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The Bumper Guide to your finances in 2013

What does 2013 hold for pensions, savings and mortgages? How about investments? Lorna Bourke finds out what the experts are saying.

 

by Lorna Bourke on Dec 29, 2012 at 07:01

If the experts are right, 2013 looks like being more of the same for our finances – only we are now getting used to it. 

This time last year the euro crisis loomed large, producing anxiety amongst investors and homeowners.  As 2013 approaches the euro crisis is by no means resolved, but we are learning to live with uncertainty – austerity now looks like the new ‘normal.’ 

Politicians are muddling through – if not finding a solution.  A total banking collapse looks less likely today than it did this time last year – even if very little has changed.  So what’s in store for 2013?

The New Year brings a raft of changes including the Retail Distribution Review which will fundamentally change the way we access financial advice.  There is also the possibility of the implementation of the Mortgage Market Review with all the lending restrictions that go with it.  2013 will also see more auto-enrolment in work pension schemes for millions who are not yet members of their company scheme and if the experts are right we are in for another year of a stagnant housing market.

We've broken down our preview of the year into sections on property, pensions, savings, investment and advice. Plus you can find links at the end of each section for useful relevant articles.

PROPERTY

House price stagnation

Pundits are predicting that the housing market will be pretty much like 2012 with perhaps a small increase in activity but very little change in house prices.  Mortgage availability will remain difficult.  The Royal Institution of Chartered Surveyors (RICS) is predicting a 2% increase in house prices and suggested any recovery would be ‘modest’. 

The usually reliable Martin Ellis, Halifax's veteran housing economist, agrees.  He believes prices will remain flat in 2013 as first-time buyers continue to struggle to secure mortgage loans, and there will be ‘little change’ in house prices in 2013.

There will, of course, be huge regional differences.

Mortgage availability a drag on the market

Mortgages are likely to remain difficult to obtain for all but those with a clean credit track record and a minimum 15% deposit.  In spite of the extra money made available to lenders through the Funding for Lending Scheme, there is not much evidence yet that this is finding its way through to the mortgage market – in particular to first time buyers needing a 90% loan.

Affordability and tough lending criteria are unlikely to ease as lenders await the implementation of the Mortgage Market Review (MMR) – possibly later in 2013 or more likely in 2014.  Most lenders, anxious to de-risk their loan books, are already applying the tough new lending criteria contained in the MMR principles. 

Mortgage prisoners

Many who want to move house will remain ‘mortgage prisoners’ unable to qualify for a new home loan at their current level, let alone a larger mortgage to cover the cost of trading up. The Council of Mortgage Lenders (CML) reckons that there are around 719,000 borrowers out of the total 11.31 million homebuyers who are in ‘negative equity’, meaning their mortgage is larger than the value of their property. These homeowners are unable to move and will remain in this predicament until they either pay off some of their borrowing or house prices rise sufficiently to let them off the hook. This could easily take until 2015 and will inevitably impinge on the market.

And there are many more borrowers on interest-only deals who will find themselves in a similar situation. During the course of 2012 most lenders pulled out of the interest-only market to comply with the new MMR requirements. Switching to a repayment loan will mean a big increase in monthly outgoings for homebuyers who want to move house. Others will face this problem when their interest-only deal comes to an end. Monthly outgoings on a £150,000 interest-only loan at, say, 4% work out at just under £500. Switch to a 25 year repayment mortgage and monthly outgoing rise to £801. This is out of the question for many at a time when many family budgets are stretched to the limit.

Landlords profit from FTB struggle

Properties in London and the south east have been propped up by foreign buyers at the top end of the market and buy-to-let investors replacing first time buyers at the bottom. This situation is likely to persist in 2013. Simon Rubinsohn, chief economist at RICS, believes mortgage lenders will continue to demand high deposits, and first-time buyers will continue to struggle to secure a mortgage. Increased demand for rental properties as first time buyers remain excluded from homeownership means that the buy-to-let market will be buoyant with the RICS predicting a rise of 4% in rents over the course of 2013.

Alright if you’ve got it

But there is good news for those who can meet the tough lending criteria.  Mortgage rates are lower now than a year ago and there are some cracking deals around.  With the exception of the lucky homebuyers on the old pre-crunch Standard Variable Rates (SVR) with Nationwide or Lloyds TSB/Cheltenham & Gloucester, which are capped for the remaining term at 2% above Bank Rate, 2013 could be the year to get a better deal on a remortgage.
 
As a result of the recent substantial drop in fixed rates, coupled with SVR increases for some, the gap between SVRs and fixed rates has widened considerably.  There are some five-year fixed rates available at around 3% up to 75% loan to value (LTV) and below 4% even up to 85% LTV. This compares with the average SVR of around 4% to 6%.  

