Bruce Nash reviews interst rates and what the future holds

To rise or not to rise, that is the question?

Since the 38 year low in interest rates recorded back in September 2001 at 3.5%, consumer debt has rocketed to over £1 trillion. This has brought about a sharp focus for many on the issue of inerest rate charges, and after the last quarter point rise in interest rates, the 5th in eight months, there is now much speculation and concern over what the future holds for further increases.

For the few savers among us, of course, interest rate increases are good news, but for the vast majority, businesses, mortgage payers, and others in debt, the speculation of more cost increases is alarming.

The most recent rise, on the 5th August, which was widely predicted, comes amid evidence of a surge in economic growth, which could fuel inflation in the months ahead. Though the move to put up interest rates by the Monetary Policy Committee also has been seen as a further attempt to cool the UK's still booming property market and soaring consumer debt.

But what will the future hold?

UK business groups are saying that further rates rises could hamper performance and have called the Monetary Policy Committee to hold fire on further increases. However, recent economic data suggests that previous rate increases have had little effect on the Uk 10-year property boom, or retail sales, which rose by 1.1 % in June alone.

Most economists will agree that a rate rise will lag any economic impact for 8-12 months, so in effect we are only just seeing the consequences of the first rate rise in Sept 2003. This could account for the signs of a slow-down in the house market, as reflected in a recent poll, which recorded a marginal drop in house prices for the month of July, the first in some years.

Our View

Wealth Matters view is that further increases in interest rates will follow, with another 2-3 quarter point rises by the June 2005, taking the base rate to 5.25% or 5.5%. We then expect a period of stability or even a drop in rates for the last half of 2005, of one-quarter point, as the lagged effects of the previous increases begin to bite.

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According to the Association of British Insurers around eight million people are not saving towards their retirement, and a further two million are not saving enough.

Are you one of those people? Do you have a plan for retiring? Most people say that they would like to retire early. For this to happen, you have to replace your income. There are several ways to do this, one of which is to contribute to a pension. This could mean contributing to your employer's pension scheme or to a personal pension or even a combination of the two.

But how much do you need to save? How much is enough? The answer to this is simple. The more you save and the earlier you start to save, the earlier you can retire. There are rules, which dictate how much you can save, and it is largely dependant on your age and how much you earn. The basic rule of thumb is this: take your age and divide it by two. This is approximately the percentage of your annual gross income that you should contribute into a pension scheme every year.

A pension is a long term investment. It is also one of the most tax efficient savings vehicles on the market. For every £100 that you contribute to a pension, the government will give you another £28.21, which equates to 22%. Higher rate tax payers have the other 18% reflected in their tax code, and so get a full 40% tax relief on contributions. It should be looked on as a good thing that you cannot access the monies until age 50 (due to rise to age 55 in the future), because the monies are there for your retirement.

But what makes a good pension plan? The answer to this is threefold: a competitively low charging structure, good fund performance and a wide range of funds to invest in, and flexibility - which include the ability to switch between funds. At Wealth Matters, your adviser can put together a portfolio of funds that represents your attitude to risk and investment goals.

Having at least an annual review of your pension will determine whether you are on track to achieve your goals. You may need to up your monthly contribution or switch funds. Retirement planning is all about that - 'planning,' starting as you mean to go on.

If you require a pension health check, then contact your adviser today.

Please note that all of the amounts and figures used in this article are based on current legislation, which is subject to change.

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Julian Gilbert takes a look at the state of investments worldwide

Worldwide stock markets have been behaving like a temperamental school child over the last five years. After the boom years in the eighties and nineties, the markets have shown extreme volatility in recent times.

In the UK, we have seen 3 years of falling equity markets, followed by a strong rally after the war in Iraq. However, since spring this year, the FTSE 100 has oscillated between 4300 and 4600 points and doesn't really seem to know where to go next. The UK has been struggling with interest rate and oil price rises, plus the potential threat from terrorism. In addition to this, many large companies are having to plough millions of pounds into their final salary schemes due to their under funding. This money in the past could have been passed on to shareholders, so boosting share returns. This negative cycle has a danger of self-perpetuation, as continuing poor share returns lead to larger pension shortfalls! Wealth Matters feel that the short term outlook for the UK is one of little growth in the stock market. However, the fundamentals for long term growth are good - low inflation and unemployment, economic activity picking up and a generally stable economy.

In Europe, economies have generally performed well over the last year, with exports and domestic manufacturing orders growing quickly. Its overall performance is likely to be greatly influenced by the global recovery. The one black cloud is unemployment, with rates up to 9% in the Euro zone by April this year - far higher than British rates. However, overall Wealth Matters are positive about this sector.

The US has had to swallow its first interest rate rise in years recently. But with inflation and oil prices on the up, this came as no surprise - expect further rises in the following 12 months. Employment levels are improving, but a weakening dollar indicates the recovery may not be as strong as first expected. With a general election coming up, and all the uncertainty that brings, Wealth Matters remain neutral in this region.

Japan has been a booming region in the last 12 months. The rise in worldwide inflation is likely to be a big fillip here, where deflation and stagnation have dogged the economy for years. Most Asian markets have been doing well too. India is now back in favour again after analysts gave a cautious welcome to the new Congress Party's first budget. Chinahas been booming, though the Government has tried to cool the economy, due to fears of inflation and runaway but unsustainable growth. The overall outlook in Asia remains positive, though these markets have proved to be very volatile in the past and we would not recommend a cautious investor to place money here.

So, overall there are growth opportunities in worldwide stock markets. For our clients, the effect of this is usually seen through their pension, investment bond and ISA returns. However, these vehicles can also invest in government and company bonds, fixed interest and gilts and commercial property. All the advisers at Wealth Matters feel that commercial property could give good positive returns over the next few years, but with less volatility than that usually associated with shares. Our favourite funds are those from Norwich Union and Scottish Widows, with the Aberdeen Property fund also available via an ISA. However, please note that these are only a couple of the providers available in the market place. If you would like to discuss, your overall investment portfolio, then please give us a call.

Please note that past performance is not a guide to future performance.

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