Bank Of England Base Rate: Why Does It Matter To You?
When it changes, the Bank of England base rate is something that's featured heavily in the news. But why is it important and when does it matter to you?
The base rate is the interest rate that the Bank of England sets, in turn, it affects the interest rates that banks, building societies and other financial services offer. The base rate changes depending on economic conditions and influences the way consumers behave:
- Low interest rates mean that borrowing is more affordable, encouraging consumers to spend more. When interest rates are low, we're more likely to consider buying a car using finance or take out a larger mortgage
- In contrast, high interest rates mean you'll earn more on savings and pay more when borrowing. As a result, it encourages people to save rather than spend
The Bank of England's monetary policy committee sets the base rate, with members voting to leave base rates as they are or change them.
How Has The Base Rate Changed Over Time?
In recent times, we've become used to low-interest rates, but this hasn't always been the case.
The current Bank of England base rate is 0.75%. It's been low for over a decade, following the 2008 financial crisis. In April 2008 the base rate was 5%. However, this was slashed several times over the course of a year in an effort to improve the economy and encourage consumers to spend and support businesses. In August 2016, it was cut even further, to 0.25%, taking it to a historic low. Over the last two years, it has increased but at a very slow pace.
Whilst we've experienced low interest rates for over a decade, this isn't the historic norm.
During the late 80s, the base rate was far higher. In fact, the interest rate reached 15% in 1989. There are many factors that led to this decision but one of the key reasons was that it was seen as a way to reduce inflation.
The current interest rate and that of the late 80s are extremes. Looking at the historical average, interest rates have usually fallen between 4% and 6%.
But how will the Bank of England base rate change in the future? It's impossible to say with certainty, but economic turbulence caused by ongoing Brexit uncertainty could mean that interest rates will fall even further; good news for borrowers but bad news for savers.
At the last monetary policy committee meeting in November, the base rate was held. However, it was the first time since June 2018 that this wasn't a unanimous decision. It could signal that the base rate will be cut further if the UK leaves the EU in a bid to support the economy.
The Impact On Your Finances
The base rate set by the Bank of England affects the interest rate commercial banks will lend money. It's used as a benchmark when lending to businesses and individuals.
Saving
You've no doubt noticed that savings have been benefitting from poorer interest rates over the last decade. If, since the financial crisis, you've been a saver rather than a borrower, you're probably worse off.
For much of the last decade cash savings are likely to have grown by only small amounts. In fact, once you factor in inflation, your savings have probably declined in real terms. This means the spending power of your savings has been reduced.
In the past, cash savings may have offered you a way to grow your wealth safely over the long term. But lower interest rates may now mean it's more appropriate to invest in order to outpace inflation.
Borrowing
In contrast, borrowers have benefitted from the low interest environment. It's cheaper than ever before to borrow money. The interest rates for credit cards, loans and other forms of borrowing are competitive.
One of the areas you may have noticed this in is your mortgage. Our mortgage is often the largest loan we'll ever take out and interest payments can be significant. If you had a tracker mortgage, which tracks the Bank of England base rate, at the time of the financial crisis, you'll have noticed minimum payments fell.
Lower interest rates make borrowing more affordable. They also present the opportunity to overpay and reduce debt quicker, whilst paying less interest.
The Bank of England base rate may affect the best way to use your money. At some point, it's wise to quickly pay off debt but in others, it can be more prudent to save or invest your capital. If you'd like to discuss how to get the most out of your wealth in the current low interest environment, please contact us.
7 Things That Could Slow Down Buying A Property
Buying a property can be a slow and frustrating process at times. Understanding when these obstacles might occur could help you minimise them and speed the process up.
Buying a property can feel like a marathon. If you're hoping to move in quickly it can seem as though everything moves incredibly slowly, from waiting for a mortgage to be approved to hearing back from solicitors. However, being prepared and knowing what can slow down a potential sale may help you keep everything moving along smoothly.
There is no guaranteed time to complete the process of buying a house. According to research, the average aspiring home-buyer will need six months and 24 days to purchase a property. This figure starts with viewing the house online, right through to that moment when you get the keys. By far the lengthiest process is exchanging contracts, which took an average of five months and 10 days after an offer was made.
There are many reasons why a house purchase may be slowed down, including these seven:
1. The seller's circumstances
With the house buying process taking months, circumstances can change significantly. Your seller may change their mind about selling the property or decide to delay for a range of reasons. If this does happen, it can be bitterly disappointing. But more than that you might be left out of pocket too. If you've already spent money on conveyancing and local searches, you're unlikely to be able to get this back.
