Market Bulletin

The Market Bulletin looks to discuss some of the key financial and economical issues influencing financial markets and how these may impact on our clients.

Market Bulletin

26 July 2010

A reasonably calm week for global markets last week. One of the concerns that has been casting a shadow over markets in recent weeks is the fear of a double-dip recession and specifically the fear that the Coalition Government’s austerity drive may push the UK economy back into recession. Last week’s Quarter Two UK GDP numbers therefore provided comfort for markets as the economy expanded at its fastest rate in four years and almost doubled the consensus forecasts expected by economists. The numbers at this stage are only preliminary and will almost certainly be revised down as more data becomes available but the underlying message is unambiguous: the UK economy is bouncing back and a double dip looks increasingly unlikely.

The other big story from last week was the results of the stress-tests on European banks. The idea was that the regulator would look at all European banks and stress-test their balance sheets to show that they were robust enough to withstand another financial crisis with the overall objective of helping to restore confidence in the banking system. Whilst the overall objective was laudable, the consensus is that the results were a bit of a whitewash. Seven of the 91 banks tested, failed. Five of the seven were Spanish cajars (their equivalent of our building societies who have huge exposure to the Spanish housing collapse), one was Germany’s Hypo Real Estate which has already been taken over by the State and the final one was a Greek bank which is also already part government owned. So, it looks like the stress tests weren’t actually very stressful and critically didn’t test for the key issue: a possible sovereign default. As the FT commented “…this is like a car crash tester failing to consider the possibility of an oncoming vehicle…”. As a result, markets largely ignored the results and ended the week up by 3%.

The coalition government last week announced further details of the proposed changes to pensions through the publication of a consultation document called “Removing the Requirement to Annuitise by Age 75”. The consultation period is now open and the intention is to introduce any agreed changes from April 2011. A summary of the main proposals are as follows:

- There will be no requirement to purchase an annuity at age 75.

- Any “unused” pension benefits still held in a pension fund on death will be taxed at a rate of 55% with the residue available to distribute to heirs.

- The proposals introduce a new concept – the Minimum Income Requirement. When the obligation to purchase a pension annuity was introduced back in 1976, the thought process was that by locking in to a fixed and guaranteed income for the rest of your life, you were much less likely to be dependent on the State. The new Minimum Income Requirement argues that if you can show that you have guaranteed income from other sources, you should be allowed to take out as much as you like from your pension funds as you are unlikely to have to fall back onto the State for financial assistance. Any withdrawals from the pension fund (aside from the 25% tax-free cash) will be taxed at Income Tax rates with any residual fund at death taxed at 55%.

Overall, the proposals represent an interesting development. Pensions have become a political football in recent years with significant changes being implemented in each of the last four years. Any attempts at simplification are welcomed as is the introduction of the more common sense approach of taking into account other secured income streams. We will continue to monitor developments and advise accordingly.

If you wish to discuss any aspect of the above, please contact us.

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