will increase to £3,840. but the Government failed to announce that the closed Child Trust Fund scheme could be merged into Junior ISAs. It seems clear that the Chancellor does not expect to encourage saving in future either, since the forecasts in the Autumn Statement documents predict that the savings ratio will fall sharply in coming years, from 6.8% in 2012, down to 4.3% by 2018.  It is particularly disappointing that no new incentives to save for social care were announced, for example an extra ISA allowance for social care.  National Savings and Investments will be allowed to bring in an extra £2bn-£3.5bn income as the Government can benefit from funding its borrowing cheaper via NS&I than by using the gilt market.  As gilt yields have increased, the low interest rates on National Savings are attractive to the Treasury.  Indeed, the OBR forecasts that average gilt yields will increase sharply in coming years, having been 1.6% in 2012, they are expected to rise to 4.2% by 2018.
  5. No new changes to pension, drawdown or annuity rules:  It is welcome news that the Chancellor did not announce further reductions in the generosity of pension allowances.  The plans to cut pension allowances have remained in place, with the annual contribution limit falling to £40,000 (from £50,000 now) and the lifetime limit to £1m (from £1.25m at the moment) after April 2014.  It is a shame, although was not really expected, that there have been no changes to improve the value and flexibility of income drawdown rules, or annuities.

Autumn Statement forecasts for savings ratio, gilt yields and house prices:

Year

Savings ratio

Gilt yields

 

House prices

2012

6.8%

1.6%

 

+1.6%

2013

5.7%

2.6%

 

+3.2%

2014

5.0%

3.0%

 

+5.2%

2015

4.6%

3.4%

 

+7.2%

2016

4.6%

3.7%

 

+4.8%

2017

4.4%

4.0%

 

+3.7%

2018

4.3%

4.2%

 

+3.8%

 

December 5, 2013   2 Comments