Tag Archive | "inflation"

Inflation hits ZERO; NS&I to Drop Easy Access ISA Rate

There is a downside to the Bank of England setting their base rate so low for so long. When it’s next-to-nothing and the financial markets get used to it, it triggers trends. It’s those trends we see across the spectrum of the financial sector, reflecting that the 0.5% base lending rate has been with us now for above six and a half years.

Whilst it’s great for borrowers, it’s dismal for savers. Throw in an inflation rate of 0% (as the markets reported yesterday) and money in the bank is worth exactly what it says on your passbook. If you’ve £10 in a savings account today, unless the markets change dramatically, after tax it’ll be worth little more than a tenner this time next year.

One of the last bastions of upholding a semi-decent interest rate, NS&I, has dealt savers a “bitter blow”. From the middle of November, its ISAs will only offer 1.25% interest, a drop of a quarter of one percent.

ISAs are still here, but for limited dividends only

ISAs have long been a traditional savings mechanism for contractors, in particular for the dividend investment that these savings accounts accommodate. In an attempt to get more of the general public saving, the government opened up the full extent of ISAs to cash savers, too.

Prior to this change, the most anyone could deposit in cash was 50% of your total ISA allowance. For 2015/16, the maximum tax-free annual deposit into an ISA account is £15,240.

When you open your account, you can choose all cash, all dividend or the original half-and-half. So even after amendments, contractors still have a safe haven for their company dividends if they choose wisely from the outset.

However, the latest drop in easy-access ISA interest rates will do little to encourage the saving the government envisaged upon making all-cash ISAs available.

Would a raise in the BoE base rate help?

Just as it takes a while for banks and lenders to drop their rates in line with the BoE, the same is true for the knock-on effect of any increases.

Mark Carney, the Bank of England governor, has hinted that the base rate will rise sooner rather than later. But with each month that passes, pundits release bated breath as the Monetary Policy Committee confirms it’s sticking to its guns.

But the MPC’s decision may change after the next meeting. The Retail Price Index, upon which inflation is based, dropped by 0.1% in August (predominantly fuelled by fuel) to a flatline zero.

What does that mean? In theory, it means that if a bottle of milk cost you £1.25 in August last year, it still cost you £1.25 this August, too.

The BoE may well have been waiting for inflation to drop back to this point (or perhaps even see if it turns negative) before changing the base rate. But even if we get the long-awaited rise, don’t expect to see your savings interest rates rise any time soon.

Banks will not giveth before they receiveth

Before giving anything back, the banks will increase mortgage interest rates to get a positive cashflow, first. Only when those rates settle will savers see the benefit of a BoE rise in interest rates.

The savvy among you will have a lightbulb above your head right about now. That’s because another favourite savings mechanism for many contractors is investing in Buy-To-Let mortgages. If you feel your ISA isn’t performing as well it ought, perhaps a brick and mortar investment may offer a sounder platform for your future.

But don’t hang about for too long. Like I say, all lenders are watching Carney and Co. As soon as the base rate rises, so will mortgage interest rates. On your marks…

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Should contractor accountants be prepared for a decade of low salary increases?

Employees, including contractor accountants, should be prepared to see their salaries increase at a much slower rate over the next decade than they did in the noughties, according to the CIPD’s chief economic adviser, John Philpott.

ONS data shows that the average annual earnings for a full-time employee in April last year was £25,879. This represented a 37% increase on 2000’s figure, or if you take CPI inflation into account, a real terms increase of 16%.

Mr Philpott explained that we saw strong economic growth throughout much of the 2000s. Inflation and unemployment were low and this enabled earnings to improve. However, those conditions are unlikely to reappear until at least 2015 and in the meantime employees could feel frustrated by their pay packets.

Philpott predicts that the first half of this decade will see the tougher conditions we have experienced since the onset of the credit crisis continue to bite. Rising unemployment puts downward pressure on pay settlements and average earnings are unlikely to rise above about 2% a year.

If this situation persisted until 2020, average salaries would rise to just £30,000 and inflation would cancel out the increase. But Philpott said that is a worst case scenario and he hopes to see growth picking up during the second half of the decade. If that happens, average earnings growth for the decade should be around 3%, meaning a median salary of £34,000 in 2020.

