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Market Update Monday 26th September 2022

Rising rates and the Russia Ukraine conflict continue to take their toll on markets

Bond and equity markets both sold off this week as a number of global central banks raised rates in their continued efforts to combat inflation, with the US Federal Reserve raising rates by 0.75% for the third time in a row, taking the upper bound to 3.25%. The negative sentiment was compounded by Russian President, Vladmir Putin, escalating the Ukrainian war by seeking to annex invaded areas of Ukraine by holding referendums. This was backed up with plans to compulsory draft 300,000 Russian reserve soldiers and make further veiled threats of the use of tactical nuclear weapons.

As of 12pm on Friday, London time, US equities had fallen 3.0% over the week, with the market having given up 85% of its rally over the summer, taking the market to within just over two percent of its low for the year, down 21.2% year to date. Although sterling-based investors have been cushioned from this fall by a magnitude of 18% as sterling has weakened against the dollar. US technology stocks fell by 3.3% over the week, taking their loss to 29% year to date, just above their low point in June. European markets fell by 4.4%, rocked by an increasingly hawkish European Central Bank, and the escalation in the Ukraine war by Russia. UK equities dropped 3.4% as the Bank of England raised rates by 0.5% to 2.25%, whilst announcing that the UK was probably in a recession. Japanese stocks were a comparative bright spot, falling 1.2% as the Bank of Japan maintained its dovish stance, keeping rates on hold at -0.1%, whilst continuing to target a zero percent yield for ten-year Japanese government bonds. Australian stocks fell 2.4%, whilst the emerging markets lost 2.3%.

Government bonds continue to weaken in the face of rising rates

US government bonds sold off, with the 10-year Treasury now yielding 3.76%, a level not seen since 2010. However, it was UK government bonds that took the limelight this week for all the wrong reasons. The combination of a comparatively small rate hike by the Bank of England, and a string of tax cuts announced by the new chancellor of the exchequer, Kwasi Kwarteng, raised concerns about rising UK government borrowing in a rate rising environment. 10-year gilt yields, which move inversely to price, jumped by 0.66% over the week, taking the yield to 3.8%, whilst two-year gilt yields are now trading at 3.96%. German government bond yields rose by 0.28%, taking the yield on 10-year bunds to 2.04%. The Swiss National Bank raised rates by 0.75%, thereby taking interest rates to 0.5% and ending negative interest rates for the first time since 2015. The Bank of Japan now remains the only global central bank still pursuing negative interest rates.

Sterling falls to a 37-year low versus the US dollar

The dollar maintained its upward path, with the dollar index (the dollar versus a basked of internationally traded currencies) rising by 2.3%. Whilst Sterling fell to a thirty-seven year low versus the dollar, trading at just under $1.11, it also fell versus the Euro, trading at €1.13. The Euro also weakened versus the dollar, falling beneath parity to trade at $0.98. However, despite the Bank of Japan being the only major central bank not to be following a tightening path, the Yen strengthened this week, as the Japanese central bank intervened in currency markets to prop up their currency.

Commodities continue to fall on recession concerns

Gold sold off over the week, falling 1.8% to $1,654 an ounce following the latest US interest rate rise. Industrial commodities also sold off as recessionary fears grew in the face of rising rates. Copper fell 1.7%, currently trading at $7,739 a tonne, whilst crude oil sold off, with Brent crude falling by 4.1%, now priced at $87.6 a barrel. European natural gas also fell a further 4.8%, now trading at €178 megawatt hour, although that remains an increase of 172% since the start of the year, and over an eightfold increase since the start of 2020.

Issues under discussion

Trying to put the inflationary genie back into the bottle

To date, 2022 has been one of the worst years on record for fixed income as central banks have played catch up as they try to put the inflationary genie back into the bottle. Many would argue that they were caught napping in the second half of 2021, as loose monetary and fiscal policy from the covid pandemic led to unprecedented levels of demand, colliding with supply chains suffering from the aftereffects of the pandemic. Although there may be some truth in this, they could not have known that Russia was about to invade Ukraine, and the impact this was to have on energy prices.

