​Negative Interest Rates

As the UK begins to emerge from months of lockdown, there is real uncertainty about what will happen next. One consideration for the UK is negative interest rates. The Bank of England Governor, Andrew Bailey, has suggested negative interest rates may be needed as part of the response to the pandemic.

The concern people have with negative interest rates is that they will end up paying the bank to look after their money although, ironically, many people already pay a current account fee, in effect paying the bank to hold their cash. But whilst negative interest rates often feel a step too far for bank customers, the key reason to implement them is to encourage corporate investors away from short term debt.

Negative interest rates can play a broader short-term role in a steep recession, when a Government needs to borrow money. Most bond investors would be eager to avoid investing in negatively yielding assets and so will either switch out of short-dated Government debt with a negative yield or they will switch to bonds issued by companies, rather than countries. Either of those outcomes has a short-term positive impact for the Government.

While the rate cuts are likely to be small in practical terms, investors will go a long way to avoid buying an asset with a negative yield, so the impact could be significant. Commercial banks will also be affected. They are required by regulators to hold cash or short-dated low risk bonds, meaning they effectively have no choice but to own bonds with a negative yield. However, whilst banks are inclined to horde cash in a recession rather than lend it out into a risky economy, a negative yield may encourage them to lend, boosting the level of activity in the economy and so stimulating growth.

This all sounds positive for the economy until you consider some of the other aspects. In some instances, negative interest rates enable otherwise unsuccessful companies to refinance debt and therefore stay in business. Those companies are never successful enough to grant employees pay rises, so while unemployment remains low, so does wage growth. Keeping uneconomic companies afloat means the more productive companies in a sector are effectively dragged down by being unable to charge higher prices.

This hinders overall productivity and eventually, economic growth over the longer term. Inflation and economic growth remain low without productivity improvements, and so the long-term growth rate in an economy becomes permanently lower.

When Governments are able to borrow money at such low rates, this will often appeal to politicians as it allows them to spend more, with the hope that this increased level of spending may bring the recession to an end sooner. However, it is not regarded as a long-term solution and it can be fraught with difficulties.

Whatever happens, we will continue to work closely with our client community to ensure plans can be adapted to changing circumstances.

If you would like to discuss your current financial planning arrangements in light of any of these issues, please do not hesitate to contact us.

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Things to do during the stay home period

As the Coronavirus Lockdown measures continue, you may find yourself with some available downtime during this period. It may be a worthwhile exercise to put your basic wealth planning "house in order" with the help of the simple checklist below. The list is not extensive and not all will be relevant to you, but anything you can do to improve matters will certainly be worthwhile doing.

1)  Collate lost pensions arrangements

Are you aware of all your existing pension arrangements? Even those dating from that short-term employment you took up many years ago? Research carried out by The Association of British Insurers in October 2018 estimates that there is nearly £20 billion held within 1.6 million pension pots, with an average size of £13,000, which have been forgotten.

If you suspect that you have an old pension pot from a previous job, you are now able to track down the pension scheme's contact details by using the Pension Tracing Service which is a free Government service, on this  web link.

2)  State Pension

In 2016, the UK Government introduced the new single-tier State Pension. Under the previous system, it was difficult to understand exactly what you may have been entitled to until you reached your State Retirement Age, however the new system is designed to make this far simpler.

The majority of individuals are unaware of how much they may be eligible to receive as their State Pension, or at what age they will qualify for it. The link below provides further information on how much you could stand to receive and at what date it could become payable. Click here for the link.

3)  Charitable donations

You may be making donations to a charity close to your heart at this time and if you are a UK tax payer, when you make these donations, you are usually able to elect to apply Gift Aid to these contributions, meaning the charity to which you are donating receives an extra 25%, at no cost to you.

In addition, if you pay tax above the basic rate, you can claim the difference between the rate you pay and basic rate on your gross donation (i.e. the donation amount after Gift Aid is applied). You should therefore remember to make a note of the donations you make, so that you can apply for the additional relief on completion of your self-assessment tax return.

4)  Budgeting

With this extra time on our hands, now could be a good time to go through the exercise of seeing what you normally spend. Whilst in lockdown, you are likely to save the costs of some of your usual expenses, such as parking, petrol, train fares, coffees, eating out and entertainment. You may also have been able to put certain monthly subscriptions on hold, such as gym memberships. As such, a good start point would be to review your expenditure prior to lockdown, to determine how much is available in disposable income to start a new savings arrangement, make gifts out of income to a loved one or to your chosen charity.

In addition, if you pay tax above the basic rate, you can claim the difference between the rate you pay and basic rate on your gross donation (i.e. the donation amount after Gift Aid is applied). You should therefore remember to make a note of the donations you make, so that you can apply for the additional relief on completion of your self-assessment tax return.

5)  Log your assets

It was all very easy in the “old” days. You invested in a savings account, got a book from the building society and put this in the top drawer. When it was needed, everybody knew where it was. Things, of course, have changed with so much being done online, and a lot of documentation being sent on email. This can be a good thing, but will also cause issues.

Therefore, it may be wise to set up a brief log of all your assets, including provider, policy number and the name under which the policy was set up. This will help your Executors enormously in future, when managing your Estate.

6)  In Case of Emergency (ICE) document

  • Do your family members know where all your important documents are held, who your Financial Adviser, Accountant or Solicitor is, and do they have their contact details?
  • Has one member of the family historically controlled all the family finances?

Now would be a good time to put all the important contact details onto one ICE document, including the location of your Will.

We hope you have found the above a helpful reminder and please do not hesitate to contact us if you have any questions.

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