Earnings capacity will be influenced by a number of factors, including skills and experience, and employers will pay a premium for people with skills that are in high demand.

Meanwhile, the Department for Business, Innovation and Skills has launched a consultation into proposals to make it easier for investors to understand company reporting and to encourage more detailed data to be published about the pay rates of executives.

The consultation will also consider whether companies should follow the guidance of the Women on Boards report and publish data showing how many women are board members.

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Are top contractor accountants getting salary increases above rate of inflation?

The issue of executive pay and bonuses could be back in the spotlight following a report from Deloitte which shows that many executive directors are receiving above average salary increases.

The Executive Directors’ Remuneration report shows that main directors on the board of FTSE 100 companies received salary increases of between 2.5% and 7.5% this year. The average was 4%. In FTSE 250 companies, the increases ranged between 0.5% and 5%, with a 3% average.

Stephen Cahill, a partner of the Deloitte remuneration team, said he was surprised to see that a number of salary increases were more than 5%; significantly above the rate of inflation and the average increase in employees’ wages. Remuneration committees should only consider increasing executive’s salaries if there is a compelling reason to do so and the increases should be in line with those awarded to other employees.

There has also been a substantial increase in bonus payments this year. In FTSE 100 companies, bonuses ranged from 71% of the maximum to 87%, whilst in FTSE 250 firms the range was from 54% to 86%.

Cahill said that some hard thinking needs to be employed over annual bonus plans and targets and expectations should be recalibrated so that bonuses are not as good as guaranteed.

However, on a positive note, the survey did find that more than 66% of FTSE 100 organisations and 50% of companies in the FTSE 250 are now deferring at least part of the bonus. Furthermore, about 50% of companies have introduced clawback provisions.

Executive salary increases should be the same as general employees and if they are above the market median at present, remuneration committees should think about freezing them to show restraint while the UK is still going through a period of economic difficulty, Cahill added.

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Do accountants for contractors want to cut holiday entitlement?

New research has discovered that a lot of private sector employers, including some contractor accountants, are thinking of reducing holiday entitlement to cut the cost of employee benefits.

Insurance provider Metlife surveyed 403 SMEs and found that 27% think holiday entitlement is too generous and 25% are thinking about reducing paid holiday leave.

Full-time workers in the UK are entitled to 28 days paid holiday per year, including bank holidays. Employers would like to cut 4 days paid leave to reduce costs and 36% say they are thinking about offering staff additional unpaid leave.

Dominic Grinstead, the MD of MetLife, said employers are questioning the value of employee benefits packages and paid holidays form an expensive part of the bundle. A lot of employees show that they are prepared to be flexible, but they do want something in return.

The survey also found that more than 33% of employees would work longer, but only if they received more money. However 60% of employees do not think they will get an annual salary increase in the next year and 28% have not seen their wages rise for more than two years.

Public sector employees are facing a salary freeze and although some private sector wages are increasing, the average 3% settlements are below inflation. 16% of private sector organisations are operating pay freezes, 31% intend to offer increases below RPI inflation and 17% say they will offer targeted salary rises for some of their employees only.

John Cridland, the CBI’s director-general, said he was confident that growth in the private sector will compensate for public sector job losses but inflationary pressures are causing the majority of employers to make tough decisions when it comes to pay.

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Are any contractor accountants getting pay rises?

26% of employers do not intend to increase salaries this year as sluggish private sector growth and public sector austerity measures impact companies’ capacity to reward their employees.

The latest annual Reward Survey from the CIPD shows that while 99% of employers will not be cutting pay this year, only 65% will actually be increasing it. A further 9% have delayed their review of salaries.

60% of respondents said market rates were the most important factor when it came to determining salary levels and 61% link pay to individual performance, at least in part.

67% of organisations operate reward schemes that are performance-related and the most common options are pay rises based on merit and individual bonuses. 29% also operate non-monetary awards for individual clerical and manual members of staff.

The CIPD’s performance and reward adviser, Charles Cotton, said it’s not surprising that some companies are not able to award salary increases this year. The survey results also show that employers are focusing more on linking pay and bonuses to performance.

Meanwhile, private sector pay edged up by 3% in the first quarter of this year. Inflation is hovering around 4.5% so the rise doesn’t fully compensate but it is an increase which is something public sector workers currently yearn for.

