Six 'lockdown habits' advisers should keep
This article first appeared in Professional Adviser
Whether it's because we had to or wanted to, lockdown gave us all the opportunity to do things differently. But which of these new habits are likely to remain part of everyday life? I share my thoughts...
I recently saw a post on social media, asking about new habits people had taken up since lockdown started.
Answers were intriguing and varied. Gardening. Spending more time with the family. Cooking. Playing the piano. Watching endless hours of Disney+.
Whether it's because we had to or wanted to, lockdown gave us all the opportunity to do things differently. In recent weeks, deserted offices and increased demand for homes on the coast have shown that some changes are likely to remain.
One thing all financial advisers will be able to say with certainty is that they adopted new methods and processes in the last six months. But which are those that should be kept and incorporated into our permanent ways of working?
Here are six.
- Virtual networking
While it's not been possible to meet peers and professional contacts face to face, online networking events have thrived.
From webinars to virtual conferences, lockdown has given advisers plenty of opportunities to find new professional connections and maintain their relationship with current ones. Considering you don't even have to leave your office (or home) to join them, this could be a more time and cost-efficient means of networking going forward.
- More regular communication with clients
We've always kept in touch with clients through annual face-to-face reviews and ad hoc meetings, but the adoption of video conferencing as an integral part of the client relationship has revolutionised this interaction, certainly in terms of ‘frequency of contact'.
While video calls may be no substitute for face-to-face advice, they're an undeniably good way of staying in touch. Aside from removing travelling time, they importantly maintain social distancing for high-risk or more vulnerable clients.
And it's not just video that has improved communication. Advisers have been upping the ante on activity such as newsletters and blogs, as well as online events and webinars. Clients have largely welcomed these initiatives, so they look set to be embedded as a part of ongoing relationships.
- Focusing on staff wellbeing/company culture
With offices sitting empty, many firms have focused on the wellbeing of their staff and have taken strong steps to ensure their team ethic remains strong.
From regular online catchups to social events such as virtual quizzes, it's likely that these team-building efforts will continue even after lockdown is over. Many firms will be in the office less often, so continuing to bring the team together virtually will remain important.
- Working on the business, not in it
Fewer face-to-face meetings have freed up time for business planning and strategy. Many advisers have found themselves being able to work on implementing new back-office systems, finally getting around to updating their tired website, or creating a new marketing, lead generation and/or client retention strategy to drive their business post-lockdown.
Ensuring your business is always moving forward is a great habit to maintain in the future.
- Building on personal knowledge
With clients to see and reports to write, it can be hard to find the time for personal development. Lockdown has given advisers the time to do valuable and worthwhile CPD, from exam study to attending product provider webinars.
As an example, when the current crisis is over, clients will need help to recover and build for the future. Decumulation is, therefore, one area it may make sense to build up skills and knowledge, both because there is likely to be more scrutiny from the FCA in the future, but ultimately to get the best outcomes for clients.
- Reviewing clients' protection
Many advisers spent months of lockdown reassuring clients about their portfolio in the light of global stock market volatility. However, it has also been a great opportunity to talk to people about the life, illness, and income protection they have in place.
Protection is still the cornerstone of all the best financial plans. While it has been particularly appropriate to discuss this during a pandemic, this is something advisers should consider continuing to build into their discussions.
Those firms who successfully build these factors into their long-term ways of working are far more likely to thrive as we enter the ‘new normal'.
What Does The Future Hold For The Property Market?
The COVID-19 pandemic has had a huge impact on the property market and is set to continue influencing demand. So, will property prices continue to rise, or will they fall as pent-up demand dries up?
In spring, as the extent of the pandemic became clear, property viewings were banned, and some agreed deals fell through as the situation changed rapidly. Inevitably, this had an impact on the number of mortgages approved and property sales. Zoopla figures show that from the beginning of lockdown in March to the end of July sales worth £27 billion have been lost.
But since the market has reopened, demand and prices have surged in many parts of the country.
Reopening the market and Stamp Duty holiday leads to a booming property market
As the market reopened, Chancellor Rishi Sunak unveiled a Stamp Duty holiday in a bid to increase property sales. Homes valued up to £500,000 will no longer need to pay any Stamp Duty on the purchase if it’s for their main home. Properties purchased as a second home, holiday home or Buy- to-Let investment will still need to pay a 3% surcharge but the Stamp Duty holiday can significantly reduce the cost.
It’s a step, that combined with pent-up demand, worked in terms of getting the property market moving again.
The latest Halifax House Price Index found that in the third quarter, mortgage applications reached a 12-year high. Average property prices have increased too. In September, the average house price was 1.6% higher than in August and 7.3% higher than a year earlier. It’s the strongest growth seen since June 2016.
While positive for the housing market in the short term, it’s expected that other factors will dampen both demand and prices over the coming months.
Russell Galley, Managing Director at Halifax, said: “It is highly unlikely that the housing market will continue to remain immune to the economic impact of the pandemic. The release of pent-up demand and indeed the Stamp Duty holiday can only be temporary fillips and their impact will inevitably start to wane. And as employment support measures are gradually scaled back beyond the end of October the spectre of increased unemployment over the winter will come into sharper relief.
“Therefore, while it may come later than initially anticipated, we continue to believe that significant downward pressure on house prices should be expected at some point in the months ahead as the realities of an economic recession are felt even more keenly.”
Real estate advisors JLL now predicts that UK house prices will fall 8% in 2020 with 650,000 transactions expected, compared to 1.18 million last year. Several factors could lead to activity within the property market falling including:
- Availability of mortgage finance
This is a factor that’s already having a significant impact on some buyers and, therefore, the market.
As the economic outlook is uncertain, many lenders have restricted their borrowing. In particular, mortgages with a higher loan-to-value (LTV) ratio have been withdrawn temporarily. This has disproportionately affected first-time buyers who now need a minimum 15% deposit for many lenders, compared to the traditional 5-10%.
As first-time buyers struggle to access mortgage finance, demand and movement within the market could stall as a result.
- The economic outlook
The economic impact of COVID-19 is also a risk factor for the property market. The furlough scheme will come to an end in October and will be replaced by the less generous Job Support Scheme, potentially leading to higher levels of unemployment.
In the three months to August, the unemployment rate already hit a three-year high at 4.5%, and redundancies rose to their highest level since 2009, reports the BBC. As restrictions continue to affect business operations and profitability, Citibank has suggested that the unemployment rate could hit 8.5% in the first half of 2021. If unemployment does reach these levels, it will undoubtedly have a downward impact on the property sector.
- Brexit
While Brexit may have slipped down the headlines due to the pandemic, it’s still a key issue affecting the housing market.
We’re now just months away from the end of the transition period, with new rules coming into force from January 2021. However, a Brexit trade deal and other changes, such as movement from the UK to the EU bloc, remain unclear. It’s expected that the economic impact of Brexit will have some effect on the housing market but with so much still uncertain, calculating the full extent is challenging.
It’s impossible to predict with certainty what will happen in the property market, especially as the COVID-19 situation continues to develop. But for all clients that are considering purchasing or selling a property, whether as a home or an investment, getting their finances organised is essential. It’s a step that can improve their chances of securing the property they want.
Four Things The Chancellor Announced That Business Owners Should Know About
COVID-19 restrictions continue to affect businesses across the country. But some measures have been brought in that could help your clients keep their businesses afloat if they’re struggling. Understanding the options that are available to business owners is essential during these uncertain times.
In September, Chancellor Rishi Sunak unveiled a new set of measures to replace or complement those initially brought in as the extent of the pandemic became clear as part of the winter economy plan.
So, what are the measures available to help businesses large and small?
- Paying employees with the Job Support Scheme
Helping businesses retain employees is one of the key motivators behind government support. With the furlough scheme now coming to an end, the Job Support Scheme will begin on 1 November. It aims to protect ‘viable’ jobs and is set to remain in place for six months, with a three-month review taking place.
For business owners, the new scheme helps pay for the salary of staff that are only able to go back to work part-time. For instance, if they work in the hospitality sector and are forced to reduce operating hours, the scheme can help top up the wages of employees.
To be eligible, employees must work at least a third of their usual hours. Businesses will need to pay employees for the hours they work. For the hours that employees can’t work, the government and employer will each cover one-third of the lost pay. The grant will be capped at £697.92.
This means employees that aren’t affected by the cap will receive a minimum of 77% of their normal wages even if they’re only able to work a third of their usual hours. For business owners, it can help retain key members of staff if they aren’t in a position to reopen fully but requires a commitment to pay some of the hours an employee is unable to work.
The Job Support Scheme is open to all business sectors. However, large businesses will need to prove their turnover has fallen during the crisis to be eligible.
As the COVID-19 situation develops, it’s expected that more regions will be categorised as a tier-three risk, leading to new restrictions that will force some businesses, including pubs, restaurants and gyms, to close. If a business owner is affected by these restrictions, a furlough style scheme will be available to help pay employees.
- Government loan schemes and extended repayments
While the grant schemes offered to businesses are now closed, firms that need additional capital can still access the COVID-19 loan schemes with the option to pay over an extended period. There is a range of loan options available for business owners to consider:
- Business interruption loan scheme: This is a government-backed loan scheme that encourages lending as the government takes on a portion of the risk. This scheme is delivered by a range of lenders, including banks and asset-based lenders. Businesses can borrow up to £5 million in the form of term loans, overdrafts, invoice finance and asset finance. While the government backs these loans, the borrower remains fully liable for the debt, so business owners need to take repayments into consideration when planning.
