Anna's Blog
Part of the government’s new plan to mend what it has branded “broken Britain” is the idea of incentivising private firms and charities to work directly with problem families. One source suggested it would be a payment by results system backed by millions of taxpayers’ money.
There are an estimated 120,000 problem families costing the public purse £9 billion a year – or about £75,000 per family once benefits, health and crime costs are taken into account. The plan is part of the response this summer’s riots but in truth the long-term social cost dwarfs the financial cost with children often locked into a downward spiral of truancy, social care and crime.
Although details of how payments to private companies have yet to be outlined, one important point the new Troubled Families Team needs to take on board is the simple idea that ‘small is beautiful’. By this I mean that small and micro companies are often those with the closest ties to their communities and who are best able to act as a bridgehead to get people from less advantaged backgrounds back into productive work.
A report by the Federation of Small Businesses back in 2008 highlighted this phenomenon and urged stronger government support. It concluded: “From the evidence reviewed it would seem that small firms are much more likely to have a larger percentage of their workforces made up of individuals who may be considered as facing a variety of disadvantages in the labour market.”
Small companies tend to have closer ties to their neighbourhoods making it important to be seen giving as well as taking. Owners are often hands on with less formal employment and recruitment procedures, allowing the flexibility to take people on in jobs when larger companies with more rigid procedures may not be keen to take the same risks when they have other blemish-free candidates.
The small business sector really is an economic wonder that needs to be nurtured. A study by Nottingham University last year looking at the decade to 2008 revealed that small businesses – those employing less than 100 people – were likely to create almost two-thirds of the country’s new jobs in an average year.
It showed the relentless ‘churn’ in the market with about 47,000 private sector jobs are lost each week offset by 53,000 new jobs. While services expanded overall, manufacturing is the biggest loser with a creation rate of 10 per cent against a destruction rate of 13.7 per cent, with the North East, West Midlands and London worst affected.
There is now an acknowledged need to help rebalance the economy back towards manufacturing and away from our reliance on the financial sector. Wouldn’t it be great if that went hand in hand with equipping underprivileged families with the skills and resources to also dig themselves out of their own spiral of decline?
Posted:
04/01/2012 22:16:34 by
Anna Sofat | with
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I think it’s pretty clear that inflation is here to stay for a while – and we’ll all lose out as a result. Inflation is a useful tool for heavily indebted governments like the UK’s, as it erodes the value of their debts, so it’s hardly surprising that the Bank of England hasn’t put up interest rates to try and bring rising prices under control. But higher interest rates would have limited effect on this type of inflation anyway, as it is a result of imports becoming more expensive, rather than rising wages.
So far we’ve seen price rises mainly in commodities, food and fuel, but there are clear signs that imports of Chinese manufactured goods are going to become more expensive as wages there rise.
The challenge is therefore to identify those investments most likely to withstand ongoing inflationary pressure. Most investors are feeling pretty risk-averse at present, so they are reluctant to look to the stock markets and instead have been looking for inflation-proof safe havens. Basically that means inflation-linked gilts and cash products such as the NS&I index-linked bonds.
But inflation-linked gilts are not cheap and continuing uncertainty surrounding the strength of Eurozone governments means they carry an increased risk of capital loss. When it comes to cash, NS&I’s index-linked bonds are particularly attractive because they’re tax free, but they are not currently available. BM Savings has a taxable three or five-year index-linked bond that can be held in an Isa to keep the returns tax-free – but you won’t beat inflation by more than 0.5%. But index-linked products such as that from the Post Office are taxable, which means basic and higher rate taxpayers have no chance of keeping pace with inflation.
So what are the alternatives? Historically, returns from both equities and property have beaten inflation, but of course those are the areas that carry more risk – particularly property, which is a much less liquid investment than equities. However, both are standing on generally attractive valuations at the moment, and investors should certainly consider them.
Most of equity investors’ total returns over the past five years have come from dividends, so I like funds investing in dividend-oriented businesses that will provide investors with an income stream even if there’s no capital growth in the short term. You won’t beat inflation through dividends alone at present, but over the longer term capital appreciation should kick in to boost total returns.
The UK equity income sector is an obvious place to look, but there are also growing opportunities to find decent income-producing international funds, and even Asian and emerging markets offerings, as emerging markets become increasingly mature and companies start to reward investors with regular payouts.
Dividend-paying businesses are also a good way to maintain some investment presence in Europe in the face of its present problems. After two major crises in the past decade, the corporate sector is in reasonable shape and sitting on good levels of cash, despite the current political and economic troubles. The major danger is of wider economic slowdown, but otherwise Europe offers good prospects for income-seekers.
Posted:
03/12/2011 13:07:34 by
Anna Sofat | with
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The long-term nature of pensions doesn’t always sit easily with the short-term nature of politics. Those tasked with improving the system often barely get a chance to digest the issues before being shuffled into a new job. Certainly the last Labour government was criticised for its ‘revolving door’ reshuffles that saw annual changes to its pension team.
It was with a sense of déjà vu that I read that shadow pension minister Rachel Reeves had been shuffled into a new position with the Treasury. As a grand finale, she tabled an important amendment to a proposal in the Pensions Bill that could make life difficult for hundreds of thousands of women.
Historically women have reached state pension age at 60 and men at 65. The current system would have equalised this to 65 by 2020, before increasing the pension age for both men and women to 66 by 2026. The new Bill proposes to accelerate this so that state pension age is 65 for women by 2018, with a rise to 66 for both men and women by October 2020.