US rates have moved up swiftly since, with the 10-year yield on US Treasuries now in positive territory having adjusted for future expectations of inflation. Whilst the risk is that central banks increase rates higher than what the market is currently pricing in, the opportunity is that economies start to slow as the higher costs of servicing debt has the desired effect. The cost of a new mortgage has now doubled in the US, this is increasingly likely to be a headwind for the housing market, a key harbinger for the US economy. Therefore, the yield on offer in fixed income markets looks increasingly compelling, both in government bonds, and within areas of the corporate credit market where investors are being sufficiently compensated for the likelihood of rising defaults.

Busting the myths about pensions

Reinvent your future to work for you

If you are approaching retirement age, it’s important to know your pension is going to finance your future plans and provide the lifestyle you want once you stop working. Pension legislation is extremely complex and it’s not realistic to expect everyone to understand it completely. But, since we all hope to retire one day, it is important to get to grips with some of the basics.

Many of us have made pension provision, but some of us don’t know very much about the details. To help you get a handle on some of the myths around pensions, we’ve got answers to some of the things you may have been wondering about. It’s particularly helpful to become aware of the things you may have thought were facts that are actually myths. Here are some examples.

Myth: The government pays your pension

Fact: The government pays most UK adults over the pension age a State Pension, which is currently:

Retired post-April 2016 – max (full rate) State Pension of £179.60 a week • Retired pre-April 2016 – max (full rate) basic State Pension of £137.60 a week (a top-up is available for some, called the Additional State Pension) Not everyone is eligible for the full amount, which requires you to have at least 35 qualifying years on your National Insurance record. If you have less than ten qualifying years on your record, you’ll receive nothing. Even if you receive the full amount, you’ll usually need to supplement it with your own pension savings.

Myth: Your employer pays your pension

Fact: Most people are automatically enrolled into a workplace pension. Your employer is usually required to pay a minimum of 3% of your salary into it and you must also pay a minimum of 5% of your salary.

If you keep your contributions at the minimum level, it might be difficult to save enough for retirement. As life expectancies grow longer, your retirement can be almost as long as your working life. It’s therefore important to put aside a portion of your earnings to create a pension pot that will enable you to receive the income and live the lifestyle you want during retirement.

Myth: You can’t save more than your lifetime allowance

Fact: There is a lifetime allowance on the benefits you can access from your pension, which is currently £1,073,100 (tax year 2021/22). That doesn’t mean that you can’t withdraw any more after that, but it does mean that you’ll pay a tax charge of up to 55%. However, there are ways of withdrawing the money with a tax charge of 25%.

Myth: Your pension provider’s default fund is suitable for everyone

Fact: Most pension default funds will start out with a high-risk strategy and steadily move your capital into lower risk investments, such as bonds and cash, as you get closer to retirement. This is to reduce volatility in the value of your investments so that you can have a higher degree of confidence in how much you’ll eventually end up with.

If you don’t plan to purchase an annuity, you don’t necessarily need to reduce volatility before retirement. You may be leaving some of your money invested for several more decades, in which case a higher risk strategy may be more appropriate.

Myth: Annuities are outdated

Fact: There was a time when almost everyone bought an annuity when they retired, and that time has passed because there are now alternative ways to access your pension savings.

But annuities still have a useful role for generating a retirement income and can be an appropriate product for some people. Unlike other pension withdrawal methods, such as drawdown, an annuity offers a fixed income for life, so there’s no risk of your money running out. fiat’s a crucial benefit for many pensioners.

Myth: You can’t pass on a pension

Fact: If you’ve used your pension savings to purchase an annuity, the income from this will usually cease when you die. But if you have pension savings that you haven’t used to buy an annuity (for example, if you’ve been taking an income through drawdown), what’s left can be passed on to a loved one.

If you die before the age of 75 there will usually be no tax to pay by the beneficiary. Otherwise, they will need to pay Income Tax according to their tax band.

Market Update Monday 19th September 2022

Global equity markets end down for the fourth week in five

A sharp pullback on Tuesday sent the major U.S. stock indices to their steepest weekly declines since June. The market fell for the fourth time in five weeks, with the NASDAQ and S&P 500 dropping 5.5% and 4.7%, respectively. Communication services and information technology shares were hit hardest as Alphabet and Meta Platforms hit new 52-week lows.

Core inflation not done yet

The main event of the week was Tuesday’s consumer price index report, which came in above expectations and softened investors hopes that the economy had moved beyond peak inflation. Headline prices rose 8.3% for the 12 months ended in August versus consensus expectations for an increase of around 8.1%. Of greater concern was that core inflation jumped to 6.3%, its highest level since March and above expectations for a rise of 6.1%. A 0.7% housing cost increase in August was partly to blame, but rising food and medical care prices also contributed heavily. Core producer prices, reported Wednesday, offered a somewhat more hopeful story, continuing a year-on-year decline that began in April, falling to 7.3% in August from 7.6% in July.

The week brought mixed messages on wage inflation, which has been a primary concern of policymakers. Weekly jobless claims, reported Thursday, showed a continuation of labour market strength, falling to 213,000, their lowest level since early summer. Media reports suggested a slightly different picture, highlighting that Goldman Sachs will soon cut jobs, joining a list of large companies, including Ford Motor and Microsoft, planning layoffs.

Recession fears hit the British pound

Shares in Europe pulled back amid signs of a deepening economic slowdown, with the European STOXX Europe 600 Index ended 2.89% lower. Japan’s stock markets fell over the week, with the Nikkei 225 Index dropping 2.29% and in China stock markets fell as currency weakness and downbeat property data overshadowed surprisingly strong factory output and retail sales indicators, the Shanghai Composite Index down 4.2%.

The British pound depreciated against the U.S. dollar, sinking to levels last hit in 1985. Fears of a looming recession contributed to this downward pressure, as did concerns that the Bank of England’s rate policy will continue at a slower pace than that of the US equivalent. Inflation in the UK came in at 9.9% in August. This reading marked a decline from the 10.1% registered in July. Falling fuel prices drove this slowdown. However, core inflation, which excludes food and energy costs, quickened to 6.3% from 6.2%.. The FTSE 100 finished the week -1.56%, aided somewhat by the benefit its many exporting constituents get from a weaker home currency.
The yield of the 10-year U.S. Treasury bond climbed for the seventh week in a row, reaching around 3.45% on Friday. The yield is up from 3.32% at the end of the previous week and from 2.64% at the end of July. The yield curve remained inverted, as the 2-year Treasury yield rose to about 3.87% on Friday—its highest level since 2007. British 10-year government bond yields also increased, to their highest levels in more than a decade, closing at 3.14%.

All eyes on rate announcements

Ahead of next week rate announcements from the US Federal Reserve and Bank of England, investors will be looking for any sign as to where to next for Central Banks. With a 75 basis point hike by the US Federal Reserve very much priced in to current market prices, any indication of a continued aggressive approach into the year-end could unsettle markets further. On the flipside of this, any signs of a slowdown or pause in the current pace of rate hikes, may be met with a sigh of relief and air of calm by markets.

Market Update Monday 12th September 2022

Markets mustered a gain

Markets mustered a gain last week, snapping a three-week losing streak, as the focus remains on Fed rate hikes, inflation, and their implications for the economy ahead. Some moderating inflation fears may have also been at work, and a midweek decline in oil prices which briefly hit their lowest level since Russia’s invasion of Ukraine causing energy shares to underperform within the S&P 500 Index, although the sector still recorded a gain.

Markets snap three week losing streak

US markets posted a gain of 3.6% as investors sort a temporary bottom to the recent market declines. Shares in Europe rose after some countries announced plans to deal with the energy crisis and boost their economies. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.06% higher. Major indexes also posted gains with the UK’s FTSE 100 Index increasing 0.96%. Japan’s stock markets rose over the week, with the Nikkei 225 Index gaining 2.04%. China’s stock markets also rose as tame inflation data and expectations of further policy support prompted buying, with the Shanghai Composite Index advancing 2.4% for the week.
The British pound depreciated further against the U.S. dollar before retracing to roughly USD 1.16, a level near the low hit in 1985. This weakness appeared to stem, in part, from uncertainty about the economic agenda of new UK Prime Minister Liz Truss. The euro rose above parity with the U.S. dollar after the ECB hiked its key rates by a record amount.

ECB raises rates to highest level since 2011

The ECB increased its key interest rates by a record 0.75 percentage point in a bid to curb inflation. The deposit rate now stands at 0.75%, the highest levels since 2011. The ECB explained in its official statement the major step frontloads the transition from accommodative policy rates to levels suited to achieve a return to the ECB’s 2% inflation target. Even so, the central bank indicated that more rate increases are likely.

UK Government intervene in Energy Crisis

New UK Prime Minister, Liz Truss, announced that the government would intervene to help reduce soaring energy costs for British households and businesses. The Financial Times reported that internal government estimates showed the size of the package could be around GBP 150 billion—bigger than bailouts during the COVID-19 crisis and would be funded by government borrowing. In Germany, Chancellor Olaf Scholz said the government will spend EUR 65 billion to shield households and businesses, raising the monies from a tax on electricity companies and a planned corporate tax.

The yield on the benchmark 10-year U.S. Treasury note jumped to its highest level since mid-June at the start of the trading week on Tuesday, attributed to anticipation of a large European Central Bank interest rate increase on Thursday and ended the week at 3.31%.

After another period of market volatility, we know the equity market lows in June priced in a mild recession and pessimism around the economic and earnings outlook. Whilst there may be further weakness in the global economy from here, that doesn’t necessarily mean markets are destined to take another leg lower. However, for markets to stage a durable recovery we need to see consistently declining inflation, resilience in economic growth and corporate earnings, alongside the valuation re-pricing we have seen so far this year.

Think about the lifestyle you want

Financial security in retirement can never be taken for granted

Life changes when you retire – and so does how you spend your money. Whatever your plans, it’s important to keep on top of things and think about the lifestyle you want. It’s also worth noting the average life expectancy at age 65 years is 18.6 years for men and 21.0 years for women.

So, it’s vital if you are planning to retire soon that you make sure you have enough money to last throughout your retirement. Whether you’re aiming to retire early or have worked way longer than you imagined, retirement should be what you want it to be.

Exciting chapter in your life

This is a new and exciting chapter in your life. And for a lot of us, retirement will be the first time that we can do what we want, when we want. With no job to tie us down, retirement is meant to be a relaxing time. However, your newfound freedom and leisure time could quickly become stress-inducing if you spend too much time fretting about your finances.

When planning for retirement, the most important question for many is, ‘How much money will I need to save to ensure I retire successfully?’ To answer this question you need to know how you want to spend your time in order to know how much retirement will cost you.

Type of lifestyle you want to enjoy

The amount of money you’ll need to enjoy a comfortable retirement is subjective and very much related to the type of lifestyle you want to enjoy during your retirement, the age at which you want to retire and whether you’ll receive the full State Pension amount. An active retirement involving a lot of travel and hobbies will cost more than a quiet retirement spent largely at home. You also have to think about any big-ticket purchases or other plans you’ll need to make.

Estimated retirement expenses

Make a list of all your estimated retirement expenses and then try to approximate how much each will cost you. Remember, some of your expenses may decrease between now and retirement while others could increase. Your housing costs may go down if you pay off your mortgage, but your travel costs could go up if you take a lot of trips and holidays. So you can use your current spending as a baseline, but you’ll have to adjust each figure up or down accordingly.

5 key considerations

Everybody’s circumstances are different, but the key considerations for most people when they think about retiring will come down to factors such as:

  1. How much money do I think I will need in retirement? [ahr_space value=”20″]
  2. Am I planning to phase my retirement by working part-time? [ahr_space value=”20″]
  3. Do I have any debt to pay off? [ahr_space value=”20″]
  4. What is the outlook for my health and potential life expectancy? [ahr_space value=”20″]
  5. How much money have I saved in pensions and other investments?

Annual figure for inflation

Knowing how much you need to cover your retirement isn’t always the easiest number to calculate, but you can adjust your strategy depending on the size of your pot. Once you know approximately how much you’ll spend annually in retirement, you can estimate the total cost of your retirement by multiplying this figure by the number of years you expect your retirement to last, and adding an annual figure for inflation.

Unexpected expenses come up

At the point you’re in retirement, it’s important to keep to the budget you laid out as best as you can. If you have unexpected expenses come up, try to trim back some of your other expenditures to make up for them so you don’t run short. In recent years, the government has made great strides in getting people to save for retirement. With retirement often lasting two decades or more, it is vital to be prepared and build up a retirement income that provides the standard of living you require in the long term.

Early Retirement

A year lost for saving and a year added for spending

An increasing number of people have been forced into early retirement due to the economic impact of the coronavirus (COVID-19), with many worried about how they’ll make ends meet in the future. Because of the pandemic, we are currently in a challenging economic period. The global economy has taken over ten years to recover from the shock of the last financial crisis.

In a survey, the findings showed that 3% of people in the 55-64 age group have taken early retirement due to the coronavirus pandemic. And 4% of people in this age group have had to access some of their pension savings to cover living costs because their income has dropped due to redundancy or reduced pay. These percentages may seem small, but they represent hundreds of thousands of people.

Risks of early retirement

While early retirement may sound like a dream come true, for those without insufficient pension savings it can be a ticking time bomb. Every year of early retirement will have an impact on your pension, in that it represents both a year lost for saving and a year added for spending. Simply put, you’ll need to make less money last longer.

Unless you’ve budgeted carefully and are sure you have enough savings, you could run the risk of your pension running out in your later years. This is an expensive time for many people, due to the cost of financing care, and that can result in unexpected hardship.

Planning for early retirement

If you’re planning early retirement, you should consider the following steps:

  • Calculate all your savings in different pension pots to find out what your total is.
  • Track down any lost pensions from previous employers and add these to your total.
  • Check how much of the State Pension you can expect to receive, and from what age.
  • Create a budget for your retirement spending, making sure to include any additional future costs you’re aware of and a little extra for future costs you’re unaware of. Be honest about how much you’ll need.
  • Make sure that the total you have in pension savings, when combined with the State Pension you’ll receive, is sufficient to cover all your future costs.

Alternatives to early retirement

If your financial situation is forcing you to withdraw from your pension but you’re not ready yet to stop saving, there are ways to access your pension that do not affect your annual allowance and therefore allow you to continue contributing at the same rate in the future.

These include:

  • Taking up to 25% of your savings as a tax-free lump sum (from a defined contribution pension)
  • Accessing a defined benefit pension (if you have one)
  • Withdrawing a pension pot worth under £10,000 in its entirety under ‘small pots’ rules Buying certain types of annuity

Can you afford to retire early?

We know that you work hard for your money, so you should be able to enjoy it as much as possible. When planning for retirement, there are now more choices available than ever before. By understanding precisely what you’ll need to get to where you want to be, you can ensure you’re prepared for the future.

So when working out if you can afford to retire early, your starting point should be to think about whether your savings and investments will be enough to cover all your outgoings, as well as all your essential living costs and any regular debt repayments you may have to make.

1.https://www.lv.com/about-us/press/covid-pandemic-pushes-more-than-154000-into-early-retirement

Market Update Monday 5th September 2022

Global equity markets end down for the third week in a row  

Global equity markets ended last week down for the third week in a row. In particular, markets were hit by news late on Friday that Russia’s Gazprom would be keeping the Russia-to-Europe Nord Stream 1 gas pipeline closed with no timeline for reopening. This followed a more constructive US August jobs report earlier on Friday prior to Gazprom’s announcement.

Fed Committed to raising rates until the job done

On Friday, Jerome Powell told investors at Jackson Hole that the Fed is committed to raising rates and fighting inflation until it “gets the job done.” This past week, financial markets took that message seriously. We saw equity markets fall and bond yields rise somewhat, even after a resilient jobs report on Friday. Friday’s August jobs report from the Department of Labour showed that the economy added 315,000 jobs last month, a number seen as solid though down from a revised 526,000 in July. The unemployment rate rose to 3.7% from 3.5% in July as the labour force participation rate increased. Nonetheless, markets are still forecasting a 75 basis-point (0.75%) rate hike at the September Fed meeting and a terminal fed funds rate of close to 4.0%, with expectations of Fed rate cuts removed from mid-2023 forecasts.

Yen hits lowest level against the dollar since 1998

US equities were down 3.3% over the week, whilst US technology stocks fell 4.2%.  European markets dropped 3.06% and UK stocks were down 2.85%. Japan’s stock markets fell over the week, with the Nikkei 225 Index down 3.46% while the broader TOPIX Index declined 2.50%. Alongside this, the Japanese currency breached the JPY 140 level against the U.S. dollar for the first time since 1998. China’s stock markets fell as coronavirus outbreaks in major cities triggered renewed lockdowns and dampened the economic outlook. The Shanghai Composite Index retreated 1.54% and the blue-chip CSI 300 Index, slipped 2.01%.

The evidence of continued tightness in the labour market helped push U.S. Treasury yields higher, with the two-year Treasury yield reaching levels not seen since late 2007, closing the week at 3.40% whilst the US 10 year reached 3.2%.

US mid-terms could offer hope for investors

Whilst markets may have trouble “fighting the Fed” in the near term, we could see calmer waters in the months ahead. There are two key drivers of a potential U-shaped recovery in markets as we head towards year-end. With the US mid-term elections taking place on November 8th, the period after mid-term elections tends to be positive for markets, regardless of which party wins. Alongside this, should inflation continue to moderate the Fed may pause on rate hikes after its December meeting, which would be a welcome sign of easing financial conditions for investors.

Pension Freedoms

Improve your financial wellbeing in later life

‘The secret to happiness is freedom’, wrote the ancient Greek historian Thucydides. And with the introduction of the pension freedoms rules, those aged over 55 now have far greater freedom of choice over how they use their pension pot to fund their retirement years.

The pension freedoms, introduced on 6 April 2015, dramatically changed the pensions landscape. How people can now access their retirement income is substantially different from previous generations. Pension freedoms have made it much easier for people to access their pension pots and as a result, some may think they can do it themselves.

Little knowledge and understanding

Pension freedoms have put a greater onus on people to keep themselves informed of their options when it comes to accessing their pension money. However, little knowledge and understanding of the rules could mean some people risk making decisions that are not best for them.

For people in their 40s and 50s, understanding retirement savings is especially critical. Pension freedoms now give savers full access to their retirement savings from the age of 55. The reforms have given over-55s greater power over how they spend, save or invest their retirement pots.

‘Half of Britons aged 55 and over (51%) admit they know little about the pension freedom rules introduced in April 2015, according to research. A further one in ten (10%) over-55s say they know nothing about the changes, which represented a complete shake-up of the UK’s pensions system five years ago.”

Think carefully before making any choices

The pension flexibilities may have given retirees more options, but they’re also very complicated, and it’s important to think carefully before making any choices that you can’t undo in the future. Withdrawing unsustainable sums from your pensions could also dramatically increase the risk of running out of money in your retirement.

  1. Standard Life’s research of more than 2,000 UK adults found 35% of Britons aged between 55 and 64 have already accessed their pension pot, prior to State Pension age
  2. https://www.ons.gov.uk/peoplepopulationandcommunity/populationandmigration/populationestimates/datasets/populationestimatesforukenglandandwalesscotlandandnorthernireland

Market Update August Monday 29th 2022

Markets continue to look for signs of an interest rate pivot in the US

Bond yields, which move inversely to price, moved higher, as investors await the hotly anticipated speech from Jerome Powell, chair of the US Federal Reserve (Fed) on Friday, as interest rate policy continues to dominate markets. Expectations are high that without giving away any details on further rate rises, the Fed chair will be keen to burnish his credentials as being tough on inflation. With economic data beginning to point towards a slowdown, investors are looking for any sign of a pivot away from the current trajectory of rate increases, which has been running at an increase of 0.75% for the last two rate setting meetings. Currently markets are pricing in a peak in US rates of around 3.8% in March 2023, with peak rate expectations gradually increasing in recent weeks, with the peak priced in as low as 3.2% at the end of July.

As of 12pm on Friday, London time, US equities are down 0.7% over the week, whilst the US technology sector has fallen 0.5%. European stocks have lost 1.3%, and the UK market is down by a similar amount, having dropped 1.2%, not helped by the continued escalation in natural gas prices. The Japanese market is down 0.75%, whilst Australian equities fell 0.2%. Emerging markets bucked the trend, rising 0.2%, with Latin American stocks increasing by 3.1%, helped by the recovery in commodity prices in recent weeks.