- Coronavirus Future Fund: The Future Fund provides government loans to UK-based companies ranging between £125,000 and £5 million. However, the firm must at least match the government funding from private investors. The loans are designed to provide a safety net for businesses that rely on equity investments or are unable to access other business support programmes because they are pre-revenue or pre-profit.
- Bounce Back Loan scheme: The Bounce Back Loan scheme is designed to help SMEs access between £2,000 and 25% of their turnover, up to a maximum of £20,000. The government guarantees 100% of the loan to encourage lending. Eleven lenders are participating in the scheme, including retail banks. One of the key benefits is that no repayments are due for the first 12 months and there are no fees to pay. Business owners cannot apply if they’ve already claimed under the Business Interruption Loan scheme, but they may be able to transfer this loan into the Bounce Back Loan scheme to secure more favourable terms.
When these loan schemes were initially announced, businesses had six years to pay. Greater flexibility is now being offered, allowing firms to extend this to ten years if they choose. For businesses that are struggling, there is also the option to make interest-only repayments or suspend repayments for six months without affecting their credit rating.
Business owners can apply for all coronavirus loan schemes until the end of 2020.
- VAT tax deferrals
Earlier this year, businesses were given the option to defer their VAT bill until March 2021.
However, this still would have left businesses potentially facing a bill that needed to be paid in a large lump sum that would affect their viability. If they choose to, business owners can now spread the cost over 11 smaller monthly payments, beginning in January 2021. These payments will be interest-free and could help business owners to spread the cost while business revenue is down.
- Additional support for the hospitality sector
The hospitality sector has been one of the hardest hit by the pandemic restrictions.
In the Summer Statement, Rishi Sunak reduced the VAT rate for hospitality businesses from 20% to 5%. This VAT cut has now been extended until March 2021. The Chancellor said this move supports more than 150,000 businesses and 2.4 million jobs.
From a business owner perspective, it’s hoped that the VAT cut will boost customer demand and give businesses in this sector confidence to continue trading. However, the VAT incentive will need to be balanced with restrictions for business owners, such as the 10pm curfew that means restaurants and bars are being forced to close early.
Keeping clients informed of changes
With the situation developing rapidly, it’s to be expected that there will be changes and perhaps additional support measures for businesses over the coming months. As the personal finances and wellbeing of business owners are often intertwined with that of their business, we aim to provide clear information that can help them plan for the short and long term. If you’d like to work collaboratively to provide support for businesses, please get in touch with our team.
Accessing A Child Trust Fund: What Are The Options?
Last month, the first children to benefit from Child Trust Funds were able to access them. So, what are they and if your child or grandchild has one, what are the options?
Child Trust Funds were introduced in April 2005 by the then Labour government. The government automatically opened a Child Trust Fund in the name of every child born between 1 September 2002 and 2 January 2011. They were introduced to encourage long-term saving for a child’s future and savings were tax-free.
To get savings started, the government made contributions at certain points depending on household income. All Child Trust Funds will contain at least £500 even if you’ve made no further contributions.
The money held in these accounts is locked away until the child reaches 18. With the first children to have a Child Trust Fund now reaching 18, it’s important to think about what the options are. It’s estimated there are 6.3 million teenagers and children that will eventually be able to access money held in a Child Trust Fund.
What should you do with a Child Trust Fund?
If the child is still under 18, you may want to consider moving the savings into a Junior ISA (JISA). These replaced the now-defunct Child Trust Funds and offer a tax-free way to save and invest for their future. Many savers will find they can access better interest rates by transferring to a JISA.
If the child has reached 18 or is nearing their 18th birthday, it’s worth considering how they want to use the money. Providers will automatically move money in a Child Trust Fund into an ISA, which is tax-free, or roll into another account with similar benefits. You essentially have three options when deciding what to do with the money.
- Spend
This option may seem attractive to teenagers receiving a lump sum of money that may be unexpected. In some cases, spending the money can be useful. For example, if it’ll help them pay for driving lessons or resources that are needed for university. However, there may be a temptation to spend with only a short-term view. If the money is going to be spent, it can be worth having a chat about how it’ll be used and whether it would improve their wellbeing and ensure they’re secure in the future.
- Save
Most Child Trust Funds will be transferred to a similar cash account when the child reaches 18. They may decide to leave it in a savings account for a rainy day. If this is what they choose, it’s well worth looking at best buy tables to find where they’ll secure the highest interest rates to help their money go further. The best interest rates tend to be with accounts with restrictions on when you can access the money.
Keep in mind though that interest rates are at an all-time low. Finding an account that offers an interest rate that beats inflation is unlikely. As a result, the value of savings will decrease over time. In most cases, saving in a cash account should be reserved for an emergency fund and when they’re saving for a short-term goal.
- Invest
Where teenagers plan to keep the money to one side for a long-term goal (at least five years away), investing the money may be appropriate. This can be done through a Stocks and Shares ISA account, meaning any investment returns will be tax-free.
You should keep in mind that the value of investments can fall. Short-term volatility is to be expected and is the reason investing shouldn’t be considered with a short-term goal. If, however, teenagers are saving intending to buy a house eventually, for instance, it can help savings keep up with and, hopefully, outpace inflation to deliver growth in real terms.
Finding ‘lost’ Child Trust Funds
As you didn’t open a Child Trust Fund on behalf of your child and may not have continued to contribute to it, you may have ‘lost’ the account.
The government has set up a gateway for finding accounts if you don’t know who the provider is. An online form can be filled in here. If you’re a parent looking for your child’s Trust Fund, you’ll need either the child’s unique reference number or their National Insurance number. You should receive the requested details within three weeks.
As your child or grandchild reaches adulthood, there are a lot of milestones approaching. The money held in a Child Trust Fund could help them purchase their first car, support them through further education or act as a deposit for a home in the future.
Now is a good time to think about whether you’d like to offer financial support as they become independent too. If you’d like to discuss if you can afford to help loved ones take steps towards milestones, from graduating to getting onto the property ladder, please get in touch. We’ll help you understand how it’ll impact your finances now and in the future.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Should You Take A Tax-Free Lump Sum From Your Pension?
Your 55th birthday, rising to 57 in 2028, often marks being able to access your pension for the first time. The opportunity to take a 25% lump sum tax-free is certainly attractive and can be too tempting to resist. But it’s not a decision to take lightly and it isn’t the right move for everyone.
The ability to take a tax-free lump sum means that pension savings are becoming disconnected from retirement, research suggests. For many of us, retirement is still some way off at 55 and you may plan to work for many more years. Removing a quarter of your savings before you give up work could affect your long-term income.
Deciding when and how to access your pension is important. Despite this, a survey from PensionBee indicates thousands of over-55s aren’t fully considering the impact early withdrawals will make. In fact, almost half (48%) hadn’t considered how they’d manage throughout retirement.
So, what should you think about before you withdraw that lump sum?
- Why do you want to take a lump sum from your pension?
According to the survey, just 3% of those considering accessing their pension did so because they were retiring or stopping work. A further 17% would use the money to cover day-to-day expenses and 9% would spend it on something special.
If those thinking about accessing their pensions aren’t planning to spend the money, why are they taking this step? Three popular responses suggest that for some, the reasons don’t align with financial goals.
- 32% worry about pensions falling in value
- 20% would make a withdrawal so they would have more ‘control’
- 12% said they simply felt a pressure to do something with it
What’s the issue with these responses?
First, pensions are typically invested, and you should expect some short-term volatility. If you’re worried about your pension losing value, it’s important to focus on the long term. If you don’t plan to use your pension as an income for several years, leaving it invested is likely to be most appropriate. It’s also worth noting that if you choose to take a flexible income from your pension, the money you don’t withdraw will usually remain invested. Speak to us if you have concerns about pension investments and market movements.
Second, you do have control over your pension investments. With a typical Defined Contribution pension, you’re usually able to choose from several different investment funds to match your risk profile and goals. This is suitable for most pension savers. For some, a Self-Invested Personal Pension (SIPP) is an option to explore but this can be complex and you must be comfortable managing investments, we’re here to provide guidance where needed.
Finally, don’t feel under any pressure to make pension withdrawals just because you’ve turned 55. For most people, if you’re not retiring, it makes sense to leave savings invested through a pension and continue adding to it.
- What will you do with your tax-free lump sum?
The figures above established that relatively few people considering accessing their pension to withdraw a lump sum intend to spend the money. If you do plan to spend, you need to consider the long-term consequences first, which we’ll look at in the next point.
However, if you don’t plan to spend the money, what are your options?
Placing the money in a savings account: Some responders indicated they intended to withdraw money to place it into a cash savings account. If you’re nervous about pension values falling or want retirement savings to seem more tangible, this may be viewed as a ‘safe’ option. After all, market movements won’t affect the lump sum withdrawn.
But inflation will affect savings. Interest rates are low at the moment and while values won’t fall because of investment performance, the value will decrease in real terms. That means over time your savings will buy less due to inflation.
Investing the money: If you’re thinking about taking money out of your pension to invest it, remember your pension is likely already invested. Pensions are a tax-efficient way to save for retirement. Leaving your money invested in a pension and adding to it until retirement makes financial sense for most people. It’s worth taking the time to understand how your pension savings are currently invested, the associated costs, and the long-term investment performance before you make any decisions.
- What impact will it have on your retirement plans?
Over a third (35%) of people said they didn’t know how to find out how much they could expect to receive from their pension in retirement.
