For all the resilience the UK economy has shown, there is no doubt that this year's ISA season is set against a backdrop of uncertainty. Whatever the pros and cons, Brexit, and a lack of clarity on what our future economic relationship with the EU will look like, has left us at a crossroads.
Is the end of BOE rate inertia finally in sight?
In this blog, we’ve argued time and again in favour of the Bank of England increasing base rates, and always been the first to back Monetary Policy Committee members, who, at varying intervals over the past eight years, have explicitly or implicitly conveyed hawkish instincts. But it has, sadly, proved to be a false dawn at every turn, and this week was no exception, as rates – currently at record lows of 0.25 per cent – once again held firm after a 7-2 vote.
The irony of this week’s rates decision is that it falls on the tenth anniversary of the Northern Rock bank run, which, in itself, has brought the ramifications of 350-year low interest rates and the never-ending policy of quantitative easing into sharp focus.
The damning facts
As revealed in This is Money, savers are now earning a woeful 20 per cent of the interest they were a decade ago. Pensioners in particular have been squeezed by virtue of the knock-on effect to annuities. This is Money’s analysis determined that a pension fund of £100,000, coupled with savings of £40,000, could have yielded an annuity income of just over £9,900 per year in 2007. Today, the equivalent figure has fallen off a cliff to just under £5,400 – or a drop-off of nearly 50 per cent.
Of course, 2015’s pension freedoms mean that annuitising is no longer mandatory, which has allowed those over the age of 55 to maximise their incomes via asset classes such as peer-to-peer lending, which also offers a new category of ISA to shield returns from tax. But it has also left many pensioners searching for higher returns on the stock market too, in addition to other risky investments. With no chance of recouping any potential losses incurred via future career earnings, it thus puts the UK’s retirees in a perilous position.
And it isn’t just pensioners who have suffered. A couple with a savings pot of £40,000 could have racked up nearly £2,700 worth of annual interest from the best-paying easy-access account prior to the financial crisis. Today, the corresponding figure is just over £500! Clearly, savers have been disincentivised since 2007, which goes a long way towards explaining why household savings rates have plummeted to record lows.
Inflation up, real wage growth down
This week, the case for increasing rates has strengthened immeasurably. Firstly, pundits and experts across the board were surprised to see inflation soar to 2.9 per cent for August – the highest for four years, and within touching distance of the 3 per cent threshold which is deemed ‘too high’. Given that the driver of this current inflation has been accounted for almost entirely by the depreciation of pound sterling, it is clear that a rates increase is the best possible antidote.
To compound this point, it was revealed that wage growth fell even further behind inflation in August, which reaffirms the unacceptable sustained squeeze on household budgets. With economic growth forecast to be stagnant for the foreseeable future, and the effect of record-low unemployment visibly not having the desired collective bargaining effect on wages, it is clear that reducing inflation is the golden ticket in terms of providing relief to consumers.
At a more macroeconomic level, there are two key arguments in favour of pulling the trigger as well. Firstly, the Federal Reserve has already begun to incrementally boost interest rates, while it appears that Mario Draghi’s hesitance to do the same will not last too much longer, with the ECB’s own quantitative easing programme set to come to an end soon, and the eurozone increasingly showing signs of strength. Were Britain to fail to follow suit, our currency weakness will be magnified.
And secondly, if it is a worst-case scenario Brexit that the Bank of England so fears, surely it will be better placed to deal with the consequences if it is doing so from a higher base, and with more room for manoeuvre?
Hope that an increase is nigh
The Bank of England will be aware of all this, yet have decided to hold fire, and maintain their dovish approach (for now). The counter-arguments in their favour, of course, are well-known – and valid, too. Clearly, with rising levels of household debt, there is reluctance to inflict higher costs on borrowing. House price growth is slowing too, which won’t be helped by a rates increase (which would make mortgages more expensive, and thus stifle demand). And indeed, against a backdrop of Brexit uncertainty, the risk that tightening could augment a dangerous slowdown in consumer spending (as a result of reduced access to cheap credit) is ever-present.
Hard decisions have had to be made, and, for the most part, they have been understandable. But the nature of economics is such that there are no perfect solutions, and it is a constant weigh-up of pros and cons. And these ‘cons’, quite simply, have been disproportionately shouldered by one specific demographic: savers. The very people we should be encouraging if we are to be a nation who lives sustainably within its means.
Fortunately, a majority of officials indicated that they believe borrowing costs will soon need to rise in order to bring inflation back towards the 2 per cent target. For long-suffering savers, it can’t come soon enough. We have, however, heard such sentiment before, and been left disappointed. Let’s hope this week’s musings don’t turn out to represent yet another false dawn.
The 2019 ISA season is now in full swing, and it's as good a time as any to focus on financial planning - and, within that, looking ahead to your retirement years to ensure financial security.
The Lifetime ISA (LISA), announced in 2016, would prove to be one of George Osborne’s last flagship gestures to UK savers and investors as Chancellor, eventually launching against a backdrop of anti-climax a year later in April 2017.
As the tax year end approaches, the financial services industry readies itself for a flurry of activity. That's in large part because, with just a couple of months to go, the so-called 'ISA season' is upon us.
Over the last decade, there can be little dispute that the reputation of mainstream banks – and particularly the so-called ‘Big Four’ (HSBC, Barclays, Lloyds and RBS) – is at its lowest ebb.
The peer-to-peer (P2P) lending industry is now regulated by the Financial Conduct Authority (FCA). The regulatory framework has been designed to protect customers and promote effective competition.
Loan underwriting is the process that we undertake to analyse all of the information provided by each loan applicant and their credit file to assess whether or not that applicant meets our minimum loan criteria. As part of that process all data is verified, analysed and summarised to paint a picture of each applicant.
When you earn interest from a regular bank savings account, for example, the bank automatically deducts basic rate tax (currently 20%) before paying your interest. With interest earned from peer-to-peer lending, tax is not deducted automatically so lenders will need to declare their income to HMRC.
As 2018 draws to a close, with our bellies full of Christmas turkey, it's only natural to look back on the past 12 months and reflect. No doubt, it's been a turbulent one economically and politically, and not everyone has had it all their own way.