Chessman & Partners Limited

The Transfer Market

perspective — Thu, 01 Dec 2011 16:25:33 +0000

Most people switch jobs several times during their working life; however, when you change employers, it is worth thinking about the pension pot that you have accrued. You might wish to consider combining your pensions into one pot. It is easier to keep an eye on fund performance if your pensions are all under one umbrella; moreover, a single pension pot will incur less paperwork and administration, and could also generate lower costs and better overall performance. Sounds like a no-brainer? In theory yes, however, there are some important issues to consider before taking the plunge.

Most occupational pension schemes and private schemes can be transferred, but there are restrictions and potential pitfalls. It is not usually worth transferring final-salary or public-sector pension schemes; the benefits are too good to lose. You should only transfer if you have actually left a company: if your current employer contributes to your existing occupational pension scheme, you should not switch. Also it is worth noting that the money in your pension can only be transferred from one pension scheme to another (until you have retired), and not every new pension scheme accepts inward transfers. If your pension pot is very small, it may not be worthwhile switching: you will have to pay charges when you transfer, and some providers impose harsh penalties if you leave their scheme. And, if you are relatively close to retirement, you might not have sufficient time to recover the costs incurred by transferring.

According to the Pensions Advisory Service, the Department of Work & Pensions (DWP) is set to publish a consultation paper examining the consolidation of small pension pots. Possible approaches could see your pension pot moving with you when you change your employer; alternatively, when you change your job, your pension pot could be left behind and – unless you decide to opt out – the cash would automatically be transferred to a central aggregator fund. The DWP believes the changes would increase the visibility of pensions saving: instead of seeing several small figures, each individual would be able to view one larger, consolidated figure.

Transferring and aggregating your pension pots might generate significant long-term benefits; however, any decision to do so should be taken for the right reasons. Tread carefully and, above all, take expert advice before making an irreversible decision. Give us a call.

The contents of this article should not be construed as advice and do not necessarily reflect our views. Independent Financial Advice should always be attained in order to assess your own individual circumstances.

Autumn Statement

perspective — Thu, 01 Dec 2011 16:25:17 +0000

The Autumn Statement from chancellor of the Exchequer George Osborne provided little cheer for either businesses or individuals, going so far as to sound a warning that the UK’s “debt challenge is even greater than we thought”. The UK government will have to borrow more money and accelerate its programme of spending cuts. Overall government borrowing for 2011/12 is expected to overshoot the chancellor’s previous target to reach £127bn. Although debt is expected to come down eventually, Osborne admitted the decline would not be as quick as the government had wished.

Borrowing is now forecast to decline to £120bn during 2012/13, to £100bn during 2013/14 and eventually to £24bn by 2016/17. The UK’s debt-to-GDP ratio is now expected to peak at 78% in 2014/15, compared with previous expectations of a peak of 70.9% in 2013/14. Expectations for economic expansion were drastically scaled back. The Office for Budget Responsibility (OBR) cut its forecast for UK economic growth in 2011 from 1.7% to 0.9%, and slashed its forecast for 2012 from 2.5% to 0.7%.

The outlook for jobs has deteriorated and the OBR expects the rate of unemployment to peak at 8.7% in 2012, compared with earlier expectations of a peak of 8.2% in 2011. The number of public sector jobs to be lost by 2017 has soared from 400,000 to 710.000 and public sector pay rises will be capped at 1% for two years once the current pay freeze has ended. Elsewhere, on a slightly brighter note, the controversial 3p-per-litre rise in fuel duty that was scheduled to take effect in January 2012 has been abandoned and the rise scheduled for August 2012 has been cut from 5p to 3p.

Looking to the immediate future, the OBR believes the UK economy will narrowly avoid falling back into recession. The economy is expected to contract by 0.1% during the final three months of 2011, and then to register growth of 0.1% in the first quarter of 2012. Nevertheless, the OBR warned that the UK has a one-in-three chance of falling into recession next year.

In particular, it believes the eurozone poses a substantial risk to the UK’s economic growth, commenting, “The probability of a much worse outcome is greater than the probability of a much better one.” For his part, the Chancellor warned: “If the rest of Europe heads into recession it may prove hard to avoid one here in the UK.”

Dilnot report

perspective — Mon, 07 Nov 2011 15:38:58 +0000

Already struggling under the weight of rising costs and budget cuts, the UK faces a crisis in the funding of social care for the elderly. Since 2004, the number of Britons aged over 85 has risen by two-thirds, and demand for care has outstripped supply. Looking ahead, the UK’s elderly population will continue to expand. In response, the coalition government set up the Commission on Funding of Care & Support – headed by economist Andrew Dilnot – to undertake an independent review of the cost and funding of social care in England.

The Dilnot Report found that the current system is “unfair and unsustainable”, and called instead for a form of collaboration between the state and the individual. It recommended that the means-tested threshold – above which individuals are liable for the cost of residential care – should be increased from £23,250 to £100,000, and that individuals’ lifetime contributions towards the cost of their social care – which is currently unlimited – should be capped at a recommended £35,000. Those living in a care home will have their food and accommodation costs capped at between £7,000 and £10,000 each year. The system should be national and portable, in order to ensure that those who move house are not disadvantaged.

