Interest rate rises: Get ahead of the curve

Posted on: 23 June 2014 by Gareth Hargreaves

Everyone knows that an interest rate rise is coming after BofE governor Mark Carney's Mansion House slip, but how can the rise work in your favour?

financial trends

Actions are supposed to speak louder than words! Not anymore. The consequence of a few public words has never been greater as Facebook, Twitter and the social media feed on every syllable.

“Careless Talk Costs Lives” was a popular propaganda slogan from the Second World War; these days, any verbal deliverance from anyone in financial authority appears to have an instant impact on markets and headlines.

The new Governor of the Bank of England, Mark Carney, is learning the hard way that every comment he makes on the UK’s economic situation is dissected and analysed in minute detail.

At the Mansion House a week ago, Carney “suggested” that interest rates could rise earlier than planned. Within hours, Carney’s forecast had been set in stone – interest rates would rise before the end of 2014 rather than early 2015.

The markets reacted immediately to the news, as did the media. The pound has risen to its highest rate over the dollar since the financial crisis of 2008 and the Governor’s words have dominated the financial pages and beyond for the past week.

Within a few days, newspapers were reporting that the cheapest mortgage deals were beginning to disappear. Lenders had been flooded with inquiries by customers trying to get a loan before rates went up.

The focus then switched onto the new Governor himself when it revealed in the Bank of England’s Annual Report that the cost of relocating Mr Carney from Ottawa to London had been £200,000. The media then added up all the various components of Carney’s salary – basic, pension contributions, living allowances and his removal costs – and declared him Britain’s first £1m Governor.

Carney’s precise words at the Mansion House were: “There’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced. It could happen sooner than markets currently expect.”

Not anymore. The markets have reacted and “priced in” an autumn rate rise with all that entails. Does that mean it will happen? Not necessarily.

Carney, like everyone else, knows that an interest rate rise is coming – the Governor probably has a slightly better idea than the rest of us as to when that will be. He has now prepared the ground for a rate rise this year and has already covered his back if it doesn’t happen until early in 2015.

Spare a thought for the Independent Financial Adviser who is expected to know more than the Governor of the Bank of England and the Chancellor of the Exchequer put together. Clients want to know when rates are going to rise – and by how much.

Whatever the choices, the option for investment and saving, the evidence is there. Those who take a long-term approach tend to benefit the most. IFAs repeatedly point out that financial planning is not for today, but tomorrow – whenever that tomorrow might be.

The day after tomorrow also comes under the expert gaze of the IFA.

Those celebrating the financial benefits of the property boom and the pension revolution announced in the Budget, will realise that such windfalls can create the problem. Passing on such wealth without the Treasury taking 40%, once the Inheritance Tax (IHT) threshold of £325,000 has been reached.

IHT is seen by many as a tax on property owners, especially those in the South East of England. The average London house price is £458,000.

Outsiders may feel that is the price of living in the big city. London and the South East now pay half of the annual £3.1 billion IHT collected by HMRC, with an average bill of £166,000. But a few simple sums will demonstrate how easy it is to breach that £325,000 threshold.

Many feel that having already paid income tax on their money, the Exchequer’s demand for another 40% on death is an unfair double whammy. Also, why can’t we offset all the costs of buying what is now being taxed?

Financial planning can be a real dilemma for those of a pensionable age, balancing the requirements of this life, with the possibility of ill-health and care, and the next. Leaving the Chancellor too much is certainly preferable to running out of money and scrimping in your final years.

Recent figures released by the Office for Budget Responsibility show the numbers paying Inheritance Tax in this country is expected to rise by a third this year, because of the increase in house prices and the economic recovery. That total will double by 2018. By then one on ten people will pay Inheritance Tax – today it is one in 20!

The “freeze” on the IHT threshold of £325,000 until 2019 is at the heart of this problem, along with the increase in house prices. Prime Minister David Cameron has recently said he would like to raise the threshold to £1m – as the Conservatives promised to in 2007 when Labour where in power.

The PM’s explanation as to why we are still stuck at £325,000 is: “We put it in our manifesto that we wanted to take it to £1m. But we did not win an outright majority; the pledge did not make it into the Coalition agreement.

“Inheritance Tax should only really be paid by the rich; it shouldn’t be paid by those people who have worked hard and saved and bought a family house.

“The ambition is still there. I would like to go further. It’s something we’ll have to address in our election manifesto.”

No firm promise there. Far better to sit down with your IFA and work carefully through the options; there are many ways of reducing the IHT tax bill, but not on a whim or as an afterthought. The sooner the better in IHT planning.

It will be time well spent - not just for you, but for your future generations, who have been a key incentive in you working so hard for so long.

We should not be surprised how a few well-chosen words can make such an impact or transform the outlook so dramatically.

Just how quickly the landscape can change can be judged by the Met Office’s warning this week that the UK, especially the South West, could be heading towards a drought.

It only seems a few weeks since we were knee-deep in water after suffering the wettest winter since 1766!

For a free, no obligation initial chat about your individual finances, call us on 0800 0112825, e-mail info@wwfp.net or take a look at our website www.wwfp.net.

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