Category Archives: Financial Planning

Investing Through the Current Crisis and Beyond

Financial markets have seen increased volatility since the outset of the Covid-19 pandemic, and with a continual flow of new information there is no clear indication as to whether markets are priced too high or too low.

With this in mind, we would like to share seven principles that we believe give a concise strategic framework for investing money in the current climate and beyond.

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When markets are moving up, worries of investors tend to be low as they are comforted by the increase in value of their wealth. However, investor behaviour can change as markets fall. The primary offender in this regard is loss aversion which often leads to bad decision making. Taking, and continuing to take, financial advice will help you understand the current investment landscape and prevent decisions that could adversely affect your ability to build wealth over the longer term.

Make an investment plan and stick to it

Whether you are saving for retirement, funding your retirement via income withdrawals, saving for a special event, utilising various tax efficient investment vehicles, investing for income or growth, or investing in your capacity as a Trustee, Attorney or Deputy, never lose sight of why you have invested in the first place; to achieve long term returns in excess of cash plus inflation.

Invest as soon as possible

Timing the market is a notoriously difficult skill to master and one that is fraught with risk. By investing at the earliest possible opportunity, you will allow your investment sufficient time to ride out the peaks and troughs of the market.

Don’t just invest in cash

With interest rates currently at all-time lows and the consensus seeming to provide little prospect for increases over the short term, cash is certainly not king. Therefore, it is imperative that investors look to use other asset classes that can provide the potential for greater long term gains and ultimately protect the value of their wealth after inflation.

Diversify your investments

Or quite simply, do not have all your eggs in one basket. Diversifying across different asset classes and geographic regions will not only help to mitigate risk but will assist in generating positive, long term returns.

Invest for the long term

This, we believe, is the key to successful investing. Not only does it give you time to ride out the peaks and troughs of market movements but it also gives you the opportunity to invest in assets that have the potential for significant long term growth. Short term investing is more akin to speculation, leaving a greater exposure to the vagaries of the market.

Stay invested

History has shown that markets go up and down, and when they fall, they recover. Staying invested will ensure you capture the long term upside of stock markets.

To highlight this, Schroders looked at the performance of the FTSE 250 Index over the last 30 years. It confirmed that remaining in the market rather than trying to time the market produced the best results.

Period invested Annualised Return
Whole 30 years 11.60%
Best 10 days missed 9.60%
Best 20 days missed 8.20%
Best 30 days missed 7.00%

 

Conclusion

When investing, it is imperative that these principles are upheld at all times. We ensure that the financial position of all our clients is sufficiently strong to withstand periods of market stress. Ultimately, the best strategy is to invest as soon as possible, and stay invested for the longest possible period of time; and these are our overarching principles when it comes to managing the investment of your money.

 

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

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Interest Rates and Monetary Policy – Where are we Now?

Living in a world of low interest rates is nothing new. In fact, with interest rates having remained so low over the last few years, and now at historic all-time lows – it’s hard to remember a time of high interest rates.

Over the course of the last eleven years we’ve seen many countries pursue this strategy to help boost economic growth and resilience and we now live in a world where interest rates across most countries are the lowest we have ever seen (in fact in some countries rates are negative!)

In this blog, we take a look at low interest rates within the frame of wider monetary policy.

Monetary policy, or the demand side of economic policy, is action that a country’s central bank or government can take to influence how much money is in the economy and how much it costs to borrow. It is used to promote macroeconomic targets that support sustainable economic growth and it generally involves influencing the money supply through interest rates or open market operations (quantitative easing or QE).

Here in the UK the Bank of England are responsible for monetary policy and their mandate is primarily to maintain the rate of inflation at 2% per annum, thus promoting economic stability. However, the Bank of England do have the powers to use monetary policy to help support wider economic goals, such as employment and economic growth. Indeed, in 2008 the Bank of England pursued one of the most aggressive forms of expansionary monetary stimulus in history by reducing interest rates to 0.50% per annum from 5% per annum. Only recently, we saw them step in to take emergency steps to reduce rates further to 0.10% per annum during the early stages of the Covid-19 epidemic in the UK.

Low or negative interest rates support economic growth in times of stress because they reduce the costs of borrowing for business and for households. This means that they are able to spend and invest, which in turn helps aid economic recovery.