Before you make plans to make any withdrawals, it’s essential you understand the value of your pension and how this will translate to an income. If you took the maximum 25% tax-free lump sum from your pension, that’s a sizeable amount. Doing it while you’re still in your 50s, with retirement perhaps several years away, means you’re missing out on the investment growth of this sum too.
Making a pension withdrawal as soon as it becomes an option could mean your income is far lower during retirement. Would you still take a lump sum to spend now if it meant the 30 years you spend in retirement are less comfortable?
The key here is to understand what impact taking the tax-free lump sum would have. We’re here to provide insight. We’ll help you to see what income your pension will provide if you take a lump sum now, taking it further down the line, or not taking it all, taking your retirement goals and plans into consideration.
If you’re able to take a tax-free lump sum out of your pension and want to understand your options, please get in touch. We’ll help you see how removing a lump sum from your pension now will affect your income in retirement and how to make the most of any withdrawals.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Your pension income could also be affected by the interest rates at the time you take your benefits.
Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
Pension Age Rises To 57: What Does It Mean?
The pension age has risen to 57. From 2028, you won’t be able to access your Personal Pension until the age of 57. The government’s decision could affect your retirement plans and it’s important to review what it means for your future.
The government previously stated it intended to increase the age people could access their Personal Pensions, currently set at 55. However, it didn’t put legislation in place, leading to speculation that the change wouldn’t go ahead. The government has now confirmed that it will legislate for the rise ‘in due course’. So, if you turn 55 in 2028 or after, you’ll have to wait an extra two years before you can access your retirement savings.
Why is the pension age rising?
The rise in Personal Pension age follows similar plans to increase the State Pension age. As people are living longer, pensions are being stretched to last for several decades. The move is part of this trend, helping people to ensure their pension savings are there to provide an income in later life.
When Pension Freedoms were first introduced in 2015, providing pension savers with more freedom, there were concerns that some would recklessly spend too much too soon and leave themselves financially vulnerable in later retirement. However, figures suggest this hasn’t been the case. The majority are taking a sustainable income.
So, is a further rise on the cards? We can’t predict what will happen. But it’s likely the age you can access your Personal Pension will rise again in the future, perhaps in line with the State Pension age. Keeping up to date with pension changes and what they mean for you is essential, this is an area we can help you with.
How does the change affect your retirement plans?
Whether the change to Personal Pension age will affect you will depend on what your plans are.
- I don’t plan to access my pension before the age of 57
If you had no plans to access your pension before the age of 57, the recent announcement doesn’t affect you. Your retirement plans should be able to go ahead. However, it’s still important to regularly review your long-term financial plans and keep in mind that further changes could be announced in the future.
- I want to retire after 57 but intended to access a portion of my pension
The Pension Freedoms meant retirement savings could be accessed how and when you liked from the age of 55.
One attractive option was the ability to take a tax-free lump sum up to the value of 25% from your pension. It’s an option many have taken advantage of before they’ve retired. Alternatively, you may want to access your pension to supplement your income before you retire.
If you had intended to start making withdrawals from your pension at 55 while still working, you’ll now need to adjust your plans. The simplest option is to push your plan back by two years to reflect the recent changes. However, if you don’t want to do this, you should assess how your other assets can bridge the gap. You may be able to use savings and investments, for instance, to provide the income you want for the two years before your pension is accessible.
Make sure you understand how using other assets could affect your wider plans and where to make withdrawals from. For example, there’s a subscription limit for ISA accounts so it may make sense to use other assets first. Please get in touch to discuss how your assets could be used in place of your pension.
- I plan to retire and access my pension at 55
If you plan to retire at 55 after 2028 and don’t want to delay plans, you need to create a new plan for building an income now. The sooner you tackle this, the better the position you’ll be in to still reach your retirement goals.
In some cases, it may be necessary to make adjustments. For instance, you may need to delay plans or cut back on your planned outgoings. While this can be frustrating after looking forward to retirement, it can help preserve your wealth to create a stable income for retirement, which could last decades.
However, you may find you’re in a better position and can still proceed with plans.
Exploring your options and assessing other assets may provide alternative ways to create the reliable income you need for the first couple of years of retirement until you can access your pension.
It’s crucial that you look at the long-term impact of using other assets. For instance, if you’d intended to use them to supplement your pension throughout retirement, how will taking a larger sum in early retirement have an impact? Or will it mean your legacy is reduced?
If your retirement plans have been affected by the changes, please get in touch. We’re here to help you understand how other assets could be used and what it means for your plans. We’ll use a range of tools to demonstrate how your wealth can be used and will be affected over the long term by funding retirement, giving you the confidence you need to make decisions.
Reflecting legislative changes in your retirement plans
Keeping up to date with government changes and how they affect your retirement plans, can be challenging. Understanding how changes will have an impact on your retirement goals, even more so. Working with a financial planner can help you see whether changes present opportunities or a need to adjust your plans. Please get in touch to discuss your retirement plans, pensions and what legislative changes means for you.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
Good Money Week: ESG And Investment Sustainability
Do you consider investment sustainability when making financial decisions? With Good Money Week starting on the 24th October, which aims to encourage people to think about sustainability when it comes to banking, pensions, savings and investments, now is a good time to learn more.
While sustainability in finance is often associated with incorporating ethics and values, it can help improve your long-term outcomes too.
What is ESG?
ESG stands for environmental, social and governance.
These are the three core pillars that are considered when weighing up whether a company is considered sustainable. All three categories can cover a broad range of areas. The table below highlights some of the things an ESG investor may consider.
| Environmental | Social | Governance |
| Greenhouse gas emissions | Human rights | Executive compensation |
| Use of raw materials | Animal welfare | Management structure |
| Impact on biodiversity | Workforce diversity | Employee relations |
| Water management | Consumer protection | Employee compensation |
ESG investing means you take some of these factors into consideration when deciding where to invest. Rather than simply looking at the financial side of the business, you’d consider how the business operates and its place in the world. This doesn’t mean the financial performance of a firm is discounted, that’s still an important part of assessing an investment even when ESG is playing a role.
For investors that want to incorporate their value into decisions, ESG investing can help. For instance, those that are concerned about climate change may choose to omit fossil fuel companies from their portfolio.
However, ESG can add value to your long-term goals too.
Sustainability and investment performance
When we’re investing, it should be with a long-term goal in mind. As a result, sustainable firms, which should also consider long-term impacts, can help a portfolio to deliver returns.
Research published in the Financial Times found close to six in ten sustainable funds delivered higher returns than equivalent conventional funds over the last decade. The research looked at 745 Europe-based sustainable funds and found that the majority of strategies have done better than non-ESG funds over one, three, five and ten years.
Sustainable funds’ rates of success varied depending on the asset class. For instance, more than 80% of US large-cap blend equity funds beat their traditional peers over ten years. It was also found that sustainable funds have a greater survivorship rate than non-ESG options. On average, 77% of ESG funds that were available ten years ago still exist. For traditional funds, the figure was just 46%.
Despite ESG values often being associated with lower returns, the findings demonstrate they can add value to investment portfolios.
A survey from Schroders found this is increasingly being reflected in investors’ beliefs too. When asked if sustainable investments are attractive, 42% said ‘yes, because they are more likely to offer higher returns’. This compared to the 11% that said ‘no, because they won’t offer higher returns’.
Hannah Simons, Head of Sustainability Strategy at Schroders, said: “Sustainability does not have to come at the expense of performance, and it is promising to see this manifesting more strongly each year in the data.”
Of course, considering ESG factors is no guarantee of investment performance. Investments will still experience short-term volatility and there is always some risk involved. It’s essential you understand the risk of an asset before investing.
The challenges of ESG investing
Alongside the benefits of ESG investing, there are challenges too. These include:
- Limited funds: The number of ESG funds available is growing but compared to the mainstream market there are limited options. This can make it more difficult to find a fund that suits your needs and goals. If you want your investments to reflect your values, you also need to keep in mind this is subjective and even an ESG fund may not align with your ethics perfectly.
- Additional cost: Researching ESG factors means more time needs to be taken before investing. As a result, ESG investing can mean additional costs. When investing through a fund, you may find management fees are higher.
- Missed opportunities: Avoiding firms that don’t meet your ESG criteria could mean you end up missing out on opportunities. While ESG can create sustainable returns, when you look at it from this perspective, it can harm investment growth in some cases too.
All investments need to consider your goals and situation too. So, alongside ESG factors, make sure you think about your risk profile, investment time frame, and more.
Investing can be complicated, and ESG adds another layer of complexity. If it’s something you’d like to incorporate into your investment portfolio, please get in touch. We’re here to help you understand your investment options and what they could mean for your long-term goals.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
5 Things To Consider When You Come Into Unexpected Money
Everyone has at some point daydreamed about what they’d do if they suddenly came into a large amount of unexpected money. But what would you do if it really happened?
Whether it’s enough money to buy a new car or a gold-plated yacht, if you receive an unexpected windfall you should always think carefully before spending it. Take your time to consider your options as you might be feeling overwhelmed.
If you’ve received a large amount of money, it’s important to be mindful of the limits set by the Financial Services Compensation Scheme (FSCS) on how much compensation you will receive if the bank fails.
Temporary higher balances of up to £1 million will be compensated for in the first 12 months per person per bank or building society. But after that, you will only receive a maximum of £85,000 for any lost savings. So, if you do decide to put your new-found money in the bank, it might be worth spreading it out across several banks to ensure that it’s all protected.
