10 Financial Considerations in Light of Covid-19

The impact of Covid-19 is concerning to us all, and the effect on our lives has been significant. Most of us will have had changes enforced upon us and our normal way of life. As part of this adjustment, we’re aware that many clients have been taking the opportunity to use the time and space they have been presented with to focus on what is important to them, and likewise, their plans for the future.

With that in mind, now is an ideal time to review your finances. A de-cluttered financial life can create peace of mind; if you have a good financial plan in place and your money in order, you are likely to feel more in control of your wealth as well as your life. With this in mind we have put together ten areas you may be able to act upon now in readiness for the future.

  1. Review your cash balances.

 

With base rates at 0.1% returns in cash will continue to disappoint. However, it is important to remember that the reason to hold cash is not for its return but for security in the short term. Indeed, your cash allocation works in tandem with your investment portfolio. The latter provides long term investment growth and income and protection from inflation, however, in the short term returns can be variable. Cash helps take pressure off portfolios in this environment by helping to support immediate expenditure requirements and provides an emergency fund.

 

  1. Review what you are spending your money on.

 

Income is hard earnt but easily spent. It’s easy to fritter money away on things that have very little value. Keeping close to how much you are spending and what you are spending on allows you to identify where you can make savings. Committing to a regular review of your expenditure at least annually is important. Once you have identified savings that can be made ask you adviser to quantify the benefit of investing surplus cash to help you visualise and understand the importance of that choice.

 

  1. Review withdrawal rates.

 

When markets fall its often advisable to reduce the income taken from the portfolio as far as you can. This statement is not intended to alarm but to inform. It is best illustrated using the example of two twins, both with £100,000 invested. Twin A draws income of £4,000 per annum and Twin B draws nothing. If investment portfolios fall by 15% immediately and then Twin A draws income, the value of his portfolio would have fallen to £81,000. Twin A now needs a return of 23.46% to maintain capital values. Conversely, Twin B has £85,000 invested and needs a return of 17.65% to recover from paper losses. Reducing income in times like this will do two things; it will help asset values recover more quickly and shore up the long term sustainability of your income strategy. Large cash balances could be used to help replace lost income in the short term.

 

  1. Consider how tax efficiencies can enhance net investment returns.

 

Married couples and civil partners (from 2019) should consider the ownership structure of their investments to ensure that where one partner pays no or lower rates of tax, investments are held in their name to make sure their personal income tax allowance and basic rate band are fully utilised. This limits the total amount of income tax paid across the household ,also allowing couples to benefit from two capital gains tax exemptions and dividend allowances.

 

  1. Utilise ISA allowances.

 

This point leads on from the last. The ISA allowance remains at £20,000 per annum, per person. This means a couple can shelter £40,000 of capital from all taxes each year.

 

  1. Consider realising gains on portfolios.

 

Selling into weakness should not be advocated. However, if you have been holding on to an investment because of longstanding capital gains rather than for sound investment reasons, now might be a time to consider restructuring your portfolio in favour of areas that might offer better investment returns in the future. Furthermore, investments currently held directly could be moved into an ISA environment to create more tax efficiency.

 

  1. Review old paperwork and legacy contracts.

 

It’s so easy to lose track of where your pension and investments are and how they are invested, particularly if you have changed employment and / or your contract providers have merged with multiple organisations over the years. Taking the time to find out what you have and where can prove to be a fruitful exercise, as the difference between the worst performing fund and the best performing fund can be quite significant over the longer term.

 

  1. Plan for retirement, don’t plan at retirement.

 

The Institute of Fiscal Studies (IFS) issued a working paper W19/02 about how individuals severely underestimate their life expectancy. The IFS has stated that the population of over 90s will increase by 138% in the next 30 years. It is now more important than ever to start planning as soon as possible. This can be done by checking your rate of funding and projecting asset values forward to identify any short fall in provision at retirement and commit to funding that shortfall. The sooner you act, the cheaper your retirement income will be as less needs to be invested over a longer term to achieve the same outcome. Acting sooner rather than later also allows you to take advantage of income tax relief (employed individuals) and corporation tax relief (for employers) each year which helps reduce the net cost of saving.

 

  1. Review objectives and need for a wealth plan.

 

In the midst of uncertainty, it is important to remember your longer term objectives and strategy. Having an overall plan for your wealth is important. Often people want to achieve multiple things and objectives can be competing. For example, clients planning for retirement are often concerned about ensuring they have sufficient income to live on during their lifetime but equally concerned about giving capital to children to help them become independent and secure home ownership. Cash flow planning uses your asset, liability, income and expenditure position to help quantify your overall position so that you can see how sustainable your income needs are and helps to highlight how much you can afford to gift. Scenarios can be built to take account of contingencies and possible market downturns.

 

  1. Wealth protection.

 

For many people, the focus of financial planning is to build up wealth and create a comfortable future. However, the ‘protection gap,’ which refers to the amount of cover needed to maintain current living standards, is real and under reported. Protection policies including life assurance and critical illness cover are there to help ensure that in the worst case scenario, there is a backstop to help support immediate financial needs so that long term savings do not need to be raided.

 

In times of uncertainty, those that are able to make and stick to a plan will often fare better in the longer term. Our team are working with all clients to ensure that they are well placed to achieve their financial objectives, notwithstanding the current climate.

To discuss any of the above points in further detail, please contact your adviser.

 

NB. The value of investments can fall as well as rise. You might not get back what you invest.

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