What’s in the pre budget report for small businesses?

November 27, 2008 | posted by Pam Atherton in Taxation, UK economy | comments (0)

The Chancellor, Alistair Darling’s package of measures for small businesses, are a curates’ egg of both useful and useless measures.

For instance, the changes announced earlier this week could take some time to take effect and the funds being made available are small given the size of the market. 

With an estimated 3.6 million SMEs in the UK, the Small Business Finance Scheme, announced on Monday, offering guarantees of up to £1 billion in total won’t go very far.

The same can be said of the £1bn of funds to be made available to SMEs  via the European Investment Bank, and a similar extension to the export credit guarantee scheme. 

Of more immediate help will be the fact that all businesses in temporary financial difficulty will be able to agree a flexible payment plan with HMRC which meets their cash-flow needs.  HMRC also says it will try to give decisions quickly over the phone and within 10 minutes.

All businesses with empty properties will welcome the increase in empty property relief to include all those with a rateable value of less than £15,000. 

However, relatively few businesses will actually benefit from the carry back of losses over 3 years because they are capped at £50,000. 

Changes to the rate of VAT are little more than a poisoned chalice for small businesses as little account seems to have been taken of the huge admininistrative cost of changing prices on all VAT-registered goods.

IT systems will also have to be altered to reflect the temporary 15 per cent rate, effective from  1 December 2008, only to re-incur those costs when VAT returns to 17.5 per cent on 1 January 2010.
 
Some businesses have already reported cases of cancellations and re-orders as customers seek to benefit from the new lower rate effective from 1 December. 

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Savers’ dilemma puts focus on gilts

November 18, 2008 | posted by Pam Atherton in Banking, Savings, UK economy | comments (0)

The dramatic cut in base rate to 3 per cent may spell good news for homeowners with mortgages, but for savers it could be a disaster.

For every mortgage, there are six to seven savers, and many pensioners and others on fixed incomes are dependent on the interest from their savings to top up their income.

So where can you put your money and get a decent rate of return, if banks and building societies cut savings rates by up to 1.5 per cent?

Some experts are touting gilts as the saviour of savers. Gilts are bonds issued by the Government which pay a fixed rate of interest over a set term and are considered to be safer than corporate bonds which are bonds issued by companies wanting to raise capital.

Because companies can go bust and default on their financial obligations, corporate bonds are considered more risky than gilts which are guaranteed by the Government.

Gilt managers are prediciting a return on 7 to 10 year gilts of around 4-8 per cent over the next two years. Ccompared with likely returns from banks and building societies of 3-4 per cent, gilts looks like a reasonable alternative.

But gilts are not risk free. Although you are guaranteed to get back your original investment back when your gilts mature,  prices and yields can vary significantly before the maturity date, depending on what happens to base rate and inflation.

So if you paid £100 today for a 10-year gilt with a 4 per cent yield, its face value could subsequently fall if base rate were to rise in two years’ time.

This would cause investors to flee gilts in seach of  higher returns elsewhere, thereby drving down the face value of gilts.  If you wanted to sell your gilt at that time, its sale value might be only £90, instead of £100.

Inflation is another enemy of  gilts as it erodes the value of fixed incomes. Although inflation now appears to be falling, it could re-emerge in future years, particularly with the increase in Government spending.

But if inflation and base rate fall to around 1 per cent, or even zero, as some commentators are now predicting, gilts could offer double digit returns. 

You can buy individual gilts via a stockbroker, or a gilt fund or gilt index tracker via a  fund manager. For advice on gilts, contact an independent financial adviser via www.unbiased.co.uk

For more on gilts, visit the Debt Management Office’s website:
http://dmo.gov.uk/index.aspx?page=Gilts/About_Gilts
http://dmo.gov.uk/index.aspx?page=Gilts/Daily_Prices

For the best savings rates visit:
http://www.defaqto.com/consumer/savings-accounts/instant-access-accounts.aspx
http://www.defaqto.com/consumer/savings-accounts/cash-isas.aspx
http://www.defaqto.com/consumer/savings-accounts/regular-savings-accounts.aspx
http://www.defaqto.com/consumer/savings-accounts/term-accounts.aspx
http://www.defaqto.com/consumer/savings-accounts/notice-savings-accounts.aspx

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Pru in dramatic U-turn on orphan assets

June 27, 2008 | posted by Pam Atherton in Insurance, Investments, Pensions, UK economy | comments (0)

Prudential today announced that it is pulling the mooted distribution of its inherited estate, following years of mulling the issue and negotiations with the FSA.

