Moneywise Sept/Oct Newletter
News
Holding your nerve in volatile times
It’s almost impossible these days not to think of that apparently Chinese curse about living in interesting times. The last few weeks might be characterised as too interesting as we tune in daily to find out the latest political twist. While business as usual goes on every day, the uncertainty that lies ahead makes planning of almost any kind an anxious prospect.
In the latest edition of our newsletter, released against the backdrop of parliamentary dissension and political turmoil, we look at the benefits of taking a long term view of your investments and shutting out the short term noise. With data showing that over the last 30 years to 2018, only about 0.2% of days generated around half of total performance, it may not be wise to react to turbulence in the headlines by jumping out of the market too quickly.
Investments are only one part of most people’s financial landscape. Managing all your sources of income to balance your outgoings is the bedrock of sound planning. When circumstances change, especially coming up to retirement, understanding your spending and the income you will have to cover it is even more important. We explore the ongoing importance of cash flow planning to help manage your finances in later life.
If you wanted to add some light reading to your autumn book list, the Office of Tax Simplification (OTS) second report on inheritance tax, published in July, might be just the thing. For a tax that generates relatively little revenue, IHT is certainly complicated in both structure and outcomes. After an 18-month review, the report contains a wide range of proposals that could affect your estate planning in the coming years.
Finally, this October marks the seventh anniversary of the start of workplace pension auto-enrolment, perhaps proving that some grand government schemes can be a success. However, one sector of the working population has been left untouched – the self-employed. Their numbers have been growing rapidly, but their pension participation has seen a continuous decline from 27% in 2008/09 to just 15% in 2017/18. Pension contributions across the board are still too low, however, and need to be increased. What is the way forward for those people who are under-saving for their retirement?
Our next update will come in the winter, when we should be in calmer, or at least more certain, waters. We look forward to discussing further developments with you then.
Email us: enquiries@pilpetersfield.co.uk
The mortgage market’s switch from LIBOR to SONIA
If your mortgage is linked to a “benchmark index rate” it was most likely in the past to be either the Bank of England’s Base Rate or LIBOR: London Interbank Offered Rate (LIBOR), which has acted for decades as the main reference rate for financial products globally, including loans, derivatives and bonds.
It’s based on the average at which large global banks would lend funds to each other and is commonly calculated in seven maturities across five currencies.
Discussions about finding a replacement rate have continued for several years, driven largely by the controversy that ignited when it emerged that LIBOR had been manipulated by several banks.
The scandal came to light fully in 2012. By 2018, the Financial Conduct Authority (FCA) confirmed that LIBOR would be phased out by the end of 2021. The regulator asked market participants to begin considering how they would transition to a new rate.
The big question that emerged was ‘what should the new reference rate be?’ Hundreds of trillions of pounds of financial assets around the world are linked to LIBOR and many legacy contracts do not provide for what happens if the benchmark ceases to be published.
Enter: SONIA – The Sterling Overnight Index Average (SONIA) was put forward as a replacement for LIBOR.
SONIA differs from LIBOR in a number of ways. It is based on actual transactions and is not set, currently, in different maturities. SONIA reflects the actual average interest rates that banks pay to borrow sterling overnight from other institutions, unlike LIBOR which is forward looking.
Some mortgage customers may be impacted by this change, as a number of lenders have reversionary rates that are tied to LIBOR and which will need to be replaced by a new benchmark.
Some institutions are moving to the Bank of England (BoE) base rate with which customers are generally familiar.
Therefore the transition from LIBOR should, in practice, represent a change in the calculation of customers’ mortgage rate, rather than a change in the rate itself.
If you are concerned about how your interest rate might be affected by this change, either call your lender or e-mail: