2016 has been a strange year from a financial services point of view with at least three areas of weirdness, not entirely expected by the public and private pundits.
The Establishment did not expect to be dealing with Brexit and even now seems to be umm-ing and arr-ing about the process and the likely outcome. For us, the major impact was telephone calls from clients asking if they should sell up something or buy something to keep them safe. Thankfully, as our clients have diversified portfolios, the short term impact of Brexit has been marginal but the longer term impact is less clear and some signs can only suggest uncertainty ahead.
One ironic outcome has been confirmation that the Remainers were right about Sterling taking a hit if we voted out and confirmation that the Leavers were right when they said that a vote to leave would be good for manufacturing exports. Unfortunately, the days of the UK being a net exporter are long gone, so only a few will be reaping any exporting rewards. For the holidaying population, the most visible outcome of the Brexit vote has been a rise in the relative cost of food and drink in the world away from our shores.
Another short term consequence of the Brexit vote was the rapid suspension of some commercial property funds, as these funds suffered some considerable outflows of cash to alternative investments. It is noticeable that now the dust has settled most of these funds are now operating fully at a slightly lower level, so the early panic has subsided. Our model portfolios were unaffected by this issue and the property exposure remained tradable at all times.
Along with Brexit, Trump was not expected as the President elect of the USA and all kinds of doom was forecast by conflicting parties. So far the equity bull market has continued, with most commentators suggesting that the equity bull market will continue for the next 12-18 months.
At this early stage, the only indications around the policies of a Trump administration appear to be the people appointed to the posts of State; far from being outsiders and untainted by Washington politics, most seem to be a variation on ‘business as usual’; whatever that means.
UK Pension weirdness
One noticeable trend from our business year was an almost total avoidance of annuities and a move to flexible drawdown to fund retirement. The Pension Freedoms have changed the choices the ‘soon to be retired’ need to make, with most of them becoming investors, living off the return from their fund instead of pensioners! As this cohort gets to 75 years old, the annuity option will come back on the horizon, but that is probably 10 years away.
In terms of pension law changes, there were two that need further explanation. In force already; Pension Lifetime Allowance is now only £1,000,000. This sounds a lot, but at today’s annuity rates that is less than £45,000 per annum. People who go over the lifetime limit face a tax bill of 55% of the excess, so poor planning is likely to come expensive.
Coming into force on the 1st April 2017, a new limit of £4,000 per annum for new pension premiums into a flexible drawdown plan if you have already taken regular income from your crystallised pension pot. At present, this limit is £10,000, but Phillip Hammond announced the change to prevent miss-use of tax-free cash. If you intend to take pension benefits early, do a bit of travelling, pay down some debt or fix the house, then re-join the workforce to top up your pension, then this could put a spanner in the works. Just taking the tax free cash is OK, as is taking a small pension pot, (under £10,000), or setting up an annuity; only income from a crystallised drawdown plan limits your future pension premiums.
Anticipated Trends for 2017
So, what is expected for 2017? Turbulence is considered by most commentators as a given; both Brexit and Trump have suggested that the easy expectations are likely to be wrong, but some common themes have arisen in investment briefings.
The first expectation is inflation becoming more of a danger. Current rates in the UK and USA are around 1%, but the Bank of England is expecting 2.8% by mid-year and some commentators have suggested 4-5% by the end of the year. The drivers of this are a rise in the oil price, the fall in the value of Sterling, making imports more expensive and the USA closing in on full employment. Wage inflation in both the USA and UK could follow on a restriction on immigration, if that actually comes to pass in either country.
The second common theme is that developed country government debt is likely to fall in value and new debt will need a higher return. Whether this will be reflected in higher savings rates to retail clients is not certain, but cash is likely to be attacked by inflation and poorly rewarded by interest rates.
The final common expectation is that equities will be continuing the steady rise for longer. The USA, UK and Far East are considered to be a good source of returns, with some commentators suggesting the emerging markets for better returns.
For our part, we are proud of the way our portfolios held up in a time of some turbulence and very pleased with the limited number of questions we were asked following Brexit and Trump. We spend a lot of time keeping our clients up to speed with regular reviews and other communications, (like this blog), and would suggest to anyone who has not heard from their adviser in donkey’s years that they need a new adviser!
Finally, we would like to wish our clients a prosperous New Year.
If you would like to know more about how we can help you plan and realise your financial goals then contact us at firstname.lastname@example.org or call us on 01223 792 196.
The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.