The inherited estate derives from assets accrued over many decades in its with profit fund which are assets in excess of the amount the insurer needs to fund its obligations to with profit policyholders.

AXA distributed part of its inherited estate a few years ago and Aviva (Norwich Union) is currently finalising an agreement over the division of its orphan estate.

Prudential’s announcement will be a bitter disappointment for the 4.5m with profit policyholders who would have been eligible for a windfall payout.

Prudential chief executive, UK & Europe, Nick Prettejohn, said: “Our with profits fund has been the top performing life fund in the UK over the past one, three, five and 10 years. Our overriding priority is to maintain the long term financial security of the with profits fund and to continue delivering strong performance for the benefit of our policyholders.”

Prudential chief actuary, David Belsham said: “Having a large inherited estate has enabled our investment managers to take a long term view on our investments. In 2003, we were buying shares at the bottom of the market when other insurers were forced sellers due to capital and regulatory constraints.

“The fund has produced fantastic investment performance of 134 per cent over 10 years and we paid out £2.7bn to with profits policyholders in February this year - more than a third of the value of the entire with profit fund of £79.1bn.”

However, the company was lambasted in a recent Treasury Select Committee (TSC) hearing when the insurer disclosed that it had used £1.6bn of the orphan estate to pay compensation for the  mis-selling of personal pensions in the 1990s. 

But Mr Belsham hit back saying: “No policyholder since 1990 has contributed to the the £8.7bn inherited estate so none of these policyholders have lost out from the £1.6bn used for mis-selling claims.”

A TSC report has also attacked the FSA for failing “to develop clear principles for the regulation of inherited estates” and for allowing Aviva to phase the distribution of its orphan assets over several years.

Which?, the consumer group, said the findings were a “damning indictment of the FSA’s lax regulation of the with profits industry.”

For more on the decision visit www.prudential.co.uk

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Why now may be a good time to buy an annuity

June 19, 2008 | posted by Pam Atherton in Insurance, Pensions, UK economy | comments (0)

What with falling house prices, soaring energy and food costs and rapidy rising inflation, it seems as though the financial news is unremittingly gloomy.

But one piece of good news  is that annutiy rates are rising and now could be a good time to buy one, particularly if you have been deferring purchase in the hope that rates would rise.

Despite stockmarket set backs at the beginning of 2008,  pension funds have recovered around two thirds of the losses they sustained during the 2000-03 bear market.

For anyone considering buying an annuity, we are now seeing a conjunction of relatively high fund values and annuity rates.

Billy Burrows of William Burrows Annuities explains: “In February 2008, pension funds  invested in equities had fallen by about 6 per cent since August 2007 and annuity rates were down by about 1 per cent.

“However, now the stock market is only 3 per cent down compared with August 2007 and annuity rates have risen by more than 5 per cent since last August.

“This means that somebody retiring today would get nearly 9 per cent more pension compared with someone retiring in February 2008, providing they have remained invested in equities throughout the period.

“As both annuities and the stock market are going up, it might make sense for investors to lock into these gains and secure their incomes by purchasing annuities.”

The reason for rising annuity rates is that they are dictated by the yield on long-dated gilts, corporate bonds and longevity trends.

Until recently, yields had been falling, largely due to a lack of supply of long-dated gilts (which insurers have to buy to back annuities), longer life expectancy and low inflation.

Now, with growing inflation and the prospect of higher interest rates, annuity rates are rising.

But what you gain with one hand, you lose with the other. While higher inflation has the beneficial effect of  pushing up annuity rates, living on a fixed income with high inflation is no joke.

Inflation at just 2 per cent will reduce your spending power by 40 per cent over 25 years. If inflation were to hit 5 per cent, your spending power would be cut by 70 per cent over the same period, according to Met Life.

In practice, few pensioners buy inflation-linked annuities because the starting income is roughly a third less than what a level annuity pays.

To complicate matters, if you defer buying an annuity, there is an opportunity cost in that the income you forgo in the deferral period is rarely recouped through higher payments in the future.

So as with all things pensions, nothing is straightforward, but you can check out the top paying annuity providers at any time by using the Defaqto annuity calculator http://www.defaqto.com/consumer/pensions.aspx

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Fixed rate mortgages hit 8-year high

June 11, 2008 | posted by Pam Atherton in Banking, House prices, Mortgages, UK economy | comments (0)

Fixed rate mortgages have become more expensive than at any time in the last eight years, according to data published by the Bank of England.

Fears that the Bank of England will have to crack down on rapidly rising inflation with a series of interest rate rises before the end of this year, is driving up swap rates  which determine the cost of funding fixed rate mortgages.

