The growing risks associated with cash and property are accelerating a shift towards pensions, especially with a growing number of British Muslims looking for an alternative to keeping cash in the bank or investing in residential property. Read on to find out more about what’s driving this trend.
The Bank of England’s monthly Monetary Policy Committee (MPC) meetings are beginning to sound like pretty dull affairs. Though no doubt laden with worthy contributions from each committee member (currently one woman and eight men), over the past twelve years, the group has tweaked base interest rates by a total of just 0.9%.
Gone are the comparatively wild, volatile days of yesteryear: between October 1989 and September 1991, for instance, the Bank’s base rate was cut by 4.5% (to a still staggering 10.88%); the most recent MPC intervention, almost 12 months ago, saw rates pinched by a miniscule 0.15%.
With little room for manoeuvre vis-a-vis base rate movement, it hardly came as a shock when, in early February, the committee suggested that negative interest rates could soon be on its monthly agenda. Accordingly, it has given domestic banks six months to prepare their computer systems for the possibility of negative rates, even though, at this juncture, their introduction remains a long-shot.
Impact of negative interest rates
Yet negative interest rates have been a feature of global markets since the 2008 financial crisis; they’re common across the Eurozone, can be found in Japan, while in Switzerland, they’re currently minus 0.75%. Initially, only companies or individual savers with large cash deposits paid banks for holding their money, but more recently, in countries including Germany, ‘depositary charges’ have been extended to cover all customers, irrespective of the amount they have.
If negative rates become a feature of British life, there’s a strong likelihood of our high street banks charging customers for looking after their cash. This would be bad news for any bank account holder, but there’s one group of almost 4 million people who could be hit harder than most.
According to the Institute for Islamic Banking (IIB), British Muslims have traditionally tended to avoid investing in pensions and other tax-efficient vehicles. Instead, a wealth of anecdotal and other evidence suggests Muslims are happier leaving their savings in non-interest bearing bank accounts or investing in property.
UK property outlook
Lodging cash with a bank could soon become expensive, so is the UK property outlook any more attractive?
Not necessarily. The pandemic has had a debilitating impact upon residential landlords, many of whom have suffered significant rent losses. In addition, proposals tabled by the Office for Tax Simplification include bringing Capital Gains Tax (CGT) in line with income tax rates while reducing the annual allowance from £12,500 to £2,000. Little wonder the National Residential Landlords Association (NRLA) report that up to one third of landlords are considering selling some or all of their properties this year.
The prospect of more missed rent payments and higher tax bills under proposed CGT reforms have dulled the UK’s buy-to-let market’s lustre, while commercial property investment remains an area reserved solely for those boasting the deepest of pockets.
Responding to such uncertainty, the IIB reports a significantly greater appetite among British Muslims for Islamic investment funds, especially as the number of equity funds conforming with Sharia principles have increased markedly over the past couple of years.
Tax advantages
“Not only has the range of Sharia-compliant investments expanded recently,” says Christine Hallett, Managing Director of Options UK, the independent SIPP and corporate pensions provider, “their appeal is supplemented by a range of generous tax advantages with which many British Muslims are unfamiliar.” The point is supported by the IIB which notes that to date, “Muslim investment in pensions is modest.”
In 2020, Options UK joined forces with worldwide Halal investment specialists Wahed Invest, launching a Sharia compliant SIPP designed to satisfy burgeoning demand from British Muslims, allowing them to invest without compromising on their beliefs.
This unique SIPP platform offers a broad range of Sharia-compliant funds, each selected for their adherence to Muslim values. Advised by its Sharia board, Wahed Invest ensures that all returns from these funds, which include investments in Sukuk funds, are Halal.
“The ability to invest in Sharia compliant funds is a relatively new development for UK-based investors,” notes Ms Hallett. “In many respects, however, Halal investing is a purer form of ESG-style investing, which perhaps explains why, since launch, demand for our Sharia compliant SIPP has come from both Muslim clients and other investors seeking solid, longer-term returns.”
Halal investing & ESG
Wahed Invest employ a rigorous financial screening process to ensure securities are Sharia compliant. An examination of each fund’s holdings confirms the cross-over between ESG and Halal, as Wahed avoid investing in companies active in areas such as firearms and alcohol manufacture, gambling and tobacco production.
“There’s undoubtedly a similarity between Halal investing and its ESG cousin,” says Christine Hallett, who adds: “Fortunately, our Sharia compliant SIPP platform enables British Muslims to take advantage of generous tax breaks and having their pension pot topped up by the Treasury. As an alternative to keeping cash in the bank or investing in residential property, pensions are finding favour with a burgeoning number of Muslim clients.”