2. Conveyancing delays
This is often a frustration among home-buyers. You've found the house you want to purchase but it seems as though your solicitor is impossible to get hold of or moving far slower than you'd like. There can be a lot of back and forth between your solicitor and that of the seller's that goes on behind the scenes. But if you're not being kept informed, it can seem as though nothing is happening at all. Take care when choosing your solicitor and do a little research. Asking family and friends for recommendations is a good option. Alternatively, a quick search online should bring up reviews.
3. Local searches
The local searches make up part of the conveyancing process but will involve your local authority. These searches aim to reveal potential issues that could affect the property in the future. This could include planning permission or environmental restrictions. How long these take will depend on your local council and activity in the market. Typically, you can expect local searches within a couple of weeks. However, if many applications have been made and there's a backlog, expect this to take longer. There's little you can do in this situation other than wait.
4. Securing a mortgage
If you're taking out a mortgage, it can take several weeks to be approved even in straightforward circumstances. However, this is one area that you have greater control over. Before you start searching for a home, make sure you're mortgage ready. This means checking your credit score and getting the appropriate paperwork in order. Usually, you'll need to provide the last three months of payslips and bank statements.
You should also carefully choose a lender based on their likelihood of approving your application. If you have a good credit rating and typical employment this isn't usually a problem. However, if your credit score is poor or you're self-employed, for example, it can be more difficult. A mortgage broker can help you go through the process more smoothly and handle any issues that come up. If you'd like support with your mortgage application, please contact us.
5. Broken chains
A chain breaking down is one of the most common reasons for a house purchase to take longer than expected. You might be ready to move, but what about your seller? And your seller's seller? The longer the chain is, the more likely that the chain will collapse, or you encounter delays. Unfortunately, there's little you can do in this situation other than patiently wait if you've fallen in love with a house that's in a chain. Keeping in contact with your conveyancer so you know how things are progressing can ease the feeling that nothing is happening.
6. Leasehold property
Are you thinking of buying a leasehold property? Then expect the entire process to take a little longer. Your solicitor will need to review the leasehold for a start. This can lead to questions about covenants and areas like maintenance charges. Whilst a delay is annoying, it's best to be absolutely clear about your responsibilities and restrictions. You may also find that a mortgage lender won't release funds until they've clarified Land Registry records, which can add another few weeks to the entire process.
7. Other offers are made
In England, there's nothing to stop other prospective buyers putting in an offer even if you're quite far into the process; this can happen right up to exchanging contracts. Known as gazumping, someone putting in a higher offer may mean you have to renegotiate the sale prices if you're certain you want the property or walk away and start looking all over again.
If you're hoping to speed up the house buying process, having your finances in order can help. Whether you're applying for a mortgage or a cash buyer, being prepared can get things going. To discuss your needs, please get in touch.
Financial Bias: How Caution Could Be Affecting Your Future
Research has highlighted how being cautious with pension investment can be as damaging as taking too much risk. In some cases, a cautious approach is appropriate. But, in others, it'll be the result of subconscious financial bias affecting the decisions we make.
Research from Cass Business School found women are more risk-averse than men. It's a trend that could be affecting how much women have in their pensions and other investments. The research also found that young people and those that are single are more likely to be risk-averse too.
Professor David Black, co-author of the paper and Director of the Pensions Institute at Cass, said: Women, because they are more risk-averse than men, would be more comfortable with lower-risk investments. Over a long investment horizon, such as that involved in building up a pension pot, this behaviour has been described as 'reckless conservatism' - women with the same salary history as men would, on average, have lower pensions as a result.
On the other hand, men's investment overconfidence can lead to 'reckless adventurism'. This is not necessarily desirable at older ages close to retirement, since there is less time to recover from a severe fall in stock markets.
What is financial bias?
Financial bias is simply a human tendency that affects our behaviour and perspective. These may be based on beliefs and experiences. In financial terms, bias may affect your ability to make decisions objectively. For instance, you may make a choice based on emotional bias rather than evidence.
Taking the above example; why are women more likely to take less risk with investments? It's likely that bias is having an impact. Whilst the research didn't show their personal circumstances, pre-conceived ideas will be affecting some women when they decide how much risk to take.
There are many forms of financial bias that may affect your decisions, including these three:
1. Loss aversion
This is the financial bias that the above research looked at. It's an emotional tendency to prefer avoiding losses over making gains. Past research has indicated that the pain of losses is greater. As a result, investors may choose lower-risk options than appropriate to avoid this.
Another example of loss aversion is selling stocks to prevent further losses before you planned. Whilst doing so may protect you from further falls, it can be damaging. Selling stocks and shares effectively lock in your losses. Remember, over the long-term, investments typically deliver returns.
2. Confirmation bias
Let's say you're looking at pension opportunities and decide one option is too high risk. But you decide to do some research anyway. Confirmation bias leads you to seek out information that supports your view. So, you'd discard the figures that suggest it could actually suit you. As a result, research simply backs up what you already believe.
