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Newsletter –April 2011 |
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NEST set to fly
The National Employment Savings Trust pension scheme, ‘NEST’, which is to be introduced by the Government between 2012 and 2017, looks set to fill the savings gap which eluded Labour’s Stakeholder scheme.
The NEST scheme is designed for the 6 to 8 million low earners who do not currently have access to good employment-based provision, but it will also be available to the self-employed.
The key difference from stakeholder is that whereas stakeholder is a voluntary scheme which enables members to opt in, they will be automatically enrolled in NEST and will have to deliberately opt out if they do not wish to participate.
NEST will be a Defined Contribution (‘DC’) scheme, in which contributions will accumulate to provide a pension pot whose value at retirement will determine the amount of pension income available. This type of scheme is to be contrasted with the defined benefit schemes under which employers promise to pay benefits calculated as a percentage of employees’ final salaries. Such schemes have become prohibitively expensive and very few are now taking on new members.
Clearly, the objective of any DC scheme must be to maximise the size of the pension pot, and this means investing in stockmarkets as efficiently and cheaply as possible. NEST has held a beauty parade of fund management groups and its negotiating muscle has enabled it to keep charges to a level which permit it to charge investors only 1.8% for setting up their plan and an annual management charge of 0.3% - both exceptionally low figures.
In order to achieve these figures, NEST has opted for a range of funds which are diversified between different types of investment asset but either minimise fund manager involvement or passively track an investment index.
NEST was also concerned to reduce the risk that the size of an investor’s pension pot might be hit by a decline in the stockmarket at the time when the investor was retiring, It is therefore also creating a range of “target date” default funds, which are designed to mature at selected retirement dates.
Not content with maximising the fund available to investors at retirement, NEST is now negotiating with annuity providers to ensure that the maximum available pension can be secured.
Employers will be required to contribute 1% of their salary initially, rising to 3% by 2017, and it is expected that within a few years NEST will become the largest DC scheme in the UK’s private sector, having attracted billions of pounds’ investment.
The logic of the NEST approach has not gone unnoticed by commercial pension providers, and similar schemes are already being developed for the middle ranks of the employed population.
Nothing ventured…
With the approach of the tax-year end and the 23 March Budget, investors whose scope for investing in pensions may have been |
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Troon office 8 Academy Street Troon KA10 6HS Tel: 01292 313737 Fax: 01292 317856 |
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Kilmarnock office Bank Chambers, 42 Bank Street Kilmarnock KA1 1HA Tel: 01563 533121 Fax: 01563 570840 kilmarnock@mcsherryhalliday.co.uk
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reduced by the new restrictions on pensions contributions have been considering the merits of Venture Capital Trusts (‘VCTs’), which offer 30% tax relief on contributions
An investment sector which has attracted particular interest among VCT investors is energy, where special government concessions are available for small-scale low-carbon electricity generation, which has benefited schemes which back solar power installations.
However, the government is currently reviewing these concessions, and this may necessitate some VCT managers changing their strategy or withdrawing schemes altogether.
This is causing some financial advisers to cease recommending energy VCTs and to suggest that clients consider alternative schemes, notably “planned-exit” VCTs, which back lower-risk, lower-growth businesses which aim to keep capital intact and to benefit mainly from the available tax relief.
Investment prospects
Recent investment reports from Barclays and Credit Suisse confirm the accepted wisdom that equities almost always outperform fixed income securities and cash over 20 year periods. However, they also note that over the past 10 years fixed income has outperformed equities for the first time since the 1930s, reflecting a period of historically low inflation, which is always good for bond prices.
A major part of the reason for the low inflation which we have enjoyed is the supply of cheap labour from the emerging markets which exported lower inflation to the rest of the world. However, this has now changed dramatically and emerging markets’ demand for natural resources, particularly energy, industrial metals and food, is exerting strong upward pressure on prices in the western economies.
The inevitable response of central banks, including the Bank of England, is to consider increasing interest rates in order to dampen demand.
This will mean increased bond yields (and lower capital values), but what about equities? Evidence suggests that initially equity prices follow bond yields upwards, on the basis that higher yields reflect a buoyant economy. But if inflation becomes a serious concern, equity prices are likely to fall.
Either way, bonds (with the exception of high yield) currently hold little attraction; but this does not necessarily make equities a safe bet beyond the short term. As always, the best policy is judicious diversification between asset classes.
If you require any further information or wish to discuss any other financial matters, please contact our Independent Financial Adviser, Mr Alan Hewitt on telephone number 01563 533121 option 3. |
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McSherry Halliday Dale and Marshall is authorised and regulated by the Financial Services Authority. FSA Registration number 113475. The guidance and/or advice contained within his newsletter is subject to the UK regulatory regime and is, therefore, primarily targeted at customers in the UK. Taxation and Trusts are not regulated by the Financial Services Authority. No responsibility can be accepted for the accuracy of the information in this newsletter and no action should be taken in reliance on it without advice. Please remember that past performance is not necessarily a guide to future returns. The value of units and the income from them may fall, as well as rise. Investors may not get back the amount originally invested.
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