Around half a million women now aged between 56 and 57 will need to work more than a year longer than they had anticipated. About 300,000 will have to wait 18 months longer. A core of about 33,000 born in spring 1954 might have faced two extra years wait’ although a late compromise has cut this to 18 months by switching the April 2020 change back to October.
The issue here is not just the lost income but the lack of time these women are being given to make alternative arrangements to mitigate that loss. For some women this will be manageable but for those on lower incomes or state benefits it will be impossible to fill the gap.
Like most women, I do recognise that the government needs to balance the books and try to adapt to a real world in which government spending is under pressure and we are living longer lives. I would have no issue in telling clients to bite the bullet and make the best of the situation if I thought the government – and by that I mean past, present and future – managed their finances well. Instead I and many other women feel we are paying the price of successive politicians’ inability to ensure the money they do have is spent most effectively.
Everyone recognises this acceleration of the state pension age is very harsh on the women caught up in it. Leaving the current rules in place would have cost the government a relatively small sum but instead they have chosen to make the women affected pay.
Posted:
15/10/2011 09:18:28 by
Anna Sofat | with
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The state pension age is evidence that the past was indeed a simpler time. For many decades the state pension was paid to men from age 65 and to women from 60. In the last few years we have seen a swathe of changes – and there looks to be more to come.
The first was the plan to equalise the state pension age for both men and women at 65 before 2020. This has since been brought forward to 2018 which will result in some women born in the mid-1950s having to wait an extra two years. That doesn’t leave a lot of time to try to make up for the lost income.
Once equalisation has been achieved, the plan was to push the state pension age back to 66 by April 2020, to 67 in the mid-2030s and to 68 in the mid 2040s. However this week came news that this was considered far too slow. It now looks like the government is planning to knock a decade off that timing, bringing it to 67 as early as 2026.
In truth the government is desperately trying to get ahead of the curve. In the last century, longevity had leapt ahead but the state pension age for men has remained 65. Retirement, from being a brief few years, is now an extended part of life potentially lasting decades. Those extra years can be very expensive.
These kind of changes make retirement planning more difficult. I wouldn’t recommend anyone to try to live on the state pension – currently £102.15 per week – but it is a useful sum of money to supplement other income. During your working life you would need to save a fund of around £120,000 in order to generate that kind of income in retirement.
Going forward it will provide the basis for many people using new ‘flexible drawdown’ rules that allow those with secured pension income of at least £20,000 a year to avoid the strict limits on how much they can take from their remaining pension funds.
One of the less talked about changes to the state pension is the ability to defer taking it for a period of time, either before you take it or while it is in payment. Those who defer for a period can then be paid a higher weekly state pension for the rest of their lives. Anyone deferring for at least a year has the choice of taking the pension missed as a one-off lump sum.
These options can work well because the returns the government offers for deferment can be quite attractive. For extra pension, the pension is increased by 1 per cent for every five weeks of deferral so that deferring for one year would boost the pension paid (for the rest of your life) by just over 10 per cent. For lump sums, interest is paid at a rate of 2 per cent above the Bank of England base rate which is at a record low of 0.5 per cent at present although could rise in future.
For anyone keen to find out at what age they might be eligible for state pension, there is a handy calculator at http://pensions-service.direct.gov.uk/en/state-pension-age-calculator/home.asp Just bear in mind that any date could be brought forward in the future.
Posted:
18/09/2011 12:42:02 by
Anna Sofat | with
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Six months after Lord Davies concluded his review of women’s representation in the corporate boardrooms of Britain’s biggest companies, progress appears to be mixed.
The positive news is that figures suggest women are being appointed to the boards of FTSE 100 firms at double the rate seen in any previous year. The bad news is that many companies outside the ‘blue-chip’ index do not seem to be embracing the change and the pace is still too slow to meet the report’s target of 25 per cent female representation on the board of every FTSE 350 company by 2015.
Lord Davies held back from recommending the imposition of quotas, but that threat hangs in the air. Most of us naturally feel that legal compulsion can be a hammer to crack a nut, but in this case the issue is massive not just from an equality or diversity perspective but also when considering the UK’s future economic competitiveness.
The talent argument is spurious – there are plenty of talented and bright women working across the full range of industries. While it is true that fewer women have boardroom experience, this is a result of underrepresentation and can easily be addressed through formal inductions, similar to the training given to new pension fund trustees to alert them to their responsibilities.
The lack of women goes to the culture at the heart of the boardroom. Unlike in many other countries where boardroom diversity is seen as strengthening the company, in the UK it still seems too many companies prefer to recruit ‘one of their own’.
The pressure is on, not just from Lord Davies but from high profile networks such as the 30% Club who are asking company chairs directly to take personal responsibility including briefing head hunters to find suitable women candidates. Shareholders are also being recruited to put pressure on to boards to promote gender equality in their companies.
We should not let the progress we can see blind us to the lack of progress elsewhere. Lord Davies was hoping for companies to embrace the change and announce clear targets they are working towards. So far those that have done appear to be the exceptions.
Unless the slow burn we have seen so far starts to spark more brightly, we seem to be heading towards legally enforced quotas. It sounds drastic, but they have been shown to work very effectively in other countries such as Norway. My view is that quotas will deliver the short sharp shock needed to change corporate culture and then will become redundant as dinosaur directors who have been clinging to the status quo finally realise what they’ve been missing.
Posted:
26/08/2011 15:25:10 by
Anna Sofat | with
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