Confirmation bias can lead to a one-sided financial view. It can make it difficult to objectively balance the pros and cons. Being aware of this can go some way to improving your research process, as can working with a financial planner.
3. Herd behaviour
If you've ever found your action mimicking those of a larger group, herd behaviour could be to blame. In some instances, it's right to follow what others are doing. But it should align with your own reasoning, plans and wider goals. With so much noise in investment markets, it can be difficult to focus on what's right for you.
For example, if markets start to decline, you may pull out investments if others are doing so. This is because you believe that the majority must be right. Yet, their circumstances and aspirations may be very different from yours. It's important to build a financial plan you have the confidence to stick to.
How can financial planning help?
Working with a financial planner can help you remove some of the bias from decisions. It allows you to view your options through another's eyes. You may have a clear idea about the best way to invest for retirement, for example. But after talking with a financial planner, you discover that taking more or less risk is appropriate.
Financial bias can also mean making snap decisions. For instance, when the value of stocks begins to fall you may consider selling. Having a long-term financial plan in place can give you the confidence to hold steady. This, in turn, can help keep you on track for your goals.
If you'd like to discuss your financial future, please get in touch. Our goal is to create a financial plan that reflects you and that you have confidence in.
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.
Why Protection Should Be Part Of Your Financial Plans To Stay On Track
Financial protection products can provide essential cash injections when it's needed most to keep your plans on track. There are many reasons why policies can be useful and provide you with peace of mind.
You may think of financial protection products as something that's removed from your overall financial plan. But they are an essential part of keeping you on track. Even the best-laid plans can go off course and many outside influences could affect your financial situation. Protection can act as a capital injection at times when you need it most.
There is a range of financial protection products that can provide you with security at uncertain times.
Even carefully crafted plans can be hit by unexpected events and outside influences. Thinking about how these could affect you now, means you're able to put in place a safety net that provides financial security for your future and plans. Becoming ill, for example, doesn't have to mean you're unable to support your children through university if you have the right protection in place.
Protection can provide certainty and security when you need it most. But despite this, many don't have any protection at all or are not confident in their policies. Just 27% of consumers are confident that the cover they have in place will meet their needs. Among the circumstances where financial protection can keep you moving towards goals are:
Being involved in an accident
Accidents occur every day. Fortunately, most don't cause long-term effects, but some can mean taking a long time off work or have a life-changing impact. If you're unable to work, it could affect your finances, and therefore plans, in the short, medium and long-term. If you'd struggle without a regular income, you should consider how financial protection could act as a safety net.
Income protection can provide a portion of your salary, usually around 70%, if an accident or illness means you're unable to work. This should mean you don't have to worry about immediate financial concerns, such as paying bills, and allow you the time to get better. Often, income protection will continue to pay out until you're able to return to work or retire. One important thing to note here is that income protection will usually have a deferred period. You should ensure your employer's sick pay or your own savings are enough to cover this period.
On the diagnosis of a critical illness
Could you afford to maintain your lifestyle if you were unable to work for a long period of time? Critical illness can affect us at any age and can have a significant impact on aspirations. It may mean you need to make adjustments to your current employment and, in some cases, could mean you're unable to work at all.
Critical illness can be difficult to come to terms with. Worrying about money can make it even more challenging. A protection policy paying out here can give you the time needed to consider adjustments where necessary and, most importantly, recover. Critical illness cover will pay out a lump sum on the diagnosis of specified illnesses.
On death
If your income is essential for your family's security, you may be worried about how they'd cope without you. Financial protection can't help with the emotional stress a death causes, but it can relieve some of the worries around money and give families time to grieve.
Having the right financial protection can mean your hopes and dreams for loved ones are still possible even if you're not there. It could, for instance, help pay school fees for children, support grandchildren getting on the property ladder and ensure your family doesn't have to give up their home. It's not a situation anyone wants to think about. But effective planning can provide a safety net for those you care about the most. If this is a concern for you, it's worth looking at life insurance policies.
Visualising the benefit of financial protection
Understanding how unexpected obstacles could affect your circumstances and plans can be difficult. Working with a financial planner can help you visualise the impact and see how an injection of capital would help at these points.
Modelling your current finances and making assumptions about the steps you'll take and other areas, such as investment performance, can help you see how you'll achieve goals if everything goes to plan. But cashflow modelling also allows you to model concerns you may have. For instance, what would happen if you were forced to give up work five years earlier than expected due to illness? Or would your family still be financially secure if you were to pass away?
By modelling these scenarios you'll be able to see where a shortfall may occur. Your capital and assets may mean you're still able to achieve aspirations, even when things go off course. But, for many people, a capital injection is essential if they're still to achieve goals. Through using cashflow modelling, we can demonstrate the benefit of having the right financial protection in place for you with the right level of cover. It can give you peace of mind that, even if the unexpected should happen, your finances can remain on track.
