The year that was...

Published on 21st December 2009

2009 has certainly been an unprecedented year for the UK's Contractor community. Against the backdrop of the worst recession since the 1930's there have also been positives to celebrate amongst all the doom and gloom. Most of our clients have continued to find work, stock and housing markets have bounced back and fears of a budget clampdown last week that could have threatened the viability of our entire sector, ultimately proved to be groundless. Here, we take a look at the key financial landmarks that shaped the year.

After the cataclysmic events of Autumn 2008, when the entire future of the market led economic model seemed to be at risk, we went into 2009 with trepidation. The question on everyone's lips was whether the concerted efforts of the worlds central banks had been enough to steady the ship for anything more than a few brief months late last year or would the new year result in a further meltdown in asset values? In the Contracting sector 8000 Freelancers and temporary staff had been dismissed by BT alone in October 08 and there was genuine concern that far more bad news was to come as the City and the wider economy fell deeper into recession. It was always going to be a difficult year but few could have predicted the twists and turns that were to occur throughout 2009.

We have seen a unprecedented measures used by monetary authorities in the UK and from around the world in an attempt to pull the global economy back from the brink of what could have been an irreparable dislocation. In the UK interest rates were lowered to and held at 0.5% for the course of the year, the lowest level in over three hundred years of Bank of England history. The re-inflationary process known as Quantitative Easing was also introduced in the new year to try and rescue the British economy from a potential meltdown caused by a lack of liquidity in the UK financial system. This capital injection now stands at a colossal £200 billion.

Housing market

Falling house prices characterised last year and beginning of 2009 but as we predicted in Planet Contractor we have seen a renewed confidence in the market over the past 3 quarters which has been helped on by those lower interest rates. This has encoraged house prices to post positive returns for six consecutive months now.

By ignoring the doom-mongers who talk down the market at every available opportunity Contractors have proven to be remarkably bullish and so we have seen a steadily increasing level of house purchase enquiries and applications as the year has progressed. Bargain hunters have had a field day over the past 12 months and the well documented mortgage lending drought has not deterred clients who had a deposit.

The reluctance of Banks and Building Societies to lend to many applicants, including the self employed, first time buyers, those with imperfect credit history and buy to let investors is leaving a vacuum in the market that can be further exploited by Contractors who can thankfully still easily access mortgage funds using our contract based income verification.

The stock market

The fallout from the collapse of Bear Stearns and then Lehman Brothers led to a rout of global equities in 2008. Having stabilised into Christmas the rot then soon continued through January, February and into March by which time many of the best known names in the British economy were trading on laughably low valuations as investors found it impossible to value assets in a highly volatile market. At the end of last year we suggested that investors had a once in a lifetime opportunity to exploit this turbulence and virtually any fund will have seen stellar returns from March onwards. These massive rises in asset prices reflect unrealisically suppressed initial valuations but are also a product of the huge boost in free capital looking for a home as a result of quantative easing.

Fundamentally its all about time in the market and not timing the market but we still seem to be looking at relatively low valuations ahead of a true return to sustainable growth in the world economy. To reduce risk we make no apologies for again repeating our mantra of drip feeding investments each month rather than putting everything into the markets in a single month.

On a further positive note, the over 50's benefited from an increase in their ISA allowance this year which is due to be rolled out across all age groups from April 2010. This increase was a further attempt to encourage people to save for the future instead of relying on what increasingly looks like a cash strapped state to provide. Since October then, over 50 year olds have been able to invest up to £10,200 in to a tax efficient ISA and will have been able to exploit recent market gains without losing profits to the taxman.

Taxation

The 2009 budget in April held a number of surprises for Contractors, most notably a Pensions Cap which limits the tax relief for higher earners from April 2011. However 'anti-forestalling rules' were the real headache for Contractors as they prevent you from investing in a pension closing down sale before the cap comes into force. This has been a nightmare for Contractors earning over £150,000 but in the PBR last week it was announced that this would be lowered to include those earning £130,000 and over. Potentially a further 150000 Britons will now be affected by this cap.

Thankfully those who have been lucky enough to have pre-existing pension investments remain largely unaffected but it remains to be seen whether current tax breaks can remain unhindered for long. It could be a case of use these valuable tax planning tools whilst you can because as the year has progressed the full enormity of the challenge facing state finances has become clear and future budgets may look to further curtail the huge cost to the Exchequor of such tax reliefs.

The upfront cost of bank bale-outs (money that should ultimately be repaid in full and could even be repaid at a profit) and of quantative easing, coupled with the collapse in tax revenues, is leading to an explosion in the national debt. A full 1% rise in NI deductions is on the horizon and a recently announced freeze in IHT nil rate bands and tax thresholds is evidence that the authorities are desperate to convince the money markets that they will make good on the promise to halve borrowing over a 4 year term.

On a positive note, last weeks pre-budget report could have contained far more bad news for Freelancers and corporation tax rate rises have again been put on hold.

Financial planning

Financial product providers have been keen to incentivise new clients against a backdrop of tightening personal budgets. We have been able to offer discounts on private medical insurance, this months free critical illness cover and 12 month for the cost of 10 offers through 2009 and will continue to search out similar offers in the new year.

For the first time a provider has been able to offer an innovative death in service policy that can be funded by a one man limited company without tax or benefit in kind considerations and pension providers continue to add to their fund choices as greater investment freedoms are demande by an increasing number of clients.

The mortgage market has been in a state of paralysis for much of the year and we have seen the death of the self cert mortgage. Underwriting of income has become more and more restrictive which has frozen thousands out of the housing market. Through 2009 we have battled against lenders who sought to withdraw our contract based income verification and whilst we have not been able to win every fight we still have access to many High Street lenders on this basis. We've looked on this as a major success story through the year when you consider how restrictive lending practice has become for many permanent employees and the self employed.

With base rates at record lows, tradtionally bouyant remortgaging activity has largely stopped because many clients are advised to remain on the lenders standard variable rate rather than incur fees to switch, at least until rates creep up again. Buy to let mortgage activity is now similarly low because of high deposit requirements and the fact that funding is only available from a hand full of lenders as 'commercial' landlords have increasingly been looked on with concern by lenders.

And 2010?

For many of us this year has been a mixed bag and it is safe to say that the country is looking forward to a fresh start in the New Year. We will be back in January to keep you up to date with all the latest financial news affecting the Contractor community.

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