Financial Review 22nd May 2015

New pension freedom shake-up leads to record low annuities
The average annual income from a standard annuity has fallen to a record low within weeks of the overhaul of the pension system. The popularity of annuities, bought from a pension pot and guaranteeing a fixed, regular income for life, fell after the the shake-up was announced.

After age 55 people can do whatever they like with 100% of their pension pot, although they still only receive the first 25% tax free. After this plan was announced in the 2014 Budget, the sale of annuities plunged. Now a healthy 65-year-old with a pension pot of £10,000 would be able to swap it for a standard annuity income of just £476 a year, down 5.9% since the beginning of the year. With a £50,000 pension pot they would get £2,550, a fall of 6.4%.

This will hit people who deferred a decision until the introduction of the pension freedoms but have since decided that an annuity is still the most suitable product for them. However, most people are now giving annuities a wide berth and opting to manage their own finances through different products.

Lucky election punters are laughing all the way to the bank
Bookies are licking their wounds after the Conservatives gained a surprise majority in the General Election. Ladbrokes was £1 million down on its election betting while William Hill was facing a £500,000 loss. Those who gambled on a Tory majority got long odds because the opinion polls suggested an outright victory was highly unlikely.

One William Hill client picked up £80,000 after placing a £13,500 bet on David Cameron having a majority. William Hill was offering odds of 10:1 on the Thursday night on the Conservatives having a majority, even after exit polls indicated a surprise surge by the party. A Ladbrokes customer collected £240,000 after wagering £30,000 on the same result at 7:1. Another Ladbrokes customer bet £25 at 80:1 that the Liberal Democrats would end up with exactly eight seats, netting £2,000.

As much as £25m is thought to have been staked on the election, making it the biggest political betting event yet in the UK. About £3m was staked on the Scottish referendum outcome, while the 2010 General Election saw bets of £6m. Bookies are now taking bets on who will be the next Labour leader and the result of an EU referendum. Ladbrokes is offering odds of 1:2 that voters will opt to stay in the EU and 6:4 on leaving.

China cuts interest rates as growth continues to slow
China’s central bank has cut interest rates for the second time this year, amid a continuing economic slowdown. It lowered its benchmark rate to 5.1%, saying the move was aimed at boosting development. China’s growth rate last year at 7.4% was down from 7.7% in 2013 and was the weakest for 24 years.

The interest rate cut was the third in six months and follows other measures to spur growth, including tax cuts. China’s slowdown is expected to continue for some years. The International Monetary Fund (IMF) has forecast China’s growth will stabilise at about 6% by 2017. Its average economic growth rate from 2003-13 was an impressive 10%.

UK trade deficit down, but exports are hit by 10% rise in sterling
The UK trade deficit narrowed to £2.8 billion in March from £3.3bn in February, figures from the Office for National Statistics show. A £10.1bn deficit in goods was bigger than expected, but was partially offset by a £7.3bn surplus in services, the ONS said.

Goods exported were 1.4% higher than in February, while imports were down 1%. But for the three months to the end of March, the deficit was £7.5bn, which is £1.5bn more than in the previous quarter. Exports have been hit hard by the 10% increase in the value of sterling against the close to historically weak euro since the start of the year.

Lower loan interest rates fuel surge in consumer borrowing
Consumer borrowing surged by £1.2 billion between February and March, the largest rise since the financial crisis in 2008, according to the Bank of England. The biggest increase was in unsecured borrowing, such as bank loans and overdrafts. They accounted for £1.1bn of the overall rise, but mortgage and credit card lending was flat.

One reason for the rise in bank loans is low borrowing rates. A year ago, anyone borrowing £5,000 would have had to pay 9.1%, but now the same amount can be borrowed for 8.1%. While this reflects an improving economy, there are also concerns that consumers will forget the financial crisis and again build up debts to fund spending.

Farmer proves money isn’t everything
A farmer made national headlines for rejecting a £275 million offer for his land from housing developers wanting to build a new town. Robert Worsley said he would be “doing a massive disfavour” to the community where he has lived all his life if he “took the money and ran”.

The 48-year-old father of two has run his 550-acre farm for 15 years. The multi-million pound potential offer is 100 times the farm’s current value, even though it covers only a seventh of the proposed 10,000-home development in Sussex. Mr Worsley is now battling the proposals, fearing that his local area faces ruin. “We’re a rural community that doesn’t want this development and don’t want to see Sussex ruined,” he said.

Insurance firms fail to make costs clear to online buyers
Customers buying home and car insurance online are not always offered clear information about their payment options and the different costs, the financial regulator has warned. At issue is the option given of either paying for a full year, or paying in monthly instalments.

The Financial Conduct Authority (FCA) claims it is not made clear that opting for monthly payments will attract a high interest charge, pushing up the overall cost of the purchase. It has published a review into 13 insurance firms and 30 intermediaries, including four price comparison websites. This was launched due to concerns that customers were not getting a fair deal when shopping online. It said the investigation showed that some providers were making it difficult to compare the cost of paying up-front versus instalments, and not disclosing the APR for the loan. It is estimated that 41% of customers buying motor insurance and 53% buying household insurance in the UK opt to pay in monthly instalments.

Industrial output sees accelerated growth
UK industrial output grew at its fastest pace for six months in March. Output rose by 0.5% from a month earlier, according to the Office for National Statistics. Manufacturing output was boosted by pharmaceuticals, rubber and plastics.

On a year-on-year basis, total production output increased 0.7% in March 2015 compared with March 2014. Meanwhile unemployment has continued to fall and the number of people in work has continued to rise, according to the latest official figures. The number out of work in the January to March period fell to 1.83 million, down 35,000 from the previous quarter and the lowest for seven years.

Average pay for employees, excluding bonuses, rose 2.2% in the quarter compared with a year earlier. Regular pay is now growing at its fastest rate for nearly four years. On a less positive note, the Bank of England cut its 2015 growth forecast from 2.9% to 2.5% and for next year from 2.9% to 2.6% in its quarterly inflation report.

Lloyds Bank pays first divi for seven years
Lloyds Banking Group is to pay shareholders their first dividend in almost seven years, the bank revealed at its annual general meeting. The chairman also told shareholders the group may consider other ways of returning capital to investors in the future.

After the election, the Government capitalised on a post-election rally in Lloyds’ shares by selling another chunk of its stake in the bailed-out bank, bringing its holding below 20%. The bank has hinted that the Government could exit completely in the next 12 months, describing this as “possible and very desirable” – although it depends on market conditions.

Lloyds said it planned to announce a dividend alongside its half and full-year results for 2015. Back in February, it was expected to pay a dividend of 0.75 pence per share, amounting to £535 million.

French economy beats Britain and Germany
France has emerged as the surprise success story in Europe as its economy beat Germany and Britain at the start of the year. Official statistics agency, Eurostat, said French gross domestic product (GDP) rose by a better than expected 0.6% in the first quarter.

The French renaissance has marked a dramatic turnaround for a country regularly dubbed ‘the sick man of Europe’. The German and British economies, the two biggest in Europe with France third, grew by just 0.3% in the same period. Italy, the next biggest economy, also grew by 0.3% and Spain, ranked fifth in Europe, saw output rise by 0.9%. “Growth is clearly broadening across the eurozone,” said Peter Van den Houte, an economist at Dutch bank ING.

In stark contrast to France, the Greek economy tumbled back into recession with output down 0.4% between October and December and by another 0.2% between January and March. Growth across the 19-country eurozone rose from 0.3% in the final quarter of last year to 0.4% in the first quarter this year.

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