Further reading:

How to get a better deal on your mortgage

Common sense to be 'hardwired' into mortgage market

The rise and fall of interest-only mortgages

What are mortgage arrangement fees really for?

RETIREMENT AND PENSIONS

Pensions test

2013 will be the second year of automatic enrolment during which companies with between 500 and 50,000 workers will go live. Only the largest companies, those with 50,000 or more employees, auto-enrolled in 2012. Employees will pay 4% of earnings into a pension scheme offered by their employer, the tax man contributes 1% and the employer 3%. Contributions are made on earnings between £5,668 and the upper limit of the qualifying earnings band at £41,450 (2013-14). Contributions are phased in and don’t reach these levels until 2018.

The vast majority of those workers who are not already members of a company pension scheme are lower paid and face a difficult decision on whether or not to opt out. This is tricky without knowing what to expect from an increased State pension, due to be paid at a flat rate of £140 a week, at a yet-to-be-determined date. In addition there are still no firm rules on how this will impact on means-tested benefits such as Pension Credit or the new ‘universal benefit’ capped at a maximum of £26,000 a year.

Many low paid workers are excluded anyway. Since the original earnings threshold for auto-enrolment was announced at £5,035 (in 2006/7), around 1 million workers have subsequently been excluded from the auto-enrolment process as governments have progressively raised the threshold to £9,440 (from April of next year) to keep it aligned to the personal allowance. But as wages are rising by less than the tax thresholds, an increasing proportion of employees will be locked out.

Between 75% and 80% of those missing out are women because many are part time workers and fall below the £9,440 threshold.  Workers earning between £5,668 and £9,440 can choose to opt into a pension and benefit from an employer contribution. But many will not be able to afford to do so. There will be no encouragement from employers to persuade them to opt in because it will add to payroll costs. Employers have to contribute 3% of earnings into the pension scheme under auto-enrolment.

Only time will tell whether auto-enrolment turns out to be a good thing. Much depends on the level of employer contributions. The minimum is 3% which is way below the 15% of lifetime earnings needed to produce a meaningful pension. The second variable is investment return. Many 10 year endowment policies – which have conservative investment policies, comparable to those likely to be adopted by managers of auto-enrolment funds – have shown little more than a return of contributions over the past decade.

Pensions complication for higher earners

No firm date has yet been set for the introduction of the £140 a week flat rate pension, although details of the state pension reform will be set out in a White Paper, which the Department of Work and Pensions (DWP) says is at an ‘advanced stage’. 

One thing we do know is that high earners will be around £1,000 a year worse off as a result of the reforms. This is because the State S2P top up pension will be discontinued once the new flat rate State pension comes into force – although people will still be entitled to all the S2P and earlier top up benefits they have accrued to date. Currently, around one million high earners approaching retirement can expect to receive around £160 a week when they stop working through their combined basic state pension of £107.45 a week plus their S2P.

The upshot is that higher earners will need to save more for retirement. But they will also suffer a reduced contribution limit – cut from a maximum of £50,000 a year to £40,000 a year from April 2014.  From the same date the cap on tax-free lifetime pension savings is reduced from £1.5 million to £1.25 million. The annual limit will affect 160,000 people while the lifetime cap will restrict 340,000 savers.  For some the new lower contribution limit will be effective from April 2013 because of their pension year end date.  Clearly high earners are going to need good advice from a specialist pension consultant.

Further reading:

How to protect your retirement from inflation

'Biggest change to pensions for over 100 years'

Don't qualify for auto-enrolment? You can still opt into a pension

The retirement taboo: why don't we discuss our finances?

SAVINGS

At least ISAs are growing

There is nothing to cheer savers with deposit rates more likely to decline than improve during 2013. The mortgage lenders now have access to cheap money through the government Funding for Lending Scheme and they no longer need to woo retail investors. The best fixed rate deposits have fallen from around 4.5% for a five year investment at the beginning of 2012 to just 3.5% today – and things could get worse. 

Those who opt for higher returns from corporate bonds, preference shares, PIBS and bond funds should be aware that although they may enjoy a higher return now, as soon as it looks as though interest rates are likely to rise (although that is not likely to happen before), the value of their bonds will fall to bring the yield into line with the new higher interest rates.

The only good news is that the ISA limit is going up from £11,280 in 2012-13 to £11,520 in 2013-14 of which 50% can be invested in a cash ISA. For many low earners, ISAs are taking the place of pension savings because of their greater flexibility and the fact that you can access cash before retirement in an emergency. The bad news is that as usual the financial institutions are ripping us off and adjusting their cash ISA rate down to take account of the fact that the interest is tax free – thereby removing much of the advantage of ISAs.