A large sum of money has the potential to transform your life if you use it wisely. So, read on for five things to bear in mind if you come into unexpected money.
- Make a plan of what your goals are
Although we might daydream about it, most people don’t keep a detailed plan on what they’d do if they came into a large amount of money.
However, it is important to make one before you think about splashing your cash recklessly. Otherwise, it can be all too easy to get overly excited and start frittering it away on things you don’t really need.
Write down everything you might want to buy or do with the money, including giving gifts. This could be anything from going on holiday to helping a loved one to purchase a home. Don’t just think about the things you’d like to do now, but those further away too.
It can be easier to plan when you have all the information in front of you, not just vague ideas. A plan will help you see which goals you can afford now, and which goals you may be able to afford in the future, with careful management of your money. Long-term goals might include retiring early or building a legacy to leave behind for your family.
When making this plan, you may benefit from the advice of a financial adviser. We can help you to organise your finances to help you meet your goals in the short and long term.
- Pay off your debts to avoid interest payments
Settling your debts is usually the most sensible thing to do if you come into unexpected money.
By settling debts now, you can save yourself from having to repay interest on the debt later, which compounds over time. This can save you large amounts of money, especially if it is a large debt or one with high interest payments.
It may also be wise to pay off short-term debts, such as overdrafts or credit cards, first since they typically have higher interest rates. After you’ve paid those, you can start thinking about paying off other long-term debts, such as mortgages.
- Keep an emergency fund
Nobody can predict the future, so no matter how well you manage your money, it’s always worth keeping a rainy day fund. This can give you peace of mind if disaster should strike.
Although the spending power of cash is eroded by inflation, it can still be important to keep a fund that’s easily accessible just in case. As a general rule, it’s worth setting aside an emergency fund with enough money to cover three to six months of expenses.
With this, you can rest easy knowing that even if the worst should happen, you’ll have some money to fall back on.
- Decide whether you want to save or invest
One important decision you will have to make is whether you should save your new-found money or invest it. Your goals should have a strong influence on what you decide.
If you’re averse to risk, putting your money into a savings account may suit you. Unlike investing, your money is safe from losses, assuming you stay within the limits of the FSCS. But it may not increase in value much, if at all, as current interest rates are likely to be below inflation.
Putting your money in a savings account is also useful if you have a short-term goal in mind, such as booking a holiday.
On the other hand, if you have a long-term goal, such as building wealth to pay for a comfortable retirement, it might be worth considering investing your money instead. Investing can help you grow your wealth in the long term, but it does come with risks. You should invest with a minimum time frame of five years in mind.
- Seek the help of a financial adviser
If you come into a large amount of money, you should consider speaking to a financial adviser who can help you to use it to achieve your goals.
It might be tempting to think you don’t need one. A study by AKG revealed that 43% of people who had not seen a financial adviser in the last five years believed they already had enough knowledge to make financial decisions for themselves.
However, when you’re dealing with large amounts of money, it can be hard to use it efficiently and understand how it can support long-term goals. Financial planners have experience overcoming the issues that may arise, such as dealing with complicated tax laws, to help you get the most out of your windfall.
A study by YouGov has shown that only 27% of people would consider speaking to a financial adviser after receiving a windfall. If you want to use your money more effectively to reach your goals, you shouldn’t be one of them. Please get in touch to discuss how we can help you realise your goals.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
5 Things To Check Before Cashing In A Final Salary Pension
If you’re fortunate enough to have a Final Salary pension, you have options for creating a retirement income that suits your goals. But, if you’re tempted to transfer out of a scheme, it’s essential you understand what you’d be giving up first.
Figures published in the Telegraph show cash transfer values for retirees leaving a Final Salary pension scheme reached record highs this summer. The estimated cash transfer value of a 64-year-old with a £10,000 a year pension was worth £260,800 in mid-June. It’s easy to see why Final Salary pension holders may want to transfer out of their existing scheme when such large sums are on offer.
However, it’s not in the interest of most people and there are numerous factors to consider before taking the next steps.
What does transferring out of a Final Salary pension mean?
A Final Salary pension, also known as a Defined Benefit pension, provides you with a guaranteed income for life.
When you start paying into a Final Salary pension, the calculation to understand your eventual retirement income is already defined. Usually, this is linked to how long you’re a member of the scheme and your final salary or career average. It is the pension scheme’s responsibility to meet these financial commitments. Investment performance will not affect how much you receive.
In recent years, the number of Final Salary pensions available has fallen as it becomes more expensive for schemes to meet their obligations due to longer life expectancy. This has also led to schemes offering greater sums to pension savers that wish to transfer out, known as a cash transfer value.
If you transfer out of a Final Salary pension, you lose a guaranteed income for life and instead receive a lump sum, which you will need to place in a personal pension, a self-invested personal pension (SIPP) or a pension scheme with another employer.
With a personal pension, your money is invested, and the performance will affect your retirement income. You’re also responsible for how and when you’ll access the savings, including ensuring it’ll last a lifetime.
5 things to think about if you’re considering transferring out
- What income will your Final Salary pension provide?
The first step is to understand what income your current pension scheme will provide. You should receive an annual statement with these details or can contact your scheme to find out more. The scheme will also set a retirement date, this is often before traditional State Pension age. Remember this income will be paid for the rest of your life. It is also usually linked to inflation, preserving your spending power throughout retirement.
- What additional benefits does your Final Salary scheme provide?
Many Final Salary pensions come with additional benefits, which, depending on your circumstances, can be valuable. For example, your scheme may offer a spouse or dependents’ pension. This would ensure loved ones continue to receive an income even if you pass away. If your family rely on your financial support, this can provide peace of mind. Any additional benefits from a pension will cease if you leave the scheme. As a result, if you transfer out, you will need to consider alternative measures.
- What cash transfer value are you being offered?
To be able to understand how transferring out will affect your retirement long term, you need to review the cash transfer value your pension scheme will offer. You can request this from your pension scheme. While this can seem like a significant sum, remember this will need to last for the rest of your life and that inflation will have an impact long term.
- How long is your life expectancy?
No one wants to think about passing away, but this is an important question when retirement planning. It’ll help you understand how long the cash transfer value will need to last for and how this compares to the guaranteed income. Keep in mind that we often underestimate how long we live for and there’s a good chance that you’ll exceed the average life expectancy and you need to factor this in.
- What investment returns can you expect from a personal pension?
If you transfer from a Final Salary pension, your savings will usually be invested. This can help your savings to grow and keep pace with inflation. However, this comes with challenges too. To achieve your desired annual income, what returns would be needed? Once you have a figure, you also need to ask:
- Are your expectations realistic?
- How much risk will you need to take?
- How will you manage market volatility?
It can be difficult to understand how a lump sum will translate into an income for what could be a 30 or 40 year long retirement. This is where financial advice can add value, helping you to grasp what giving up a Final Salary pension means for you in terms of income and lifestyle goals. You can’t transfer Final Salary pension with a value of more than £30,000 without seeking specialist financial advice.
Considering your lifestyle
One of the reasons that people consider transferring out of a Final Salary pension is the lump sum on offer. It can provide you with more flexibility in how and when you access your pension. For instance, you may plan to spend significantly more in the early years of your retirement.
However, in many cases, you can use other assets to create more flexibility and still benefit from the security of a guaranteed income. As a result, you need to consider your retirement lifestyle in the short and long term before you move forward with plans. Financial planning can put your options into perspective with your goals in mind. We’re here to help you create a retirement lifestyle that suits you, please get in touch.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Transferring out of a Defined Benefit pension is not in the best interest of the majority of pension savers.
Does Market Volatility Affect Your Pension Choices?
If you’re retiring this year, you may be worried about what the market volatility caused by Covid-19 means for your options.
The good news is that Pension Freedoms, introduced in 2015, means you can choose how and when you access your retirement savings.
Market volatility may have affected the value of your pension but that doesn’t mean your overall plans have to be adjusted. However, it’s important that you understand the impact market volatility could have.
The impact will depend on how you intend to access your pension.
- Taking a lump sum
Once you reach retirement age, it is possible to take your pension through lump-sum withdrawals. You can even choose to withdraw the entire amount, though this isn’t appropriate for most retirees.
Usually, you can withdraw up to 25% tax-free. If you’ve intended to take a lump sum out of your pension to take advantage of this, it’s worth assessing if your pension value has fallen. Withdrawals that exceed the 25% tax-free lump sum will be taxed as income and could push you into a higher Income Tax bracket. As a result, taking a lump sum may not be the most efficient way to access money.
- Purchasing an Annuity
An Annuity is a product you buy with your pension savings that delivers a lifetime income. As a result, if the value of your pension has fallen, you may find that the income you can purchase is now lower. But it is an option that can provide financial security throughout retirement.
The amount paid out will depend on the Annuity rate. For example, a 5% Annuity rate would pay out £5,000 every year for every £100,000 initially paid.
The Annuity rate you’re offered varies depending on a range of factors, including your age and health. You can also choose to purchase a joint Annuity, ensuring your partner would continue to receive an income if you passed away first, or one that rises alongside inflation to maintain spending power. These options would typically mean a lower level of income to begin with.
If you’d like to use an Annuity to fund retirement, you’ll need to assess how recent volatility has affected your overall pension value. This means you’re able to see what Annuity rates mean in terms of income. Take some time to shop around, different providers will offer varying rates. The good news is that with a guaranteed income, you won’t have to worry about market volatility affecting income in retirement.
- Using Flexi-Access Drawdown
Flexi-Access Drawdown allows you to take a flexible income that suits you, usually, the remainder will stay invested until you make another withdrawal.