Interest rate expectations gradually ratchet higher

Government bond yields rose, with shorter dated bonds rising the most. The yield on 2-year US Treasuries touched 3.40% mid-week, before settling back down at 3.37%. The 10-year Treasury is currently trading at a lower yield of 3.07%, meaning that the 2-year 10-year yield curve remains inverted, which many investors (but notably not the Fed) believe is a signal of an upcoming recession. The UK yield curve is also inverted, with 2-year gilts trading at a yield of 2.80% versus 2.61% for 10-year gilts. Whilst perhaps counter intuitively the German bund yield has yet to invert, with 10-year bunds trading at a yield of 1.35%. Futures markets are currently pricing UK rates rising to 2.8% by the November meeting, versus 1.75%, with rates rising to 4.0% by March. Whilst Eurozone rates are priced to rise from zero today, to 1.3% by December.

UK retail energy price cap rises by 80%, with further rises forecast

Gold fell 0.3% over the week, now priced at $1,758 an ounce, whilst industrial commodities continued their recent renaissance. Brent crude rose 4.4%, trading at $101 a barrel, copper was up 0.8%, at $8,167 a tonne, and European natural gas increased a whopping 28% over the week, priced at $318 a megawatt hour. On Friday the UK regulator increased the price cap on household gas and electricity bills from £1,971 a year to £3,549, an 80% increase. However, this is due to be reviewed again in January, with the latest industry forecasts suggesting the cap could rise to over £6,600 a year by the spring. If this comes to pass, this would be more than a fivefold increase on the price cap set in October 2021.

Bad news is good news as US economic data shows continued signs of softening

US home sales data softened further this week, as the annualised figure for July of newly built homes fell by 12.6%, versus forecasts of a 2.5% fall. Meanwhile the latest service sector purchasing managers’ index, which measures the business conditions service sector companies find themselves in, came in at a 27-month low of 44.1, with any reading below 50 representing contraction, also worse than forecasted. With a focus on interest rates, bad news is good news, as this drip, drip, drip of softening economic data may help the Fed to pivot on its rate hiking path. However, Neel Kashkari, president of the Minneapolis Fed, who has previously been perceived as more dovish on US central bank policy (less inclined to raise rates), was quoted this week saying that a combination of “maximum employment” and “very high inflation” makes the Fed’s approach “very clear, we need to tighten monetary policy to bring things into balance.”

Retirement Options

How to ensure a comfortable retirement

The pension freedoms have given retirees a whole host of new options. There is no longer a compulsory requirement to purchase an annuity (a guaranteed income for life) when you retire. The introduction of pension freedoms brought about fundamental changes to the way we can access our pension savings.

Once you reach 55, you can access your pension pot. You can take some or all of it, to use as you need, or leave it so that it has the potential to continue to grow. When you take your pension, some will be tax-free but the rest will be taxed.

The amount taxable will depend on your circumstances, which can change. Tax rules can also change in the future. It’s up to you how you take benefits from your pension pot. You can take your benefits in a number of different ways.

Choosing which method

You’ll need to choose which method you use to do so, with options including: buying an annuity (a guaranteed income for life), taking income through flexi-access drawdown, withdrawing lump sums or a combination of all of them.

There are advantages and disadvantages to each method, and in some cases your decision is permanent. Which option or combination is right for you will depend on:

  • Your age and health
  • When you stop or reduce your work
  • Whether you have financial dependents
  • Your income objectives and attitude to risk
  • The size of your pension pot and other savings
  • Whether your circumstances are likely to change in the future
  • Any pension or other savings your spouse or partner has if relevant Everybody’s situation is different, so how you combine the options is up to you.

Annuities – guaranteed income for life

Annuities enable you to exchange your pension pot for a guaranteed income for life. They were once the most common pension option to fund retirement. But changes to the pension freedom rules have given savers increased flexibility.

You can normally withdraw up to a quarter (25%) of your pot as a one-off tax-free lump sum, then convert the rest into a taxable income for life – an annuity. There are different lifetime annuity options and features to choose from that affect how much income you may receive. You can also choose to provide an income for life for a dependent or other beneficiary after you die. The amount you receive can vary. It depends on how long the provider expects you to live and how many years they’ll have to pay you.

