Your IndustryAug 4 2016

Advisers recommend blocking out ‘short-term noise’

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Advisers recommend blocking out ‘short-term noise’

Advisers have said their clients should contine to block out “short-term noise” caused by Brexit and the post-vote rate cut and focus on the long-term.

This afternoon the Bank of England announced a cut in rates to a new record low of 0.25 per cent, along with a package of stimulus measures designed to prevent a Brexit-related slowdown.

Shortly after the announcement the pound fell against the dollar to $1.32 while the yield on benchmark UK 10-year gilts fell to a new record low of 0.63 per cent.

But Andrew Wilson, head of investments at Towry, was sceptical about how much of an impact this would have.

He said: “Cutting from 0.5 per cent to 0.25 per cent will be unlikely to make much of a difference to anything, and of course you can’t force people to borrow.

“That said, there may be some psychological benefit in the sense that the Bank of England is alert to the current economic dangers, and is being proactive, as further evidenced by the additional QE.”

Richard Ross, director of Norfolk-based Chadwicks, said that if anything investors should be reassured the Bank of England is taking action.

He said: “It makes it more difficult around fixed interest. Before the referendum we thought the next move in interest rates would be up so we moved to shorter duration which was a mistake.

“You should invest in real assets because they will give you some form of inflation protection. I accept bricks and mortar isn’t appropriate at the moment but you can look at other areas such as infrastructure.”

Martin Bamford, a chartered financial planner with Surrey-based Informed Choice Independent Financial Planners, said the turmoil since the referendum showed the value of diversification.

He said: “It shows the importance of being diversified and sticking to the long-term. For our clients that is about 40 or 50 years so reacting to things happening over the course of a few weeks isn’t really that smart.

“At some point interest rates will have to go back up and at that point gilts won’t be such a good place to be.”

As well as cutting rates the Bank of England restarted its QE programme and will purchase an additional £60bn in gilts, as well as up to £10bn in corporate bonds over the next 18 months.

It will also introduce a new term funding scheme, worth up to £100bn, in order to encourage more bank lending.

Andrew Pennie, head of pathways at Glasgow-based Intelligent Pensions said one area that would be affected would be annuities.

He said: “The cut in interest rates will likely see a further drop in gilt yields which will have a negative impact on annuity rates and defined benefit pension deficits.

“Annuity rates are already at record lows having fallen 12 per cent since the start of the year – one wonders how much further they can actually fall.

“It’s no surprise that many are choosing not to buy an annuity under the new pension freedoms in the hope that future rates might improve or a belief better returns can be generated elsewhere.”

Darren Cooke, a financial planner with Derbyshire-based Red Circle Financial Planning, agreed the cut could affect people who were just about to buy an annuity, but said he didn’t have any clients who fell into that category.

He said: “Clients appreciate they have invested for the long term. Some of my clients were invested in 2008 and they know this is short-term noise.

“It is just one of those events that causes volatility in the market. A year ago it was China, six months ago it was oil prices and now it is Brexit. In six months it could be Trump being elected.”