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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.
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.
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%.
RETIREMENT AND PENSIONS
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.
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.
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.
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.
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