However, there is a limit to how low interest rates can go before the measure becomes less effective or ineffective. For this reason, central banks across the world have pursued aggressive Quantitative Easing programmes alongside the reduction of interest rates. At its simplest, Quantitative Easing involves central banks digitally creating money which is then used to buy government bonds. Large purchases of government bonds help to keep bond yields low, which in turn helps to keep borrowing costs low.

Following the QE packages announced in March and June 2020, the Bank of England’s bond purchases will rise by £300bn to £745bn.

Government Bonds

It is interesting to see how these bond purchases (QE) have acted to support the government’s ability to fund their rescue package.  As many will be aware, the Chancellor of the Exchequer, Rishi Sunak, announced a support package for businesses valued at £350bn. The size of the stimulus speaks for itself. The government doesn’t have this sort of capital in a bank account ready to deploy. Capital therefore must be raised by issuing government bonds; debt-based investments that involve investors, institutions or other governments loaning money to a government in return for an agreed rate of interest (coupon) usually over a defined period of time (term to maturity).

Governments issuing bonds to help fund public spending is nothing new, it happens annually in line with their expenditure plans, and the government is usually able to sell these bonds with relative ease.

However, the rescue package needed to mitigate the impact of Covid-19 has been so large, the size of the stimulus means the government has had to issue a huge amount of debt very quickly at a time when the UK currency is weakening and investors are more risk averse.

The Bank of England’s QE package helped the UK government solve this problem by buying a large proportion of the bonds themselves. By avoiding the potential issue of not having a sufficient amount of buyers prepared to invest in bonds, the risk of higher cost of government borrowing has subsequently been circumvented. Keeping borrowing costs low is important for the long-term economy, leaving the country better placed to support the economy and public services in the future for generations to come.

Other Asset Classes

Quantitative easing and low interest rates also provide indirect support for other assets classes. as the demand for government debt increases, deposit rates fall as do yields. The result being that investors may have to look to riskier areas of the stock market and the economy in their search for income and or return.

In environments where too much money is invested and not enough spent, the flow of money into the real economy can reduce, creating ‘asset bubbles’ rather than support for employment and wages. Rising unemployment and falling wages can result in deflation.

However, low interest rates usually encourage borrowing which adds new money to the money supply. This can cause inflation because there is more money in the system which chases a fixed amount of goods and services, so prices rise. To avoid this central banks must act quickly enough to increase rates and sell bonds back into the secondary market once signs of a recovery support a reversal of monetary expansion.

Debt

It is true that at times of monetary expansion and low interest rates borrowers will see their cost of debt fall. The effects of low interest rates can take some time to feed into the economy but in time households have lower mortgage repayments and therefore higher levels of disposable income and business pay less to finance their operations which can help to improve their return on investment (all things being equal).

However, it’s not all good news for borrowers. Those seeking finance may find it more difficult. This is because when interest rates fall, the banks generally have less capital to lend out as their deposit base falls and lower interest rates reduce the profitability of a loan which doesn’t encourage taking risks and creates a reluctance to lend.

Nobody, as yet, knows the long-term extent of economic damage Covid-19 will have. Due to the unprecedented nature of the virus, it’s difficult to apply models from previous economic downturns and therefore, it’s equally hard to predict how quickly the economy will recover.  The use of monetary policy is clearly complex, with many different variables in play, and it will be interesting to see how policy-makers respond as and when the green shoots of recovery occur.

Notwithstanding this, it’s difficult to see any scenario in which the Bank of England or any Central Bank across the globe start to increase interest rates materially in the short to mid-term. Unfortunately for savers, this means that deposit rates are likely to remain unprecedentedly low for the foreseeable future.

 

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

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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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Avoiding the Herd… The Importance of Sticking to a Financial Plan in Times of Uncertainty

It can be tempting to take investment tips from friends or try and DIY your investment portfolio with the help of the financial columns. In fact, investors do this time and time again – we’re human beings and we’re hard wired to follow certain psychological urges. One of these is to follow the herd – we’re socially driven creatures and so tend to be attracted to things that are popular, preferring to ‘fit in’ rather than stand out from the crowd. This is especially true in times of uncertainty…why would you deliberately do something different to what those around you are doing?

Here are 3 reasons why you should stick to your own plan rather than following the herd…

  1. You risk impacting other areas of your plan

Any investment decisions you make have the potential to impact the rest of your financial plan. If you lose money on an investment, this will impact the amount of money you can put towards other parts of a financial plan, or may detract away from the pots that you had earmarked for other things. Your plan has been developed for your own circumstances, meaning the financial choices made by other people may not be suitable for you.