Further reading:

Savers should max out on cash ISAs instead of fixed-rate bonds

The Citywire Money ISA Guide

A whistle-stop tour of your finances in 2012

INVESTMENT

Optimistic on shares, but no fireworks

This is the time of year when the pundits stick their necks out and predict where the FTSE100 will be 12 months down the line.  But don’t expect any fireworks from UK markets. Most forecasters are expecting 2013 to be pretty much like 2012 – although some are more optimistic than others.

According to the annual Reuters poll, the FTSE100 share index is set to rise 8% by the end of 2013, accelerating after a slow start on expectations that the global growth outlook will improve. With the FTSE100 currently just below the magic 6,000 mark this would mean the index at around the 6,500 by December 2013.

Not everyone is so optimistic. The US ‘fiscal cliff’ still remains unresolved (at the time of writing) and will overhang markets in the early months of 2013 until it becomes clear what effect, if any, it will have on the US economy. The Reuters poll showed a broad range of predictions for the FTSE100 from 5,500 to 7,000 at the end of the year. All but two of the 50 strategists polled believe the FTSE will be at least 6,000 by the year end – which is pretty much where it is now, so nothing to write home about.

Forecasts depend as much on the fact that the bond market is looking like a bubble set to burst as any fundamental enthusiasm for equities. Legal & General Investment Management, for example, agrees with the Reuters poll and believes that, ‘the catalyst should come from investors shifting allocations into equities in search of yield and the prospect of further earnings growth heading into 2014.’

A survey from the Association of Investment Companies (AIC) reveals that 87% of investment trust managers expect stock markets to rise next year - the most bullish result in the poll’s 10-year history. This compares with 71% a year ago when the index was at around 5,500. Some 62% of managers expect the FTSE-100 to close next year between 6000 and 6500, with an optimistic one in seven tipping a finish of between 6500 and 7000.

Blue chips were the most widely favoured sector last year, picked by 20% of managers. They are preferred by only 4% this year – below 10% for the first time in the poll's history. Instead, managers are tipping financials (22%), technology (17%) and resources (13%).

Emerging markets are the favourite pick for 25% of managers for the fourth year in a row, while  Europe is also liked by 25% of managers (11% last year), and 21% the US. Only 25% of managers see the eurozone debt crisis as the biggest single threat to equities in 2013, compared with 62% a year ago. One-third of managers cite a global recession as their primary concern, while 13% specify geo-political instability.

Further reading:

Bullish investors set to pound on bond-like shares

France is black mark in hunt for European bargains

Why 2013 may be a great time to start investing

FINANCIAL ADVICE

Paying for financial advice

So there it is. But if you need advice on any aspect of your finances from pensions to investment, January 2013 sees the biggest upheaval in financial advice since the 1986 Financial Services Act was implemented in 1988. Those who offer full advice must charge fees and pass exams – the gold standard for which is Chartered Financial Planner.  The rest can still give ‘restricted advice’ and be remunerated by commission.  But we all know the potential pitfalls of commission bias. The upshot will be that if you want impartial advice you will have to pay fees. The alternative will be to take an interest yourself in your financial affairs and manage your own money – which is no bad thing.

Further reading:

How to find a good financial adviser after RDR

The Citywire Money guide to the RDR Revolution

16 comments so far. Why not have your say?

Dislexic Landlord

Dec 29, 2012 at 09:05

I can only really comment as a Landlord and it looks to me that I will benifit once again from the mess the UK is in

It is indeed a very strange world

I have looked this year at buying shares especialy for dividend income but the time span is short and I will leave money in my shares where it is for the long term

I must admit I just dont get the feeling of really owening anything buying shares In fact I know very little abou tthe companys apart from they are well known and make profits

Buying Bricks and Mortar takeing charge of a project manageing the property is far more fun than the click o fa mouse

I think it wil be more of the same I bellive there will be oppertunitys to make good yeilds in property especialy buying from distressed sales

I think we are still in part one of the property problems in the uk in genaral Part two will only happen when intrest rates rise and we will then see repos go through the roof again this will be a good time to buy again

A point I would like to add struck me a few wees ago If you look atthe BTL activity of the past 4 years Landlords have moved strongly back in to the market this will cause aproblem in years to come for the larger Family homes

I think we al lagree the FTB has gone and with there exit there will be no movement in the years to come up the property ladder

