Category Archives: Investments

Saving for Retirement – Are you Doing Enough?

A recent report by pensions provider Scottish Widows has found that more people than ever are saving for a comfortable retirement. Scottish Widows 15th annual Retirement Report revealed that 59 per cent of people are now saving at an adequate rate, a 4 per cent increase from 12 months ago, when the figure stood at 55 per cent. The increase in savings rates has been attributed to the rise in the minimum contribution levels of auto-enrolment pensions, introduced in April 2019.

To date, over 10 million people have been automatically enrolled in an auto-enrolment pension scheme and according to the Office for National Statistics, the proportion of individuals who are now saving into a defined contribution pension has risen from 17 per cent in 2012 to 47 per cent in 2018.

Although this is a definite step in the right direction, in many cases, it will still fail to provide a pension pot that will be adequate to see an individual through the entirety of their retirement. The Scottish Widows data found that although the proportion of under-30s now saving into a pension has increased dramatically, three in five are saving below the recommended level for a comfortable retirement and 14 per cent of the age group are not saving anything.

Furthermore, the report found that 22 per cent of adults in the UK expect they will never be able to retire.

Auto-enrolment has proven to have a measurable impact on pension savings, but the danger is thinking that this is enough. Those that are able to save more – both into pensions and ISAs – will give themselves a greater level of options when it comes to retirement.

The problem is that many people are blissfully unaware of how much they will need in retirement and therefore how much they realistically need to save. The good news is that there are many different tools available that can help clarify your position.

Regardless of your age, having the discipline of regular saving or setting goals for annual savings can go a long way to funding a financially comfortable retirement.

The Scottish Widows report can be found here.

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5 Tips on…How to Start Investing

For one reason or another, the world of investing eludes many of us. We often consider it to be beyond us, confined to the high-earners and super-rich. But maybe that perspective needs to change…

Although many people now hold a pension through their employer, without additional contributions most of us will find that, on retirement, the final pension pot will be vastly insufficient to meet our retirement objectives.

Given the proposed increases in the State Pension Age and the near eradication of Final Salary pensions, the onus is now on individuals to build an investment portfolio that can be used for their future benefit.

So how do you get going?

1. Define your objectives

The first step before making any big financial planning decisions is to think about what you want to achieve. For many of us, our primary goal will be to build a fund for a comfortable retirement, but investment objectives can be vast and varying. How you go about investing will also be influenced by your current age, your earnings, how long you intend to work for and whether you have dependants.

Taking the time to define your end goals will allow you to work backwards and set out the best way to get there.

2. Budgeting is key

Before making any investment it is vitally important that you have a good handle on your expenditure requirements. We would always advise clients to keep back a pot equal to approximately 6 months’ expenditure in cash as an ‘emergency fund’.

Once you have a pot of cash set aside, analyse your income and expenditure and determine how much you can realistically invest each month. Even if you can only afford a small amount, operating this strategy over a long period of time could have a significant impact on your financial position in the future.

3. Consider risk carefully

Investments such as stocks & shares provide the potential for capital growth over the medium to long term (in excess of 5 years). However, these types of assets are likely to fluctuate significantly in value.

Before making any investment, it is vital that you consider the extent to which you are willing to see the value of your investment fluctuate on a regular basis (i.e. your ability to cope emotionally with fluctuations in value) and your ability to observe fluctuations in the value of your investments without it adversely affecting your standard of living (i.e. how dependent are you on this money?).

4. Be realistic about timeframes

Investing is more about providing ourselves with greater options and flexibility in the future than achieving a strong return today, tomorrow, next month or even next year. When we build investment strategies for our clients, we do so with a time period of at least 5 to 10 years in mind. We are looking to achieve positive returns over the long term. If you are likely to need access to your money within the next 5 years, making an investment now will not be appropriate.

Before making any investment, think about what your objectives are (e.g. school fees, retirement etc.). If you think you might need access to the money within 5 years, you should keep it as cash.

5. Don’t be put off by the jargon

The world of stocks & shares is filled with acronyms and terminology that can be off-putting to even seasoned investors. That said, you do not need to have great expertise in analysing the shares of individual companies in order to make a suitable investment. There are many investment vehicles available that simplify the investment process. Your pension with your employer will use such vehicles to give you exposure to global markets.

Whilst many of these vehicles are heavily regulated in the way they are marketed, always take care to ensure that you understand and are comfortable with any investment you make.

6. Allocate your money sensibly

We’ve all heard of the phrase ‘don’t put all your eggs in one basket’ and this holds particularly true when it comes to investing. You’ll likely have a chunk of money tied up in property already, and it is important that you consider other assets.  The long-term aim of sensible financial planning is to build a diversified portfolio of wealth that gives you a greater number of options in later years.