 

  1. You’ll pay a price for popularity

The very nature of something being popular is that it’s unlikely to be cheap. This is never more true than in the world of investments, where the rules of supply and demand apply directly – the more popular something is, the higher the price you will pay. By buying into something at the same time as everyone else, you’ll pay a premium price, you will limit any gains that might be realised, and you may buy in at the peak, meaning the only way is down.

 

  1. You’re unlikely to be able to time the market

In times of uncertainty, it is often a temptation to stick with the so-called ‘safe haven’ of cash. This can lead to investors wanting to withdraw from the markets and hold the cash, or else stop regular or one-off contributions into pensions or ISAs. Whilst holding in cash may seem like the sensible option, there is always a risk that you will end up paying more to re-enter the markets than the price you exited at. This is especially true in economic downturns as you will most likely disinvest on a downward trend and look to re-invest when things improve and are on an upward trajectory.

Being disciplined and following a financial plan certainly isn’t easy. It often requires sacrifices and can sometimes feel like you are going against the grain. But research shows time and time again that staying invested over the long term rather than attempting to make short term gains by withdrawing and re-entering investments delivers greater returns over the course of an investment.

Of course circumstances change, and financial plans need to be reviewed at least annually to ensure they are still suitable. If it’s time for a review of your portfolio or the uncertainty of covid-19 has led you to think you should have a robust financial plan in place, please contact us to speak to one of our independent Chartered financial planners.

 

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

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Amendments to Taxation and Allowances as of 6th April 2020

With everything going on in the world at the moment, it can be easy for other news and developments to pass by unacknowledged. For us, the end of the 2019/20 tax year was far from usual – with all of our staff working from home to undertake client instructions prior to the end of the tax year.

As with the start of any new tax year, the 2020/21 tax year brings individuals a refreshed set of allowances. Alongside this, a number of changes that had been previously announced have come into play. Here is a summary of these changes.

Changes to pension tapering

From 6 April 2020, the adjusted income limit for pension tapering rules increased to £240,000 (from £150,000) and the threshold income limit rose to £200,000 (increased from £110,000).

Although the new rules are a welcome relief for some, particularly those affected by these rules working tirelessly in the NHS, there is an added sting in the tail.

For those with adjusted income in excess of £240,000, not only do the tapering rules still apply, the annual allowance will continue to taper down to a reduced level of £4,000 (previously £10,000).

Therefore, anyone with an adjusted income of £312,000 will see a reduction in their annual allowance of £6,000.

Lifetime allowance for pensions

The lifetime allowance for pensions increased to £1,073,100 on 6 April 2020 in line with inflation.

Capital Gains Tax 

The Capital Gains Tax (CGT) annual exempt amount for individuals increased to £12,300 for the 2020/21 tax year (the 2019/20 tax year allowance was £12,000).

As of 6 April 2020, Capital Gains Tax is now payable within 30 days of completion of a sale where CGT is realised. The process now involves submitting a provisional calculation of the gain to HMRC and paying the tax that is due.

Increase in NIC threshold

The threshold at which taxpayers start to pay NICs National Insurance Contributions (‘NICs’) increased from 6 April 2020 to £9,500 per annum. This rise is part of the Government’s commitment to reduce contributions by the low paid. The increase applies to both employed (Class 1) and self-employed (Class 4) individuals.

JISA Limit Increase

The Junior ISA allowance more than doubled from £4,368 to £9,000 per annum from 6 April 2020. For those setting aside money for children or grandchildren, this increase may provide a significant opportunity to boost savings.

RNRB increase

As of 6th April, the main residence nil-rate band increased to £175,000.

This is in addition to the existing nil-rate band, which is frozen at £325,000 until the end of 2020 to 2021. In effect, the increase now means that a married couple/civil partners between them have a combined Inheritance Tax free allowance of £1,000,000 to pass on to direct descendants.

The caveat on this is if the net value of the estate (after deducting any liabilities but before reliefs and exemptions) is above £2 million. In this situation, the additional nil-rate band will be tapered away by £1 for every £2 that the net value exceeds that amount.

Contact a Financial Adviser

For more information about any of these changes and how they might affect you, please get in touch with us.

 

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