This is the option where investment volatility can have the biggest impact. As your savings remain invested, you need to be aware of how your investments have performed. Continuing to take the same level of income during a downturn, as you did previously, will mean you need to sell more units to receive the same amount. This can deplete your pension quicker than expected if you haven’t considered it beforehand.
As you’re responsible for how and when you access your pension, you also need to ensure it lasts throughout your life, which will undoubtedly include some periods of short-term volatility. Therefore, you must consider downturns as part of your retirement plan.
Remaining exposed to the markets isn’t all negative though. Historically, markets have recovered in the long term. Keeping your pension invested means you have an opportunity to benefit from a recovery as well as long-term gains.
Creating a retirement plan
How and when is the ‘right’ time to access your pension will vary between retirees. It’s a decision that should focus on your retirement goals and long-term plans.
Remember, you don’t have to access your pension as soon as it becomes available. If you don’t need the savings yet, leaving your pension invested can give your investments a chance to recover in the long term and perhaps grow further.
You also don’t have to choose one of the above options exclusively. You can mix and match the options to suit you. For instance, you could withdraw your 25% tax-free lump sum at the start of retirement, use a portion to create a base income with an Annuity, and use Flexi-Access Drawdown to access the remainder at different points.
If you’d like to discuss your retirement plans, whether this is how current circumstances have affected your initial plans or you’re starting from scratch, please get in touch.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
UK’s Biggest Pension Fund Divests From Fossil Fuels, What Does It Mean?
The UK’s biggest pension fund, Nest, is beginning the process of divesting its huge portfolio from fossil fuels. But what does that mean and why is it making the change?
Nine million pension savers use Nest to build a retirement fund. It handles the retirement savings of many workers that have begun saving under auto-enrolment. It has £9.5 billion in assets under management. The move to divest from fossil fuels follows a wider trend of taking ESG (environmental, social and governance) issues into account when investing.
Divesting from fossil fuels
Divesting means getting rid of a business interest or investment. This may be shares in a specific company or sector. In this case, it refers to companies that have a business interest in the fossil fuel industry. Specifically, Nest plans to divest from companies involved in thermal coal, oil sands and arctic drilling by 2025.
In recent years, there has been a growing trend for considering ESG factors when investing. This has included other pension funds divesting from fossil fuels due to the impact of climate change too. But Nest is the largest pension scheme in the UK, representing an investment shift for millions of savers.
Research supports the move made by Nest. Findings indicate that it’s a change many employees would welcome. Some 65% of pension savers believe their pension should be invested in a way that reduces the impact of climate change. Just 4% strongly disagreed with this idea.
Despite this sentiment, only 1% have made a change to the way their pension is invested in the last year. This was down to a variety of reasons:
- 38% had never thought about how their pension is invested
- 25% assumed their money was already invested responsibly
- 17% didn’t know they could change funds
Whether or not ESG factors are important to you, it’s essential you check how your savings are invested. Pension providers will offer a range of funds that will vary in their risk profile and goals. It’s usually simple to change the fund you’re invested in online.
Mark Fawcett, Nest’s Chief Investment Officer, commented: “Not only is this the right thing to do, it’s also what our savers want and expect from us. How can we offer them the prospect of a better retirement if we ignore the world they’ll be retiring into?”
The financial impact of divesting from fossil fuels
Considering ESG issues when investing appeals to many people, but there are often concerns about what it means financially. Does considering climate change, for instance, mean your returns will be lower?
The good news is that isn’t automatically the case. However, you still need to consider risk, diversification, goals and all the other factors you’d usually consider when investing when making decisions about ESG investing.
Figures from Nest show its fund that considers a range of ESG factors outperformed alternatives. In the five years to the end of March 2020, annualised total returns for Nest funds were:
- 6% for the 2040 Retirement Date Fund
- 0% for the High Risk Fund
- 2% for the Ethical Fund.
It’s impossible to predict with certainty how different stocks and funds will perform over the short, medium, and long term. However, divesting from fossil fuels doesn’t mean you have to miss out on returns that will boost your pension savings. If you’re considering making ESG factors part of your pension investment plan, please get in touch.
Looking beyond pension investments
It’s not just pensions where you may want to think about divesting from fossil fuels or other ESG factors either. You may want to look at your wider investment portfolio with these in mind.
With Good Money Week approaching next month, which encourages sustainable investing, now is the perfect time to think about how your money is invested and whether it aligns with your wishes. With many ESG factors, the issues are subjective. This can make it difficult to understand how you can bring your views into your investment decisions while still achieving your wider financial aims. This is an area we can help you with.
Please get in touch to discuss your investments, pensions and ESG goals.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
How advisers can 'rewire' their clients' brains
This article first appeared in Professional Adviser
Advisers who understand the workings of human bias will be able to step in and help their clients stick with their investment plan, even when emotions might be driving them to do something.
We all like to think we make sensible decisions, but the truth is that no one is quite as rational as they believe. This becomes especially true in times like these, when we find ourselves faced with extreme and prolonged uncertainty.
While much of the world's focus was on caring for friends and family when the pandemic first took hold, for advisers, the continued stock market volatility was - and still is - a challenge, with clients understandably concerned about the value of their portfolio and long-term financial outlook.
And in times of trouble, humans are more susceptible to emotional decisions, which makes the risk of potentially dangerous knee-jerk reactions that bit higher.
Renowned psychologists Daniel Kahneman and Richard Thaler both won the Nobel Prize for Economics in recent years for demonstrating how humans are prone to biased decision-making. This increased focus on ‘behavioural finance' has seen financial advisers and planners sometimes taking on a new role of mentor or counsellor to their clients.
While we remain in these challenging times, there are four common biases advisers can look out for based on these theories.
Loss Aversion
Experts have said that humans feel the psychological pain of losing around twice as powerfully as the pleasure of gaining. It's easy to see how this relates in a financial context.
When making investment decisions, people are more likely to focus on risks over potential gains. Individuals may be unwilling to make financial decisions that represent loss, such as selling an investment that has fallen below the price at which it was purchased, even though the decision itself may be the best option.
In times like now, when there has been a loss of value, the aim for advisers is to continue keeping clients focussed on the bigger picture. Remind them that the risk profile was considered tolerable at the time of the initial investment and that downturns were built into the financial plan.
The Semmelweis Reflex
Back in the 1800s, Hungarian physician Ignaz Semmelweis observed that ‘childbed fever' could essentially be eliminated if doctors washed their hands before they assisted with childbirth.
Semmelweis expected a revolution in hospital hygiene because of his findings, but it wasn't to be. This is because his hypothesis - that there was one cause of disease that could be easily prevented - ran counter to the prevailing medical ideology, which insisted that diseases had multiple causes.
As fitting an analogy as this may seem, in investment terms, it means clients might often reject new information because it contradicts their own established beliefs. For example, someone might believe that a certain percentage of their assets must be in cash, based on their age, for no other reason than that they have always believed it.
The role of an adviser is to provide clear evidence to clients and challenge existing views and beliefs. Explain why doing things differently can be advantageous and show them the benefits of new ways of thinking.
Overconfidence
When faced with a tricky situation, humans have a tendency towards ‘fight or flight'. From an investor perspective, those who choose to ‘fight' are likely to be those who are highly-engaged, glued to market updates and might ask for regular changes to their portfolio.
Any good financial adviser knows that their job is to encourage against this chopping and changing. Keep reminding them that there is a financial plan in place designed to take periods of volatility into account, and counsel against checking portfolio values all the time.
Familiarity
A familiarity bias occurs when a client only wants to invest in assets they know well. They might only want to consider FTSE shares, for example, and shy away from other assets that could drive returns, such as international shares.
One way to tackle this would be to demonstrate that a portfolio of international stocks is full of companies that clients may be familiar with. In this instance, you might look to show them that, by choosing international shares, they would be investing in companies such as Apple and Facebook, which may help to reduce anxiety.
Familiarity can also be built into your client experience. Simple touches like adding a photo to an email signature can help make clients feel more familiar with you, which in turn can help reduce any anxiety associated with using an adviser.
Those advisers who understand the workings of these theories will be able to step in and help their clients stick with their investment plan, even when emotions might be driving them to do something that may steer them away from their long-term goals.
3 Financial Lessons To Teach Young Adults Before They Go To University
Young adults planning to head to university this year have faced more challenges than usual thanks to COVID-19. Yet, come September, thousands will still be heading to university and, for some, that will mean independence for the first time. It's important that students are given some financial lessons.
Questions remain over how universities will tackle social distancing restrictions when it comes to lectures, seminars and accessing resources like the library. However, if your child or grandchild is moving away from home to attend university, they’ll need to take control of their finances no matter how courses are structured. If they haven’t had to pay things like rent or manage day-to-day outgoings before, it can be a steep learning curve.
It’s not surprising that taking control of finances can be a daunting prospect. In fact, 79% of students worry about making ends meet. In line with this, 77% stated they wish they’d had a better financial education before starting university. Luckily, there are some things you can teach them to help them manage their finances better as they strike out on their own.
- How to create a budget
First, is how to put together a budget and why it’s important.
For many first-year students, university life will be the first time they have to handle bills and all their day-to-day expenses. A budget can help keep them on track. It’s particularly important because of how student loans and grants are paid. Students will receive a lump sum at the start of each term, as a result, the money needs to last several months before the next instalment arrives.