Flexible retirement income – pension drawdown

When it comes to assessing pension options, flexibility is the main attraction offered by income drawdown plans, which allow you to access your money while leaving it invested, meaning your funds can continue to grow. This option normally means you take up to 25% of your pension pot, or of the amount you allocate for drawdown, as a tax-free lump sum, then re-invest the rest into funds designed to provide you with a regular taxable income.

You set the income you want, though this might be adjusted periodically depending on the performance of your investments. You need to manage your investments carefully because, unlike a lifetime annuity, your income isn’t guaranteed for life. You may be able to ask your pension provider to invest your pension pot in a flexi-access drawdown fund. If you have a ‘capped’ drawdown fund, you can keep it or ask your pension provider to convert it to flexi-access drawdown.

Small cash sum withdrawals – tax-free

This is an important consideration for those weighing up pension options at age 55, the earliest age at which you can take up to 25% of your pension pot tax-free. You should ask yourself whether you really need the money now. If you can afford to leave it invested until you need it then it has the opportunity to grow further.

For each cash withdrawal, the remaining counts as taxable income and there could be charges each time you make a cash withdrawal and/or limits on how many withdrawals you can make each year. With this option, your pension pot isn’t re-invested into new funds specifically chosen to pay you a regular income and it won’t provide for a dependent after you die. There are also more tax implications to consider than with the previous two options. So, if you can, it may make more sense to leave your pension pot to grow so you can enjoy a larger tax-free amount in years to come. Remember, you don’t have to take it all at once – you can take it in several smaller amounts if you prefer.

Combination – mix and match

Of all the pension options, if appropriate to your particular situation, it may suit you better to combine those mentioned above. You might want to use some of your savings to buy an annuity to cover the essentials (rent, mortgage or household bills), with the rest placed in an income drawdown scheme that allows you to decide how much you can afford to withdraw and when. Alternatively, you might want more flexibility in the early years of retirement, and more security in the later years. If that is the case, this may be a good reason to delay buying an annuity until later in life.

The value of retirement planning advice

There will be a number of questions you will need answers to before deciding how to use your pension savings to provide you with an income. These include:

  • How much income will each of my withdrawals provide me with over time?
  • Which withdrawal option will best suit my specific needs?
  • How much money can I safely withdraw if I choose flexi-access drawdown?
  • How should my savings be invested to provide the income I need?
  • How can I make sure I don’t end up with a large tax bill?

Tax on your pension

When you receive money from a pension, you pay tax on any income above your tax-free personal allowance. Your pension provider will take off any tax you owe before you receive money from your pension pot. You may have to pay a higher rate of tax if you take large amounts and you may owe extra tax at the end of the tax year.

Top 5 things to consider before withdrawing money from your pension

  1. Pensions freedoms: Familiarise yourself with the pensions freedoms so you are aware of your options. You can now do a lot more with your pension pot than previously. Everyone is different and it is important to find the right solution for your circumstances. What risks are you willing to take?[ahr_space value=”20″]
  2. Saving requirements: Consider the amount of money you will need each month to maintain your lifestyle. Ask yourself: How much might I need? How much might I get? Do I still have a mortgage to pay off? What other sources of income do I have, and do I need my pension to keep up with inflation? Could I consider working for longer? Do I want to have annual holidays?[ahr_space value=”20″]
  3. Costs later in retirement: Think about costs later in your retirement. What will your living costs be in the future? Care needs are not a subject we are comfortable thinking about but it is important to have conversations about it with your family, as well as Powers of Attorney, Wills and inheritance.[ahr_space value=”20″]
  4. Health and life expectancy: We often vastly underestimate this, but evidence shows we are mostly living longer, with a growing variation in healthy life expectancy. If you have a partner, do you need to provide for them financially after you die, or are you relying on them?[ahr_space value=”20″]
  5. Obtain professional financial advice: Few of us may expect to give up work altogether in our 50s. But a growing number of us are dipping into our pension before retirement age. Before we get into the different ways you could withdraw money, there are some more general things to think about first. Try asking yourself the following questions: How long will I need my money to last? How long do I want to keep working? How much tax might I pay? Could my health and lifestyle affect what I get? How much do I want to leave behind?

 

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