The average rate that lenders are quoting for two-year fixed rate mortgages for borrowers with a 25 per cent deposit, rose from 6.06 per cent in April to 6.27 per cent in May - the highest since September 2000, when base rate was 6 per cent, 1 per cent higher than today.

Average three year fixed rates have jumped from 5.67 in April to 6.13 per cent in May, while five year  fixes have risen similarly from 5.85 per cent to 6.11 per cent. The data assume a 25 per cent deposit and exclude higher loan-to-value deals as many of these are no longer available.

Fixed rate mortages were the most popular type of mortgage taken during 2007, with the majority of fixed deals taken for a two year period, but more recently borrowers are tending towards variable rate products such as trackers.

Rising borrowing costs are likely to put further downward pressure on the housing market, where the number of house sales hit its lowest level since 1978, with only 17.4 transactions per estate agent in the three months to the end of May.

But although house prices fell on average by 1 per cent in the three months in April, they are still 44 per cent higher than five years ago, according to a house price survey by the Department of Communities and Local Government, based on sale completions.

A spokesman for the DCLG said: “The current issue affecting the market is fundamentally about the supply of credit - a very different situation to the early 1990s which was about high interest rates and unemployment.”

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First Direct resumes mortgage business

May 20, 2008 | posted by Pam Atherton in Banking, Mortgages, UK economy | comments (0)

First Direct has resumed offering mortgages to new customers, following its withdrawal from the market last month, due to it being overwhelmed with new business.

The bank, which is part of HSBC, was receiving five times its normal level of applications when it decided to stop offering mortgages to new customers in order to shift the backlog.

Business soared because it is able to offer better rates than its competitors due to its non reliance on the money markets for funding. Rival lenders, meanwhile, who are more dependent on wholesale funding were pulling deals and increasing rates.

But the bad news is that First Direct has increased rates for new customers on its two year fixed rate deal from 4.95 per cent in April to 5.76 per cent.

First Direct chief executive, Chris Pilling, said: “We’ve honoured the fixed rates available when people first contacted us about their mortgage.”

Elsewhere, Katie Tucker of mortgage broker, John Charcol, said: “Fixed rates have been the most competitive for the last two weeks but funding costs have shot up which means that any good rates available now will be gone in a few days, so make your application immediately if you’ve had a quote.

“All mortgage rates are going up. Whilst trackers were competitive, bank rate is now only expected to fall once or twice again this year because inflation is rising worryingly high. The Bank of England has  said that it can’t drop bank rates as much as originally expected because of the need to contain inflation.”

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No end in sight to debt misery

May 2, 2008 | posted by Pam Atherton in Banking, House prices, Loans, Mortgages, UK economy, Uncategorized | comments (0)

New figures published today by The Insolvency Service show that in the first three months of 2008, 25,264 people fell victim to the insolvency epidemic.

9,614 IVAs and 15,651 bankruptcies were reported, with some debt counsellors predicting that individual insolvencies could reach 101,056 by the end of the year.

For these people, insolvency means they have already reached the end of the road as far as their debt problems are concerned. But there are plenty more  people about the befall the same fate.

Today alone, a further 292 people will fall victim to insolvency and 74 homes will be repossessed, according to Credit Action’s debt statistics.

The one piece of good news is that year on year, there has been a 22pc drop in IVAs in the first three months of 2008, compared to the first three months of 2007.

Graham Lund deputy managing director at Call Credit attributes this to the new IVA protocol which came into effect at the start of February, designed to reduce the mis-selling of IVAs, and put an end to unscrupulous IVA firms pursuing unsustainable deals.

Consumer debt in the UK has now reached a staggering £1.4 trillion, a figure that is increasing by £1 million every five minutes, according to Credit Action.

But the credit crunch is not the only problem facing consumers. You Gov says that the real rise in the cost of living is nearer 9 per cent, more than double the average salary increase of just 3.4 per cent, which means that 5 million consumers are spending more than they earn every month.

Small wonder, then, that so many people are getting into financial difficulties. But an IVA or a bankruptcy should be the last resort as both these routes out of financial ruin have a very serious impact on your credit record and ability to borrow in the future. In the case of bankruptcy, it could also damage your employment prospects.

If you find yourself in financial difficulty, the worst thing they can do is ignore the problem and hope it goes away. Under the banking code, banks now have a duty to help people in financial hardship and free debt advice is readily available from organisations such as the Consumer Credit Counselling Service (www.cccs.co.uk) , National Debt line (www.nationaldebtline.co.uk) and Citizen’s Advice www.citizensadvice.org.uk).

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