Suddenly having a large amount in your account, certainly makes it tempting to splash the cash. However, it’s a step that could leave them short for the rest of the term. Going through what they’ll need to pay for each week or month can help manage how their income is spent, there may be some expenses they hadn’t previously considered too. Taking out one-off costs and committed spending can help create a weekly disposable income that they can enjoy.
The good news is that student accommodation is often paid termly too and includes bills, so you don’t have to worry about them missing rent payments.
- How overdrafts work
Student overdrafts are incredibly popular. These are typically interest-free while the student is still in education. Often the limit will increase each term or academic year. For instance, starting at £1,000 and reaching £3,000 in their third year. Some accounts will come with additional freebies that can be valuable, such as a free railcard.
An overdraft can be a useful way to manage finances throughout university. However, research from the Money Advice Service suggests it’s still an area where students could benefit from some guidance. Four in ten admitted they had gone over their overdraft limit or used an authorised overdraft, potentially leaving them facing hefty penalties.
With an overdraft, it can be easy to see the funds available as free money, rather than a source to fall back on occasionally. Managing an overdraft effectively goes back to budgeting.
It’s also important to look ahead to after they graduate, and interest starts being added to the overdraft. Keeping in mind that it will need to be paid back at some point can help students rein in their spending on non-essential items.
Some banks will offer an extended 0% interest period, where the overdraft limit will gradually reduce, helping new graduates slowly pay back what they owe. When opening a student account, it’s worth seeing if this is offered and what the eventual interest rate could be as a result.
- What to consider before using a credit card
In addition to overdrafts, students may find they’re offered a credit card for the first time too.
The good news is that not many students would turn to a credit card if they needed money. However, for the 14% that would, it’s important they understand how a credit card works and the potential negative effects to consider. Forgetting to make a payment or spending more than they can afford to pay back could leave them struggling financially for years to come.
The Money Advice Service research found that in 2018, 176,000 students had fallen back on, or missed payments on bills or credit cards for three months or more. It’s a mistake that could harm their credit rating, making securing loans, a mortgage, or other forms of credit far harder in the future.
Having an honest conversation about credit card interest rates and what a credit score means for their future, can help students understand why alternatives may be a better solution for them. Of course, there are times when a credit card is useful, but having a plan to pay it back is essential too.
Supporting students through university
There are plenty more financial lessons to pass on to young adults before they head to university and after they graduate. Making it clear you’re there to talk about financial concerns they may have and offer advice when they need it, can help create a positive attitude towards their finances.
Completing a degree can be expensive and you may want to offer financial support to your child along the way. Whether you hope to provide regular financial support or cover one-off costs, we’re here to help. From understanding what’s affordable to which assets are most appropriate to use, please contact us to discuss how you can help children or grandchildren as they head off to university.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
5 Ways The Chancellor Could Recoup The Cost Of COVID-19
While the health concerns of the COVID-19 pandemic remain, some of the focus is now shifting to the economic impact. Measures taken to reduce the spread of infection and save jobs have cost the Government a huge amount that will need to be recouped in some way. The final COVID-19 bill is impossible to estimate, we don’t know how things will change over the coming months. However, the Office for Budget Responsibility estimates the cost for the current tax year is likely to be more than £300 billion. The Government was expecting to borrow around £55 billion for the whole of 2020/21. But in the first two months of the tax year alone, it has borrowed £100 billion to cover the costs of the scheme implemented due to the pandemic.
Chancellor Rishi Sunak was appointed Chancellor in February this year. He’s already delivered a delayed Budget in March, as the pandemic was starting to take hold in the UK, followed by the Summer Statement in July. Both have focused on protecting people and the economy as COVID-19 spread. As the Autumn Budget is now approaching, his attention may be turning to how some of the costs can be recovered.
While nothing has been formally announced yet, speculation is mounting that some allowances will be reduced, some of which may affect you:
- Capital Gains Tax
Speculation that changes to Capital Gains Tax (CGT) will come in are rife after the Chancellor commissioned The Office of Tax Simplification to investigate if it’s “fit for purpose”. Compared to previous levels of CGT, the current rates are relatively low. This provides plenty of scope for allowances to be reduced or rates to rise.
CGT is paid on the profit when you sell certain assets. This may include a property that isn’t your main home, personal possessions worth more than £6,000 (excluding your car), investments not held in an ISA, and business assets.
Individuals have an annual exemption of £12,300 per tax year. Profit beyond this allowance is taxed. Basic rate taxpayers have a CGT rate of 10%, this rises to 20% for higher and additional rate taxpayers. Where the profit is made on property, an additional 8% tax is added for all Income Tax bands.
- Pension tax relief
A change in pension tax relief hasn’t been mentioned by Rishi Sunak yet. However, his predecessor Sajid Javid has called on the Government to reduce the amount of tax relief paid to high earners. It could now be something the current Chancellor is exploring too.
Assuming you don’t exceed your annual pension allowance, you receive tax relief at the highest level of Income Tax you pay. As a result, higher and additional rate taxpayers receive far more through this incentive. The Pensions Policy Institute found workers earning less than £50,000 made up 83% of taxpayers, but they received less than a quarter of pension tax relief paid.
A change to pension tax relief is likely to make it ‘fairer’ by offering a flat-rate tax relief for all pension savers.
- Pension triple lock
The pension triple lock guarantees that the State Pension will rise every year in line with either inflation, average wage growth or a minimum of 2.5%. It helps to protect spending power among pensioners. Maintaining the triple lock was a manifesto pledge, but some signs are pointing towards changes in the future.
The Chancellor told the Treasury Committee that it would be appropriate for the government to look at the triple lock at the “right time”. There are concerns that a spike in wages would make the guarantee to pensioners unaffordable in the coming years.
- Pension tax-free lump sum
Currently, when you access your pension, which is available from the age of 55, you can withdraw 25% of the money tax-free. Any further withdrawals are subject to Income Tax, the same way your salary or other sources of income may be.
The tax-free lump sum has proved a popular option among retirees and it’s a decision that’s likely to be unpopular with those approaching their retirement date. Reducing the tax-free lump sum to 20% could add £1.8 billion of extra revenue, the IFS has suggested, making it an attractive option for the Chancellor.
- Inheritance Tax
Again, any changes to Inheritance Tax rules would prove unpopular but there have been growing calls to reform the system to make it fairer and simpler.
At the moment, individuals can take advantage of two allowances when leaving wealth to loved ones. The nil-rate band is currently £325,000, with no Inheritance Tax due if your estate is below this figure. Those passing on their main home to children or grandchildren can also use the residence nil-rate band, currently set at £175,000. Unused allowance can be passed on to a surviving spouse or civil partner. In effect, this means couples can leave up to £1 million without worrying about Inheritance Tax.
Reducing the allowances or scrapping the additional residence nil-rate band could help raise tax revenue.
Rishi Sunak has some decisions to face before the Autumn Budget, and it’s likely some allowances will be affected. It may be appropriate to change plans when these are announced, but you shouldn’t act on speculation. If or when things change, we’ll be here to help you.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might have read in this article. All contents are based on our understanding of HMRC legislation which is subject to change.
Could Family Income Benefit Insurance Be Right For You?
When we plan for the future, it’s also important to think about the unexpected things that might happen. No one wants to think about passing away before their time but doing so can enable you to take steps to secure your family’s future if needed. One option that is worth considering is family income benefit insurance.
What is family income benefit insurance?
Family income benefit insurance is a type of Life Insurance policy that would pay out to your loved ones left behind if you passed away during the term. It would pay a regular income for a set period of time.
It’s a policy that can provide peace of mind if your family rely on your income to pay ongoing costs. A lump sum can be useful but if it’s to last for an extended period, it can involve a lot of budgeting and potentially the need to invest it, placing the capital at risk. The reassurance of a regular income can provide financial support to loved ones when they need it most.
As with other types of financial protection products, you’ll need to pay regular premiums during the term. How much these premiums are will depend on a range of factors, including the level of cover you want and policy term, as well as your health and lifestyle.
It is possible to take out a joint policy, providing protection if either you or your partner passes away. You also have the option to link the income paid out to inflation. This would mean higher premiums but ensure spending power is maintained.
What to consider before choosing a family income benefit policy?
If you think family income benefit insurance is appropriate for your priorities, there are two key things to think about when selecting a policy.
- How much income would your family need?
Understanding how much income your family would need to maintain their lifestyle is important. This should cover the essentials and you may also want to factor in some discretionary spending too.
You should start with the income you need now, but keep in mind that this figure can change if you were to pass away. For instance, you may have other policies or assets that would allow your family to pay off the mortgage, significantly reducing outgoings. On the other hand, if additional childcare would be needed, their expenses may start to rise.
Family income benefit insurance is designed to help your family keep on top of finances at a time when they’re grieving, so it’s important that the income delivered would be enough.
- How long would the income be needed?
Policies offer various terms too, so you need to consider how long they’d need an income for to maintain financial security. This will depend on your priorities and the overall circumstances of your family. If your partner is reliant on you for income, you may want to ensure a regular payment is made until they’d reach retirement age, or if you have young children, you may link the length of the policy to your youngest completing education.
Traditional Life Insurance or family income benefit?
Life insurance is a commonly chosen type of financial protection that can provide security for loved ones should you pass away too. However, there can be times when both types of protection can add value to your financial plans.
Life Insurance will pay out a one-off lump sum on your death should you pass away during the term of the policy. It can provide your family with a significant amount to pay higher expenses. This may include paying off the mortgage or other forms of debt or ensuring school fees are paid for until children reach adulthood. It can help your partner ensure the big outgoings are minimised.