7. Start investing as soon as you can to maximise the benefit of compounding

 “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” Albert Einstein

 A strategy that any investor can employ to increase the value of their investments over a long period of time is to maximise the benefit of compounding.

When you deposit money to a cash account, you earn interest. The next year you earn interest on both the cash you originally deposited and the interest earned from the first year. In the third year you earn interest on your original deposit and the first two years’ interest.

The effect applies to investments too and can have significant impact on their value over a long period of time.

8. Don’t try to time the market

Whether you have 30-years’ experience of investing or none, your ability to effectively time the market is limited at best. Often it is the case that delaying an investment only forces you to invest at a higher price further down the line.

To avoid the risk associated with buying at a single cost point you could stage a lump sum investment over a few months, or make monthly contributions on an ongoing basis.

9. Enjoy it!

There is certainly satisfaction to be had out of building an investment portfolio. As you observe the value of your portfolio grow over time, the possibilities of what you could do with the money invested in the future will become more clear and exciting. Getting starting is often the most difficult part, from there, you can hopefully enjoy the ride.

10. Take advice

Although it is possible to go about investing yourself, you will need to consider whether you want to invest your own time in doing this or whether you would rather hand it over to the professionals. Many people decide that the time involved in researching, monitoring, and reviewing their investments would be better spent elsewhere.

Furthermore, you need to be sure that an investment is suitable and affordable. That incorporates considerations of risk, cash flow, and the ongoing assessment of your investment portfolio. This is where the expertise of a wealth management firm is valuable. A financial planner can help you to build a portfolio of suitable investments for specific objectives and control the extent to which it goes up and down in value over the short term.

 

For more advice on getting started with your investment portfolio or to speak to us about your financial planning needs, please contact us.

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10 Years on from the Global Financial Crisis

On the 15th September 2008, Lehman Brothers collapsed, and the chain reaction brought the global financial system to its knees. Taxpayers’ money was pumped into the system, but this was not enough to prevent loss of confidence and bring about the recession.

It’s hard to believe that we’re now some ten years on from that day. Much has changed since 2008 – both economically and politically – and thankfully we’re now in a relatively stable position.

In this article, we take a closer look at performance of the markets since 2008 and the factors that have impacted this, alongside looking at the lessons the financial crisis has taught us.

Where are we 10 years on?

The effects of the Global Financial Crisis on the global economy still linger today. Interest rates remain extremely low by historic standards and Central Banks (other than Japan) have only recently stopped Quantitative Easing. Most Western Governments are still operating austerity measures, and whilst unemployment is low, wage growth has only recently started to pick up. The continuing lack of productivity gains is also worrying.

That said, the global economy is growing, and has been for a number of years. Despite the best efforts of Donald Trump to disrupt trade and the strength of the Dollar having an upsetting effect on emerging markets, global GDP is set to grow by c. 3.9% during 2018 according to the IMF.

Market performance since 2008

If you held a portfolio of global investments during the Global Financial Crisis and held your nerve, you will likely have made quite significant capital gains. The S&P 500 (representing a pick of 500 large companies listed on the New York Stock Exchange & NASDAQ) has grown by 311% gross since the 15th September 2008.

There have been some disruptions to performance over the 10-year period, but in general terms, markets have experienced an unprecedented period of performance.

So what has driven this, given that the global economy has not exactly delivered stellar growth and productivity remains low?

The most significant contributor to the performance of stock markets since the Global Financial Crisis has been loose monetary policy.

Firstly, let’s look at conventional monetary policy. Following the Global Financial Crisis, Central Banks around the world dropped interest rates to extremely low levels (in the UK, the base rate has been at or below 0.50% pa since March 2009). What does this mean for the economy? Well, for companies and consumers, borrowing is cheap. Therefore, companies are more likely to borrow and invest in their operation in order to expand, thus restoring growth to the economy and getting people back into employment.  For consumers, they are incentivised to, first, spend their money rather than save, and second, borrow money to make large purchases whilst credit is cheap (for example, the growth in car leases over the past few years).

So, if companies can be incentivised to produce more and consumers can be incentivised to spend more, the economy is buoyed. Also, given how cheap it is to borrow, it becomes less difficult for companies to turn a profit. Profitability of many companies has further been boosted by the lack of wage growth as production costs have not experienced significant upward pressure over the 10-year period.

For investors, therefore, over the past 10 years the trade-off has been between saving in accounts attracting interest rates of around 1.00% pa or buying the shares of companies which are operating in a relatively easy and profitable environment. The lack of alternatives for those with money has, at least partially, contributed to the strong performance and relatively low volatility of stock markets.