The way in the past was to sell your little flat move to a semi build your family and then move to a detached stay in the detached till retirement sell the house buya bungalow no mortgage money in the bank and then die LOL

This model will change completly inthe years to come asthe FTB who kick start the chain will not be there

In a sentince Large houses will not sell (apart from London ) which is a market in itsself and will stay that way

Large houses will become a burden to the Middle Classes in my opinion they will take your pension in repairs and genaral up keep and when youdohave to have care in old age it will be taken from you in a rest home

So Part 2 of my thoughts will have large problems to come

we are far from out ofthe woods yet

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Dislexic Landlord

Dec 29, 2012 at 09:54

A point I forgot to add

House prices in future will grow very slowly especialy larger properties

The lower end of the market will have value through the yeild ie rent

any landlord worth there worth would only buy with a gross yeild of 7%

For me it has to be over 9%

Ive been watching the detached Houseing market andits going knowhere

Small properties will sell if the yeilds above are used and thats why I say we have part two to come

If you want to value you your home look a tthe yeild in 2013 and you will have its true value

We have all learned a lot since 2008 and i think the learning curve will be steep in the years to come especialy in the UK Houseing market

as for values increasing in 2015 Im not counting on that one either

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Paul Eden

Dec 29, 2012 at 10:50

I read in the above that 'no firm date' has been set for the introduction of the new flat-rate pension. Reading everything I have read in these columns and elsewhere had left me (and no doubt others) in no doubt that there WAS a firm date for the introduction of the new flat-rate pension!

Am I really alone in thinking this? Was not the introduction planned to happen in 2015/16? Am I imagining it? Were not people saying they should be allowed to defer for one or two years so they too could qualify for this new pension scheme?

Or are we now seeing another 'U' turn in government policy? Worse, has the whole matter now been relegated to a committee of MPs for further study...or worse still, consigned to a Public Inquiry to report back five or more year?

Indecision and prevarication seem to be, as always, the order of the day. Statements are made, firm dates set for change, promises made and then all are retracted with glib statements such as...'no firm date has been set'.

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Janzen

Dec 29, 2012 at 12:06

For those of us with the facilities to find the better OEIC's, Investment Trusts and Offshore Mutual Funds 9% gross income offered by the property market will seem like a lot of work and risk for a modest return.

Most mutual fund investors, choosing good performing funds for themselves (not through IFA's), will have achieved more than 25% gross return last year with a portfolio spread across Asia, Emerging Markets, Global Markets, Europe, UK and single country funds like Thailand. The better mutual funds in Thailand will have returned more than 40% gross.

2013 will likely bring good performing funds in North America but most people have avoided the USA this year since funds there are as volatile and unreliable as their politicians.

The better performing funds take time to find but provide a worthwhile return.

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Dislexic Landlord

Dec 29, 2012 at 12:28

HiJanzen

I knew an investor would come up with your comment about being hard work for 9%

In the very short term you are correct but you need to think long term

The currant Rental market we are in at present is Rental Growth and that is a fact of the 2012,s 2013,s

so the income from property will increse Ive been in this game a very long time and looking back at 1984 rents that I personaly collected for a two bed flat was £27.00 per week thirty years on its near £150 per week

Its all about supply and demand at present and belive me there is great demand to rent

also you need to have the money to put in OEIC,s to have income a Landlord at present can make posiive cash flow with little cash mind saying that you do need 30% deposit

but to give and example at present Ivejust bought a property for 68k the deposit was £22000 inc fees and my nett profit is £3700

so I think that works out at around 17% return

of course there is insurance voids repairs ect ect but running a large property bussiness it works very well

Also althoughI haveonly commited 22k I have the full asset value in future when pricesdo pick up (God Knows When )

so i hope you can see my point why property over anything else at present

When the property market price moves higher I will be with you investing in OICS ISA,S and shares

But it will be my incomefrom property that will allow me to invest

property investment gives a person with no wealth to become weathy

It is a Bussiness and its not always an easy ride But Its been agreat experiance and I love every min Good and Bad

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Janzen

Dec 29, 2012 at 13:36

Dislexic Landlord

I apologise if you read my comments as patronising. I assure that was not my intention. I was just trying to make a comparison of the options for individual investors that would require less "hands on".

The OEIC's, IT's and Offshore mutual funds, I refer to, have relatively low entry levels and therefore available to all investors. That's one of the benefits of mutual funds . Another is the massive spread of risk as opposed to individual equities. My point is 25% -40% gross on any amount is a good return when subject only to CGT.

I had appreciated that you use borrowed money to fund the majority of your 9% return which is a perfectly normal approach (to bolster the value of any business) and with your experience in the property market you will no doubt keep the finances in kilter.