The increase in private sector pay has been led by the automotive and utilities sectors. 3% is still well below the CPI rate and when you factor in the freeze in public sector pay, the average comes out at 2.5%.

Experts are now predicting that the Bank of England will hold the base rate at its historic low of 0.5% until at least November. With inflation rising faster than wages, take-home pay will continue to shrink for a while yet.

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Contractor accountants could benefit from skills shortages

Over 50% of people working in accounting and finance departments think the economic outlook is good at the moment and staff growth has gone up by 30%.

However, on the downside, many are warning that another wave of redundancies is inevitable.

Poolia, a specialist recruiter, conducted a survey that found financial departments are more positive about the economic outlook for next year although they do still have concerns over staffing levels.

57% expect to see revenue growth next year, 40% predict an increase in projects and more than 30% anticipate increasing recruitment.

The general manager at Poolia’s finance and accounting practice said that there will a race for talent next year but the long term outlook will remain challenging. Companies cut back on vital trainees during the recession and now find themselves in need of experienced workers. However, there is currently a shortage of people with the right skills to meet this demand. 38% of firms are struggling to recruit skilled employees at managerial level and 40% reported problems finding transactional clerks. This lack of supply could lead to more opportunities for contractor accountants.

George Osborne is reasonably confident that the government has taken the correct measures to secure a sustainable economic recovery. While speaking to reporters at the G20 summit in Seoul he said that economic data had been on the optimistic side for the past few weeks and that gave him cause for confidence.

The Bank of England on the other hand is erring on the side of caution saying the outlook remains uncertain. Mervyn King expects the recovery will continue but its strength will depend on developments in the world economy.

Inflation will remain high next year due to the VAT rise, rising energy bills and an increase in the cost of raw materials, but should fall below the 2% target in a couple of years.

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Rainy day savings are making a comeback

The recession has fuelled an increase in rainy day savings, according to Jonathan Davis, an economist at Jonathan Davis Wealth Management.

In fact a recent survey from Mintel found that around 43% of Britons have prioritised saving for a rainy day this year, up from just 15% last year.

Davis said the credit crisis was a wake-up call for a lot of people, who realised that for the last ten years they have based their life on debt.

This is a little like closing the stable door after the horse has bolted but it is still encouraging that people are now looking to give themselves a financial cushion in case of a disaster such as redundancy. Savers should have a reserve fund equal to at least six months average spending, to get them through unforeseen difficulties, advised Davis.

Although rainy day saving may be on the increase, few people are saving for their retirement and this is of paramount importance, the expert added.

Savers may not be so happy to learn that the Bank of England has forecast that inflation is going to stay above its 2% target well into next year. Currently the CPI is standing at an annual rate of 3.1%, meaning a basic rate taxpayer needs a savings account that pays at least 3.8% in order to protect the value of their investment.

Now could well be the time for contractors to sit down with their contractor accountant and take a good look at incomings and outgoings and decide how to maximise your assets.

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Choppy recovery but little risk of a further credit crunch

The August Inflation Report from the Bank of England, which was published yesterday, was not as optimistic as contractor accountants might have hoped.

Mervyn King, the Governor of the Bank of England, warned that the economy faces a choppy recovery over the next couple of years. The Bank has said they expect inflation will remain higher for longer than they had previously anticipated and this has led to a lowering of the economic growth forecast. The report also suggests that interest rates will remain at their historic low in the immediate future.

Previously, the Bank had expected to see growth of around 3.4% in 2011 but this has now been revised to around 2.5%. The main reason for the revision is the coalition’s decision to increase the VAT rate to 20% as from the beginning of next year.

Mr King pointed out that the continuing economic stimulus measures along with the drop in value of the pound were helping the economy to expand but this is being offset by the lack of lending from the banks, something that affects contractors.

However, King did stress that the cost cutting plans put in place by the government have reduced the risk of a double dip recession.

Economists were quick to comment with some saying the report was more ‘dovish’ than had been anticipated. Howard Archer, from IHS Global Insight, said the report reinforced their view that interest rates will remain at 0.5% until early in 2011. He forecasts that we will not the first rise in rates will until the summer next year.

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