There are of course downsides to keeping interest rates so low for such a long period, and the principal one is the lack of improvement in productivity. By keeping interest rates so low, companies don’t have to try hard to stay in business. That is, if interest rates were higher such that the cost of production for companies was higher, there would be a greater incentive for companies to produce more (or produce a better product) for each unit of input into the production process. Without that incentive, companies are quite happy to hold cash on their balance sheets and do not see a great need to invest, and that restricts technological advancement.

Let’s now move on to unconventional monetary policy; Quantitative Easing (QE). You will likely have heard of QE; it has been well talked about since the Global Financial Crisis. QE is an expansionary policy whereby Central Banks purchase financial assets in order to increase the monetary supply. The theory behind this is that, by increasing monetary supply in the economy, banks are incentivised to lend to consumers and companies, and this further supports consumption and production. Furthermore, increasing the monetary supply creates inflationary pressures in the economy, and stable inflation is important as, again, it encourages people to buy now rather than waiting until tomorrow when prices will be higher.

So QE again improves the environment for companies to operate in. What it also does, though, is inflate the prices of financial assets. By actively purchasing financial assets (such as government bonds, corporate bonds, and even shares in companies), Central Banks increase the demand for these assets and that has the effect of increasing prices (translating into Capital Growth for investors).

The same has happened in property markets. Cheap and easy credit, when combined with low returns on other assets, has made owning property for investment purposes more attractive since the Global Financial Crisis.

So what lessons can we take?

There’s no doubt that Central Banks have had a significant impact on stock markets, in particular the rate at which markets recovered following the Global Financial Crisis.

Whether that will be representative of the experience of investors after the next recession is debatable. Interest Rates are on the increase in the UK, but at a slow rate. Furthermore, the value of the financial assets currently held by Central Banks is significant.

Should we experience a downturn before rates normalise and Central Banks have been able to sell down the assets they hold, the effect that similar monetary policy measures would have would be limited at best.

There is, of course, always fiscal policy (government spending and taxation), but the focus on austerity and balancing the books doesn’t seem to be going away any time soon (despite the pressure from the left).

The impact of the next downturn for investors could be rather more drawn out than the Global Financial Crisis. However, one should remember that much has been done to reduce the systemic risks that caused the Global Financial Crisis.

If you had been advised to buy into the S&P 500 on the day after Lehman’s went under, you would probably have run a mile. However, with the benefit of hindsight, you’d now have been sitting pretty. As ever, the message is that no one has the ability to time the market. The successful investor doesn’t invest for today, tomorrow, or even next year, but invests now for the next 10 years.

 

 

 

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Gresham Experts to Take the Floor for June Masterclass

The date and topic for our summer Masterclass have been set. On 27th June, Gresham will host a presentation entitled ‘Property vs Pensions’.

Whilst part of the appeal of our Masterclass events is usually the external speakers we bring in, this time we’ve decided to shake things up and utilise our very own experts!

Financial advisers Becky Sugden and Daniel Ardern will be delivering the presentation, providing current figures, statistics and insight into these two popular forms of investment.

The Topic

The past 20 years has seen a boom in the UK housing market, leading many to believe that as an investment strategy, property is ‘as safe as houses’. But when it comes to planning for the future in the current climate, is this still the case, or are pensions a more viable route to follow?

In this session, the team at Gresham Wealth Management will look at the relative advantages of investing in rental properties and within personal pensions, and how the two can be used to complementary effect to accumulate wealth and meet retirement needs & requirements.

The presentation will then turn to commercial property, how these can be purchased by a pension, and the advantages and pitfalls of undertaking this strategy both personally and for the company.

CPD Points

Gresham Wealth Management is one of the few firms of financial advisers in the North West that is registered to deliver CPD training. Professionals attending this event will receive 1.5 CPD points.

Book your Place

Our Masterclasses always aim to be informative yet enjoyable. For this summer special, we’re holding the seminar at lunchtime with lunch and informal networking starting at 12 noon before the presentation starts at 12:30. The event will conclude by 2:00pm.

Our Masterclass events are always popular and we only have limited capacity. So if you wish to attend, we advise that you reserve your place as soon as possible by clicking here.

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Property vs Pensions – Where’s Best to Invest?

Brits have long had a love affair with residential property; the past 25 years or so has seen a significant increase in the number of people choosing this route for investment purposes.

People like investing in residential property for rental purposes as they enjoy the boost to their income during their working life, they see it as a way to provide an income during retirement, and they like the idea of passing the property to their children and grandchildren following their death. Further, property is a tangible asset (you can see it and touch it) and can be easily understood which many people find comfort and certainty in.

Recently, however, in an effort to make residential property more accessible to first time buyers, the Government has brought in two measures that make investing in buy-to-let property less attractive.

The first of these measures is the Stamp Duty Land Tax (SDLT) Surcharge introduced on the 1 April 2016. This increases the total SDLT applicable to those purchasing an additional residential property by 3% of the purchase price, making the initial outlay required to purchase a buy-to-let property significantly more expensive.