However, a Life Insurance policy may not cover the day-to-day expenses in the long term, such as utility bills or children’s clothing.
This is where a family income benefit insurance policy can complement existing Life Insurance. It’s a step that can give your loved ones the safety net they need to grieve without having to worry about day-to-day costs or taking on additional work.
It’s important that all financial protection policies are considered with your priorities in mind. Please contact us to discuss if family income benefit insurance should be part of your financial plan or if there are alternative solutions that would be more appropriate.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
What Should You Check When Reviewing Your Pension?
Have you reviewed your pension lately? Even though we make regular contributions to pensions, it’s not often something we think about until retirement is approaching. However, keeping track of progress during our working lives is important too.
Figures show that pension savers have been using their time in lockdown to get to grips with their retirement pots. Some 37% of pension savers, the equivalent of seven million people, have taken action relating to their pension in the last few months. One in seven admitted that the lockdown has prompted them to think about their pensions more.
So, if it’s been a while since you looked at how your pension is growing, now could be the perfect time. But what should you focus on? These seven areas are a good place to start.
- The total value of your pension
The headline figure is probably what draws your attention when you look at your pension, and it’s something you should keep an eye on. Yet, it’s a task just 15% have done during lockdown.
Keeping track of the value of your pension can help you understand whether you’re on target to meet goals and give an overview of how investments perform. The current value alone doesn’t provide you with all the information that you need, which is where the forecast comes in.
- Check your pension forecast
It can be difficult to understand how the value of your pension now will affect your retirement. Pension providers will offer a forecast, indicating how your savings are likely to grow over time. Keep in mind, this isn’t guaranteed, but it can be a useful base to work from.
With a forecasted lump sum, you’re in a better position to understand the lifestyle your savings will afford you. A financial planner can help put this into the context of your goals, such as the annual income it will deliver.
- Act if you have a pension gap
Acting if you find there is a gap between your pension forecast and the amount you need to meet aspirations can help set you on the right track. The sooner you act, the easier it is to close the gap or seek alternative solutions. Even a small contribution increase can have a big impact if it’s taken early in your career thanks to the compounding effect.
The figures found 5% of pension savers have increased their contributions during lockdown. It’s a step that could make your future more financially secure.
- Understand where your pension contributions are coming from
Every month, you’ll probably see a portion of your salary go into your pension. But it’s likely you benefit from other contributions too. Understanding the impact these have on your overall savings can help to highlight why adding to your pot is important.
First, if you’re employed, your employer will need to make contributions on your behalf. An employer must contribute 3% of your pensionable earnings. Second, the Government also provides tax relief on the contributions you make. Tax relief is set at the highest rate of Income Tax you pay.
In both these cases, your pension is effectively benefitting from ‘free money’ when you contribute.
- How your pension savings are invested
How a pension is invested is often overlooked. But it’s an important part of managing your retirement savings and making the most out of contributions.
When you first start saving into a pension, your money will be invested in the default fund. However, pension providers will offer alternatives. These will often include a variety of risk profiles or the option to select an ethical investment fund. As with when you’re investing outside of a portfolio, you should consider your goals, investment time frame and capacity for risk.
Just 8% of people have checked where their pension is invested during lockdown. However, 5% have made a change to their pension investments, indicating that for many the default fund may not be the right option.
- Your pension age
A pension provider will make an assumption about when you plan to retire, usually linked to the State Pension age. If you plan to retire earlier or continue working past this age, you should update your profile.
How your pension is invested may be affected by your retirement date. For instance, many pension providers will move savings to a lower-risk investment fund as your retirement date draws near to reduce the risk of volatility significantly affecting value. If your retirement date is wrong, this may not align with your plans.
- Check if your employer offers additional pension incentives
Your employer may offer additional incentives to encourage you to save more into a pension. These can prove valuable and help your retirement savings grow faster.
Some employers will match your contributions up to a certain level. In this case, increasing your own contributions would mean you receive even more ‘free money’. A salary sacrifice scheme may also be an option that’s available to you.
Please get in touch if you’d like to discuss your pension and what it means for retirement. The research found 38% of people lack confidence in their financial situation, our goal is to help you feel secure about your future.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by interest rates at the time you take your benefits.
The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.
Planning for a 100-Year Life
When you think about your lifestyle goals and financial plan, how far ahead do you look? It wasn’t so long ago that planning to reach 80 meant you could be sure of financial security throughout your life. But now, it’s becoming increasingly common to celebrate your 100th birthday, bringing new challenges to planning.
Just a century ago, 1% of babies born were expected to live to 100. As healthcare and a range of other factors improved, life expectancy has increased too. If you’re a female aged 60, there’s a 12.3% chance of turning 100, for 60-year-old men it's 8.1%. If you’re 40 the chance of reaching 100 is even greater, at 18.7% and 13.3% for men and women respectively.
While improving health conditions are certainly positive, living longer lives means we need to change lifestyle too.
Changing lifestyles
When you think about preparing to live longer, it may be money that springs to mind first. After all, a longer life means you’ll need to establish financial security that will last longer, probably with a longer time spent in retirement. But as with all financial plans, your goals and lifestyle should remain at the centre.
Previously, life was broadly split into three stages of education, working and retirement. We’re already seeing these stages change. It’s now far more common to find people transitioning into retirement, spending time on education in later years, or going back to work in some form after retiring.
You might be able to retire at 65, but would you want to spend 35 years in retirement? For some, this sounds ideal, but for others, it’s a long time not to work in some way, whether that’s through traditional employment or starting their own business.
Planning for a 100-year life should start with thinking about how you’d like your life to look.
- What are your goals at 60, 70 and beyond?
- When would you like to retire, and would you prefer to transition into retirement?
- What makes you fulfilled?
- What are your priorities now, do you expect them to change?
Of course, these lifestyle goals aren’t set in stone. In fact, regularly reviewing them and seeing if they still align with your aspirations and circumstances is important. But having an idea of what you’d like to achieve can provide direction and confidence.
Longer lives mean rethinking traditional lifestyle models, it’s a chance to think about what you want.
Managing your finances for 100 years
While goals and lifestyle aspirations are essential, we can’t ignore the fact that finance plays an important role in achieving this. Planning for a 100-year life presents new challenges.
It can be difficult to understand how personal wealth will change over a 10-year period as you need to factor in a range of areas, from investment performance to inflation. When looking at a 100-year life, you may be considering these factors over several decades, making it even harder to gauge how wealth can change and what’s sustainable.
This is where financial planning can help. Using a range of tools, we can help you bring together lifestyle aspirations with your current financial situation. It’s a step that can help you understand how your wealth will change depending on the decisions you make, whether that’s contributing more to your pension for a longer retirement or using a lump sum to tick something off your bucket list.
As we live longer, finances naturally need to stretch further and can become more complicated, and financial planning becomes even more important.
Planning for the next generation
As you consider life expectancy and financial planning, you may be considering what you’ll leave behind for loved ones.
Considering how our finances would hold up during a 100-year life is important for us all as it becomes more common. But it’s even more crucial when helping the next generation plan. One in three children born today will live to see their 100th birthday. It won’t become a rare milestone, but the norm. As a result, planning for a 100-year life needs to become the norm too.
You may be in a position to help children and grandchildren, whether it’s passing on knowledge or making regular pension contributions on behalf of a child. Small steps taken in the early years can help create a solid foundation that can be built-on, including learning positive money habits.
As you set out your own financial plan, this should include the inheritance you intend to leave behind. It can help you understand how loved ones will benefit and ensure the necessary steps are taken, such as writing a will or reducing Inheritance Tax liability. It’s a step that ensures your wishes are carried out and can help loved ones prepare for longer lives too.
If you’d like to discuss how your wealth will change over time, please get in touch.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the time you take your benefits.
The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
5 Ways You Can Reduce Tax Liability In Retirement
When you retire, there are a lot of financial decisions that need to be made as you start accessing the savings and investments you’ve built up. It’s natural to have lots of questions about your financial security at this point, such as:
- How much income will I receive from my pension?
- How long will my savings last for?
- How should I access my pension?
But one important question is often overlooked: How much tax will I pay?
How and when you access your pension, savings and investments can have an impact on your tax liability. Planning your retirement income with tax in mind can help reduce the amount of tax you pay, helping your savings go further. It should be one of the areas you consider as you approach retirement and that financial planning can help you understand with your circumstances in mind.
In some cases, it’s possible to create a tax-free retirement income or reduce liability greatly. So, what should you consider when assessing retirement income?
- The Personal Allowance
The Personal Allowance is the amount of income you’re entitled to receive tax-free each year. For the 2020/21 tax year, the Personal Allowance is £12,500 for the majority of people. As a result, it’s important for planning your retirement income.
The Personal Allowance covers all forms of income, including your State Pension and income from investments, for example. Once you factor in all income sources in retirement, the total will likely exceed the Personal Allowance, but it provides a base for building a tax-efficient income. As the allowance resets with each tax year, spreading out or delaying taking an income at times can help you fully make use of the tax benefit.
It’s worth noting that if you’re married or in a civil partnership, the marriage allowance allows one person to transfer up to £1,250 of their Personal Allowance to their partner too.
- Pension withdrawal tax-free allowance
If you’ve been paying into a Defined Contribution pension during your working life, it will usually become accessible when you turn 55. This includes 25% available to withdraw tax-free. You can choose to take a 25% lump sum, tax-free, when you first access your pension, or you can spread the tax-free benefit over multiple withdrawals.
