At Rose Financial Services, being recognised as a specialist mortgage brokerage and independent financial adviser, it is accepted that we are and will remain abreast of any developments affecting the products and services we provide to our clients. In recent weeks and months there have been some changes that I would like to summarise for you. The content can sometimes be complex so, if you want further details and specific advice for your own personal circumstances, please contact us.
1) EU Savings & Tax Directive
In August of this year the EU implemented a little advertised but significant piece of legislation to reduce some of the tax avoidance that has existed for years via numerous international or ‘offshore banking centres.
The actions they have taken allow for a freer flow of information between EU states and some offshore centres primarily for the benefit of each member nations tax authorities. In other words, the insurance and investments providers are obliged to not only provide tax-related information but, in some cases, will automatically withhold a percentage of interest to meet the likely tax payable.
The action has the affect of ‘watering down some of the benefits previously attached with using offshore arrangements, but they have not fully closed all the windows of use. Indeed, some centres will continue status quo and, if not excluded from the directive, will simply ignore the pressure being applied.
So, for the time being at least, there are some very good reasons to continue to explore the tax breaks on investments offshore.
2) The European Central Bank (ECB) increases its Base Rate by the first time in 4 years
Concern for rising inflation in its EU member states has forced the ECB to take a defensive stance by increasing its base rate by 0.25%. Not a lot and not as much as the markets had expected, but enough to make the cost of borrowing that much more expensive.
Most mortgages in Spain have an interest rate that is priced against an index known as the ‘Euribor (European Interbank Offer Rate) which is how banks calculate the interest charged to one another. Because of the long term nature of residential mortgages, the banks use the annual rate when the price a mortgage loan for you. It is the Euribor annual rate that has seen the largest increase of late, again because the money markets expected a half point rise in the ECBs base rate rather than just a quarter. That has translated to an average mortgage costing 3.5% rather than just 3% just a few weeks ago. Of course, it could be that the quarter point may be enough and the markets may adjust the index in a downwards direction. But it is reasonable to assume that the new price is here to stay for a while.
The 3.5% average rate is an increase of nearly 17% in real terms so it is not insignificant! However, we have to put things into perspective here. A mortgage of Euros 100,000 will now cost 291 a month rather than 250 if arranged on an ‘Interest Only basis. Still an awful lot less than the cost of borrowing in the UK!
3) Using your property for pension planning via a SIPP
With effect from next April, the UK Revenue will be offering a tax break by allowing various types of assets, in particular property, to be placed under a tax umbrella known as a ‘Small Self Invested Pension or SSIP for short.
Whilst this is not likely to used by most people, even those owning their home, it will be of interest to property portfolio owners and even those folk owning a holiday home overseas. That applies to a lot of people with property in Spain.
Whilst the final rules have yet to be announced by the Inland Revenue, it is understood that the fundamental benefit will be reduce if not eliminate capital gains tax and inheritance tax by transferring such assets into a pension. In the long run, of course, the savings could be significant so this has to be an option to consider when buying property, either in the UK or elsewhere such as Spain.
4) UK pensions The Turner Report
I know! You are probably fed up with hearing and reading about this. But I am not a politician so I can say what I really think without worrying about the consequence!
I have been in finance a long time and that means around the issue of pension planning and the potential ‘time bomb that it is whenever it is raised and brought into the public eye.
There are a few basic facts that cannot be ignored, even politicians try to.
1) We are all living longer! That means that pensions are payable for a longer period and that extra money has to come from somewhere. The UKs system of ‘Pay as you go (tax collected is paid out immediately as a pension) cannot continue to work as the ratio of people paying tax will fall against those in pension payment. Fact!
2) The birth rate is in decline! This has the same effect as 1) above i.e. that, in time, there will be fewer people to pay tax. That being so, can future governments persuade the then tax payers to continue to pay an ever increasing amount? I doubt it! Fact!
3) The UKs private pension funds are the largest in Europe. Thats simply because we do have the intellect to understand the need to save for the future albeit that the bulk of these monies are via the large public and private pensions funds. However, the small man who does not have the benefit of a company pension really does need to plan more for himself. Fact!
The fundamentals are not good and cannot be avoided. The realities of the decisions that have to be made are obvious but, as always, needs some political courage and conviction to bring about action. What is needed is pretty obvious;
- An older state and retirement age as Lord Turner correctly surmises. But why wait until 2020! Its an issue now so make the change now!
- Save more! The New Zealanders realised some years ago that they had the same problem and have reacted. They have implemented a second tier pension plan. Yes, it costs more but this is now unavoidable.
- Save more yourself! Do you really want to rely on third parties that may, when you need it the most, not be able to deliver. Savings as a percentage of earnings has fallen dramatically in the UK in recent years as people spend for today. Time to change attitude I think!
So there we have it! A flying visit to various issues that can and will impact your daily financial lives. If there are any points that you would like further explained do not hesitate to contact us at Rose FS.
Mark Mountney is a partner in Rose Financial Services, a specialist mortgage brokerage and Independent Financial Advisor based in the Parque Comercial, Mojacar. He is a fully qualified mortgage and financial adviser in the UK with some 10 years experience in managing his own firm. Mark was also a founder of The Association of Mortgage Advisors, the trade association for mortgage intermediaries with 13,000 members.