The second is the retraction of mortgage interest relief against rental profits in excess of the basic rate tax band. This has reduced the profitability of buy-to-let property for higher rate and additional rate tax payers.

So what is the alternative for those considering the purchase of a buy-to-let property?

Well, it might just be that wholly unfashionable and infinitely boring of things, the personal pension.

At a similar time to the changes on the tax treatment of second homes and buy to let properties, Pensions Freedoms were introduced which allowed people to access their pension monies, making personal pensions a more attractive alternative to a Buy to Let investment property.

Pensions have traditionally been an inflexible investment vehicle that forced the purchase of an annuity on retirees. However, as a result of the introduction of pension freedom reforms, retirees are now allowed the flexibility to draw as little or as much of their pension as they like in any year that they like by selling down their pension investments.

Furthermore, the reforms changed the way in which pensions are taxed on death of the member. Personal pensions are typically not included as part of the estate of the member on their death and therefore escape assessment for inheritance tax purposes. Instead, personal pensions are subject to income tax at the rate applicable to the beneficiary if the member dies after reaching age 75, and this is only applied when the beneficiary draws from the pension (so can be managed to limit the tax applicable). If the member dies before reaching age 75, the beneficiary will be able to draw on the pension without incurring any tax whatsoever.

Other positive attributes of personal pensions include the following:

• Contributions are income tax relievable and are limited to 100% of UK Relevant Earnings up to a maximum of £40,000 per annum.

• Investments held within a pension tax wrapper are free of income tax and capital gains tax.

• Any person accessing a pension during retirement can take 25% of their pension as a tax free lump sum. The remaining 75% can be accessed either flexibly or by purchasing an annuity and will be subject to income tax.

It should be noted that apart from in circumstances such as severe ill health/protected early retirement age, pension investments cannot be accessed prior to age 55 (increasing in line with the State Pension Age), so will not be the most suitable tax wrapper in all circumstances.

How does this compare to the tax position for buy-to-let properties?

• Instead of being subject to a tax charge on their investment (SDLT + SDLT surcharge), pension investors enjoy tax relief at up to 45%. This boosts the initial investment value which will potentially have a significant impact over a long period of time (as a result of the compounding effect).

• Within the pension, investments are not subject to income tax or capital gains tax. By contrast, buy-to-let property investors will be subject to both throughout the full period of ownership (including whilst they are working and are potentially a higher or additional rate tax payer).

• Finally, unless other arrangements are used, buy-to-let properties will be included as part of the estate on death and therefore could potentially incur a tax charge of 40%.

There are ways in which buy-to-let property can be held more tax efficiently (particularly for higher and additional rate tax payers), such as within a company structure or using a trust, however, rearranging an existing property portfolio in such a way could incur a significant cost.

So, from a tax angle, if the investor is unconcerned by the prospect of tying their money up until they reach age 55 (rising to 57), then pensions potentially present a significantly more efficient investment proposition than residential property.

Beyond tax

The tax position of investments is one thing, but there are other factors to consider when investing your money. One such factor is volatility. In short, the value of investments can fall as well as rise and the more volatile an investment is, the greater the fluctuations in value will be. Different types of investments react to changes in market conditions and world events in different ways. In order to balance the risk of volatility across investments, you ideally want your money to be spread across investment classes that react differently to changes in the market.

As it happens, property and equities are two asset classes that have exhibited extremely low correlation of returns over the past 35 years (we are using equities for this example as, typically, a large proportion of a pension portfolio would be allocated to them). So is there an argument that property and pensions could, in fact, work alongside each other?

Unfortunately, legislation dictates that residential property cannot be held within a pension. However, it is reasonable to assume that the majority of individuals who are considering an investment in a buy-to-let property will already own the residential property in which they live. By investing in equities (whether or not this is within a pension portfolio), such an investor improves their ability to manage risk via diversification (and will thus potentially improve the growth characteristics of the portfolio) and improves the liquidity characteristics of their overall portfolio of wealth.

Returning to our original question – Property vs. Pensions – what is the answer?

Whilst some people will find it difficult to be swayed from property, for those who have previously overlooked pensions and alternative asset classes, perhaps now is the time to take another look. Initially, you should review the pension provision that you have in place and the level of contributions that are being made. Depending on your income and income tax position, thinking about refocusing your excess income and making additional contributions may allow you to take advantage of the numerous tax breaks available.

For more information on any of the above, or to discuss reviewing your pension position with one of our Chartered Financial Planners, please contact us.

This article, written by Daniel Ardern, originally appeared on Pro Manchester’s website.

 

The Financial Conduct Authority does not regulate some Buy to Let Mortgages, Tax Advice or Estate Planning.

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