Clearly you would not be in this market unless had the skills to find the good paying tenants that avoids gaps in your income stream and focus your investments in that part of the market that would, avoid the concerns of many, that the housing in the UK is still overpriced. These two are the risks that have been my concern about rental property.

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Les Craig

Dec 29, 2012 at 14:18

Hi, can anyone tell me which OEICs,ITs and offshore mutual funds to invest in rather than property, to return 25% TO 40%

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Moylando

Dec 29, 2012 at 16:39

Mr Craig. No one.

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gggggg hjhjkl;'

Dec 29, 2012 at 16:51

Congratulations Janzen At the annual return levels you are claiming (gross or net and in money or real terms) you are the GREATEST INVESTOR IN THE WORLD!!!

Even Warren Buffet, who precedes you as the greatest living investor only manages 21% a year on average (way ahead of anyone else) and that is investing in a few very specific areas.

I am surprised we have not heard more of you in the past. You have managed to hide your success very well indeed.

The ability to pick the very small number of successful OIECs out of the many thousands available is a magical skill indeed.

Once again WELL DONE!!!

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snoekie

Dec 29, 2012 at 17:24

Dislexic, I know where you are coming from, but I only became an investor about 18 years ago, and not really enough for a deposit, hence my conetration on shares.

But I have long seen the benefits for those that can start with one rental property and get that, with its free equity, to support another purchase, until there are a number of properties to easily be able to carry one or more periods of voids, on top of the burdens being imposed by LAs as well as the costs involved getting rid of the odd "rogue" tenant as well of refurbishing the damage done to the property. Saw quite a few examples where this worked for clients where in their business they had the opportunity to use cashflow to support the deposit for their first purchase, whilst still continuing in business. Pretty soon they switched to property, almost exclusively, but then that was mainly the commercial, shops and offices, with the odd residential letting. Problem tenants were much easier to get rid of, and being able to ge orders for costs, reducing that element of overhead.

Fairly soon, there would be enough income to also start making serious inroads into the outstanding mortgages as well providing a decentish income.

A colleague followed those words, and whilst he is still working (in his fifties) he now has enough income to retire on, after 15 years of buying to let in a serious way. As for rogue tenants, he doesn't have the legal costs to worry about, he does it himself.

Having said that, with all the regulations, the BTL market can be a minefield, and requires constant attention, and the headache of LAs when a tenant thinks he/she is hard done by, and LAs rarely accept that a tenant is wrong so keep chasing lost causes! Not for everyone, there needs to be a basic landlord and tenant law knowledge.

As for the new regulations on pensions WATCH OUT, the thin edge of the wedge, and an ideal set up for the bureaucrat and to control you in the future, as well a source of rich pickings for thieves like Brown/Balls/Bliar/Siliband.

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Dislexic Landlord

Dec 29, 2012 at 17:50

Hi Snnoki and Jansen

Im never offended by good commenst I listen and read every think i can on makeing money My Accounant says I have a fetish for BTL and he may well be right

BTLis just like any other bussinessIve made loads of errors and I have learned by them

I always inform landlords buying the property is the easy part

Manageing propery is the key to sucsess and the main part ofthe sucsess is selection of customers

and a good Garntour donsent come in wrong nither

Being on top of legislation is very important thats why I read every thing I can on BTLover and over again im quite an Anorak

If you really want something in life it takes effort BTL is no differant

thanks for all the responces regards DL

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John Grant

Dec 29, 2012 at 20:38

Thank you Janzen, for your comment at 12.06 today, our minds must think very alike. Using almost all of the places and countries you mentioned in your letter the total increase on my portfolio this year at todays date is 32.5%. If I can emmulate this increase in 2013 I will be very pleased. Good luck to your fund picking next year, in either funds or in investment trusts.

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John Grant

Dec 29, 2012 at 20:42

Further to my last comment, sectors for next year that I will be concentrating on will be UK smaller companies, UK mid-caps, European, Emerging, Russian and commodities. I wish everyone a good New Year and good investing for 2013.

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Matt via mobile

Dec 30, 2012 at 17:16

Dyslexic Landlord: Any chance you'd write a blog? I'd love to read more. We're looking to move next year to a bigger house and we're considering keeping our end of terrace as a BTL rather than sell as market is stagnant and may take a while to sell.

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Dislexic Landlord

Dec 31, 2012 at 07:48

Hi Matt

If I can give you any advice just ask im more than happy to help anyone new to the bussiness

all the best DL

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Moylando

Dec 31, 2012 at 18:26

Anyone thinking what I'm thinking ?

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