The proposals have raised questions about cost – if implemented, the recommendations would increase the annual charge to the taxpayer by £1.7bn. Controversial current rules mean the elderly often have to sell their homes in order to finance their care, but the Dilnot Report proposes that the value of the person’s home should only become a factor if they move into a residential care home.

Andrew Dilnot commented: “Putting a limit on the maximum lifetime costs people may face will allow them to plan ahead for how they wish to meet these costs.” At present, according to the Dilnot Commission, one in four people will spend little or nothing on social care. Half will spend more than £20,000, and one-quarter will spend more than £50,000. One in 10 will spend more than £100,000. Looking ahead, insurance companies are expected to step into the breach and offer solutions to help individuals and advisers to plan ahead. It is difficult for individuals to forecast the cost of their future needs, but it is important to consider how you are going to fund the cost of any care that falls below the recommended cap.

Global update

perspective — Wed, 02 Nov 2011 16:06:16 +0000

Even though major markets were up significantly during October, the month was characterised by exceptional volatility across global indices. Investors remained jittery during the month amid intense speculation over the outlook for the eurozone and concerns the region’s leaders might not be able to reach an agreement over measures to resolve the debt crisis.

The FTSE 100 index rose 8.1% over the month as a whole, while in the US the S&P 500 index increased by almost 11%. In Europe, the CAC 40 index rose 8.7% and the DAX index climbed 11.6%. That said, it is worth noting, despite these relatively strong monthly performances, all these indices remain below – and in some cases substantially below – their levels recorded on 31 December 2010.

Investor sentiment was briefly boosted by the news the ‘Troika’ of the European Central Bank (ECB), European Union and International Monetary Fund (IMF) had agreed to provide Greece with its latest tranche of bailout money, comprising €5.8bn (£5bn) from eurozone member states and €2.2bn from the IMF. The Athens Stock Exchange has fallen by almost 43% since the end of last year.

The banking sector suffered a particularly torrid time during October, and some major banks – for example, Societe Generale, Bank of America, RBS and Commerzbank – experienced very large daily swings. Share prices in the sector were boosted by the ECB’s announcement of emergency loans totalling €40bn to help the recapitalisation of the eurozone’s banks. However, the sector took a battering at the end of the month following the news US broker MF Global had filed for bankruptcy protection, having buckled under the pressure of $6.3bn-worth (£3.9bn) of exposure to eurozone government debt.

As the month drew to a close, Europe’s leaders finally agreed emergency measures to address the region’s problems and reduce Greece’s debt burden to 120% of its GDP by 2020. Private banks holding Greek bonds will have 50% of their returns written off, the European Financial Stability Facility (EFSF) will be expanded and European banks will have to achieve a higher capital ratio by June 2012 in order to protect them from the risk of future crises or defaults. However, during the final hours of October, Greek Prime Minister George Papandreou announced a referendum on the on the measures, raising fears the deal could be thrown into jeopardy. Looking ahead, the recent bout of volatility appears unlikely to subside in the immediate future.

Outlook for Shares

perspective — Mon, 17 Oct 2011 17:31:56 +0000

It is often said that stock markets are driven by fear and greed – and, right now, it is probably fair to say that fear is winning. A combination of negative factors – from disappointing economic data, fears of a “double-dip” recession, the eurozone’s sovereign debt crisis and the fiscal crisis in the US to the ongoing unrest in the Middle East and North Africa and the effects of the Great East Japan Earthquake – have conspired to undermine investor sentiment. Amid an atmosphere of uncertainty and a backdrop of volatility, many investors are unsure what to do next.

The benchmark FTSE 100 Index lost more than 11% of its value over the first nine months of the year, although during early August, it dipped 15% below its starting level. The most recent figures from the Investment Management Association (IMA) suggest that investors have become increasingly risk-averse and, during July, net retail sales dropped to levels last experienced three years ago. Although demand for bond and balanced funds remained relatively robust, equity funds registered net outflows for the first time since February 2009, and net outflows from UK, US and European funds outstripped inflows into Japanese, Asia-Pacific and Global funds during the month.

Amid the tumult of market and macroeconomic noise, it is worth taking a step back and looking again at corporate fundamentals. Although the current backdrop is saturated with significant structural and macroeconomic problems, many individual companies are in good shape, and the share prices of some high-quality firms look relatively inexpensive. Corporate balance sheets have strengthened; many companies retrenched during the financial crisis and recession, and have subsequently found themselves able to resume or raise dividend payments. That said, it is worth considering any significant intensification of the eurozone’s debt crisis could squeeze corporate finances, reducing companies’ ability to return value to shareholders.

Looking ahead, there is still good value to be found in the equity market, although investors should probably prepare themselves for a bumpy ride. In the current climate, it is worth re-examining the structure of your investment portfolio and ensuring that it is properly diversified and appropriately structured to meet your needs. Above all, it is worth reassessing your attitude to risk. The summer’s extreme volatility has led many investors to reconsider their own definition of what constitutes “risk” – and, in some cases, to find that their tolerance for loss is rather lower than they previously thought.

To discuss your own specific circumstances contact your local Perspective office.