How and when you access your pension can have an impact on your income and lifestyle for the rest of your life. So, it’s important to understand the long-term impact of taking the tax-free lump sum.
- Withdrawing from ISAs
ISAs (Individual Savings Accounts) offer a tax-efficient way to save and invest. Each tax year, adults can add up to £20,000 to ISAs, either contributing to a single account or spreading it over several. Through an ISA you can either save in cash, earning interest, or invest to hopefully deliver returns. The key benefit of ISAs is that interest or returns earned aren’t taxed.
As a result, you can make ISA withdrawals to supplement your pension income and other sources in retirement without increasing your tax liability.
- Capital Gains Tax allowance
Selling certain assets for profit can result in Capital Gains Tax, this includes personal possessions worth more than £6,000 (excluding your car), a second home, and shares that aren’t held in an ISA or PEP (Personal Equity Plan).
However, there is an annual Capital Gains tax-free allowance, for individuals it is £12,300. In retirement, this can be a useful way to increase your tax-free income. It’s important to understand your assets, their value and how they can create an income.
- Dividend Allowance
If you’re invested in companies that pay a dividend, the Dividend Allowance can boost your income without affecting the amount of tax you need to pay. This is on top of any dividend income that falls within your Personal Allowance.
For the 2020/21 tax year, the dividend allowance is £2,000. Carefully planning your investments and expected dividend allowance can help you boost your retirement income by £2,000 without facing additional tax charges.
If your dividend income exceeds the allowance, you will need to pay tax. The tax rate is linked to your tax band and may be as high as 38.1% if you’re an additional rate taxpayer.
Depending on your circumstances and goals, there may be other allowances and reliefs you can take advantage of too. Using a combination of saving products, such as personal pensions, stocks and shares ISAs and general saving accounts, it may be possible to achieve the retirement income you want while reducing tax liability. Whether you’re nearing retirement or are already retired, it’s worth considering how much tax you’ll pay and whether there are allowances that apply to your situation.
Planning for taxation changes
While the above information is accurate for the moment, allowances, levels of taxation and reliefs do change. As a result, it’s important that your retirement plan and income are reviewed at regular points. This allows you to take advantage of any changes and adjust how and when you take your income if necessary. If you’d like to discuss your tax liability during retirement, please get in touch.
Please note: The Financial Conduct Authority does not regulate tax planning.
Junior ISAs: Everything You Need To Know About Saving For Children
Building a nest egg for a child can help set them on the path to a financially secure future and highlight why saving is important. One of the most popular ways to save for a child or grandchild is using a Junior Individual Savings Account (JISA). During 2017/18, money was added to over 900,000 JISAs.
Money held in a JISA isn’t accessible until the child turns 18, making it an excellent way to save for the milestones they’ll reach in early adulthood. You may choose to save with the hope that it will be used to fund further education, learn to drive or get on the property ladder. Having a lump sum to use can make it easier for children to achieve goals and create a secure foundation as they become independent.
JISAs: The basics
JISAs operate in much the same way as adult ISAs do.
You can use a JISAs to save in cash, earning interest on deposits, or to invest and hopefully deliver returns over the long term. JISAs are also a tax-efficient way to save, interest or returns earned are tax-free.
One area where the JISA does differ is the subscription limit, the amount you can deposit each tax year. In this year’s budget, Chancellor Rishi Sunak significantly increased the JISA subscription limit from £4,368 in 2019/20 to £9,000 in 2020/21. The new limit means parents and grandparents can build a substantial nest egg for children.
The JISA annual allowance can’t be carried forward and if it’s not used during the tax year, it’s lost.
A parent or legal guardian must open a JISA on the child’s behalf, however, other family and friends can then contribute as long as the annual limit isn’t exceeded.
The money placed within a JISA belongs to the child and can’t be withdrawn until they’re 18, apart from in exceptional circumstances. However, when the child reaches 16, they will be able to manage the account, for example, transferring to a different provider to achieve a better interest rate.
If you’re considering opening a JISA on behalf of a child, one of the first things to do is to decide between a cash account and a stocks and shares account.
Cash JISA vs Stocks and Shares JISA
As with adult ISAs, you have two key options when saving through a JISA: cash or invest.
Both options have pros and cons, which one is right for you will depend on goals and time frame.
Cash JISA: The money deposited within a Cash JISA is secure and operates in a similar way to a traditional savings account. Assuming you stay within the limits of the Financial Services Compensation Scheme (FSCS), the money would be protected even if the bank or building society failed. The deposits within a JISA will then benefit from interest, helping savings grow. While JISA interest rates are typically more competitive than the adult counterparts, you still need to consider inflation. When interest rates don’t keep pace with inflation, savings lose value in real terms, reducing spending power. Over several years the impact can be significant.
Stocks and Shares JISA: Rather than earning interest, the money deposited within a Stocks and Shares JISA is invested with the aim of delivering returns. The key benefit is that it offers an opportunity to create higher returns than interest would offer. However, all investments involve some level of risk and in the shortterm, it’s likely volatility will be experienced at some points. This means the value of savings can fall based on the performance of investments. However, historically, investments have delivered returns over a long-term time frame.
So, which option should you pick?
How you feel about investment risk should play a role in choosing between a Cash JISA and a Stocks and Shares JISA. However, the time frame is also important. Typically, you shouldn’t invest with a short time frame (less than five years) as this places you at a higher risk of being affected by short-term volatility. In contrast, longer time frames give you a chance to smooth out the peaks and troughs of investment markets.
If you’re unsure whether building a nest egg through cash or investing is right for you, please get in touch.
You don’t have to choose between a Cash JISA and a Stocks and Shares JISA either. If your goals mean you want a mix of cash savings and investments when building a nest egg, it is possible to open both types of JISA in your child’s name. The total contributions to JISAs must not exceed the annual subscription limit.
If you’d like to start saving for your child or grandchild, please contact us. Whether you want to invest through a JISA or discuss alternative options, we’re here to help you create a plan that meets your goals.
Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
What Would Negative Interest Rates Mean?
With interest rates at an all-time low and the economy facing uncertainty, you may have read headlines about whether negative interest rates are the next step. But what would that mean in practice and is it an option that would really be considered in the UK?
Ever since the 2008 financial crisis, interest rates have been low. Earlier this year, there were suggestions that the Bank of England would gradually start to increase its Base rate as the economy continued to recover. However, the Covid-19 pandemic has changed that. In March, the central bank decided to cut the interest rate twice in a month.
Lowering interest rates is one of the tools central banks around the world use to stimulate economic growth as it lowers the cost of borrowing. With coronavirus disrupting normal business practices, the Bank of England first cut its base rate from 0.75% to 0.25% on 11th March 2020 and then slashed it again to 0.1% on the 19th March 2020, the lowest it’s ever been.
With the interest rate hovering just above zero, the possibility of negative interest rates is rising.
How would negative interest rates affect you?
You can split the impact of negative interest rates into two areas depending on whether you’re saving or borrowing.
Let’s start with saving.
Usually, when saving, you’d earn interest on the deposits. For example, with £1,000 in a savings account earning 3%, you’d receive £30 after a full year. If the interest rate is negative at -3%, you’d instead owe the bank £30, in effect paying to save your money.
Once you factor in the impact of inflation on your spending power, savings can quickly become eroded if interest rates are below zero. While using a savings account is still important in some cases, such as holding your emergency fund, it may mean that alternatives should be considered to get the most out of your money, such as investing.
Moving on to borrowing, in theory, negative interest rates are good news.
The cost of borrowing should reduce as interest rates fall. Using a mortgage as an example, you’d still need to make repayments, however, with a negative interest rate, the outstanding amount is reduced each month by more than what you’ve paid. It can reduce debt quicker. However, it’s worth noting that some mortgages have a ‘floor’ interest rate that it won’t go below.
Negative interest rates: From Europe to Japan
While negative interest rates have never been implemented by the Bank of England they have been used elsewhere.
Sweden’s central bank cut interest rates to -0.25% in July 2009, in the wake of the financial crisis. Since then it’s been used by other European banks too, including the European Central Bank which covers the 19 countries that have adopted the euro, as well as Japan.
There are a variety of reasons why negative interest rates are used. However, during times of recession or economic hardship, people and businesses tend to hold on to their cash, waiting for the economy to improve. A lack of spending by businesses and individuals can weaken the economy further. As a result, negative interest rates can be used to encourage people to spend and drive the economy forward, though there are risks associated with the practice too.
While negative interest rates have been used before, they are by no means the norm and are still considered unconventional.
So, are negative interest rates coming to the UK?
It’s impossible to say for certain and much of the decision will depend on how the economy and businesses respond over the coming months. When asked about the potential for negative interest rates to be introduced in May during a Treasury Select Committee, the Bank of England’s Governor, Andrew Bailey said negative interest rates were under ‘active review’.
Bailey added: “We do not rule things out as a matter of principle. That would be a foolish thing to do. But can I then follow that up by saying that doesn’t mean we rule things in.”
As always, it’s important to keep an eye on your financial plan with current conditions in mind. However, responding to speculation should be avoided. Instead, if you’re concerned about the introduction of negative interest rates, keep in mind that your financial plan has been built with your goals at the centre. There may be a time when negative interest rates are announced and we’re here to help you assess your financial plan if this should happen. Please get in touch if you have any questions.
Please note: The value of your investment can go down as well as up and you may not get back the full amount your invested. Past performance is not a reliable indicator of future performance.