If you're worried about how your lifestyle and aspirations could be affected, please get in touch. We're here to help manage your current finances and put safeguards in place to protect your plans where necessary.
5 Ways Financial Planning Can Help If You're Self-Employed
Being self-employed comes with many benefits. But it often means taking more responsibility for your finances now and in the future, this is an area financial planning can help with.
Millions of people in the UK are now self-employed. Whether you work for yourself or are part of an industry where contracting is commonplace, it can place pressure on your finances. You need to manage your financial situation and potentially plan for periods where you're not earning an income. Working with a financial planner can give you confidence in your career and future security.
There's been rapid growth in self-employment in the UK in recent years. According to official official statistics:
- 3 million people (12% of the labour force) were self-employed in 2001
- By 2017, this had increased to 4.8 million people (15.1% of the workforce)
There are many benefits to being self-employed, but it often means you need to take greater control of finances in order to ensure you meet goals. So, how can a financial planner help you?
1. Paying into and managing a pension
The majority of UK employers will now benefit from a Workplace Pension. However, if you're self-employed, you'll need to set up and manage your own pension. Whilst you won't benefit from employer contributions, you're still entitled to tax relief. For many self-employed individuals, a pension will be the most efficient way to save for retirement.
There are a variety of ways of setting up your own pension and you may have many questions.
Should you invest through a fund or select your own investments?
How much should you aim to put away each month?
What kind of income will your contributions afford you?
A financial planner can help create a long-term financial plan that considers your lifestyle now and the one you want to achieve in retirement.
2. Creating a financial safety net
When you're self-employed, there is a chance that your income will stop or reduce. As a result, it's important to create a financial safety net that you can fall back on should something happen. This could be a period of illness, meaning your income stops in the short-term or a contract coming to an end.
Financial planning should give you confidence that you're financially secure even if these 'what if' scenarios did happen. The right solution will depend on you and your priorities. It may involve building up an emergency fund and taking out an appropriate insurance policy, for example.
3. Building suitable savings and investments
We all know we should be putting some of our income aside. But it can be challenging to know what to do with it. Should you hold in cash or invest? There's no right or wrong answer to this. It'll depend on your personal situation and attitude to risk.
With so many different providers and products on the market for both cash savings and investments, it can be just as daunting to decide where to put it. Again, this will depend on you and what you're saving for. If you're saving for a goal that's a year away, you'll need a very different product if you plan to save for 15 years. Our goal is to help clients pick out the right products for them.
4. Getting to grips with tax liability
As you'll be responsible for organising your own Income Tax, it's worth spending some time understanding it. There are often steps you can take to reduce your liability depending on your circumstances. However, there are other areas of tax to be aware of too; could your income from investments be liable for tax, for example?
Knowing your tax responsibilities enables you to avoid potentially hefty penalties and set realistic expectations. Tax regulations can often be complex and difficult to apply to your situation. This is where working with a financial planner comes in useful. We're here to help you get to grips with tax and make the most out of your money.
5. Understanding your long-term goals
Financial planning isn't just about looking at figures though. It helps you to see how your money habits can help you achieve short, medium and long-term aspirations. People often know what they want in the short-term but planning further ahead can be difficult.
If you're self-employed, it's worth thinking about whether you ever want to return to traditional employment, when you'd like to retire, and what the future holds. Talking with a financial planner about your wider goals can help put in place a plan that sets you on the right path.
If you have any questions about the above issues or any other financial matter, please get in touch. We aim to work with all clients, including those that are self-employed, to have confidence in their future.
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 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.
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.
The Financial Conduct Authority does not regulate Tax and Estate Planning.
Education Champion
TheMy Personal Finance Skills pro bono initiativedelivers financial education workshops to schools and colleges across the UK through a network of Education Champions and aims to be the largest programme of its type in the UK.
Paul is delighted to have recently been appointed as an Education Champion and is already working with one local school who are really enthusiastic about what the programme has to offer.
The My Personal Finance Skills programme offers schools free workshopscovering elements of financial education to schools with themes relevant to students' life stage. Themes includemy future finances, staying safe from financial scams, understanding your first payslip and understanding attitude to risk and how that impacts decision making.
The financial education material has undergone a process of piloting in schools and has also been awarded the financial education Quality Marksupported by Money Advice Service after fulfilling the following criteria:
- Developed in consultation with a teacher or educationalist and tested with young people in the target group
- Having a dedicated Theory of Change and evaluation plan
- Having a principle focus on financial education
- Including opportunities for structured learning
- Engaging and relevant for young people
- Clearly written and easy to use
- Containing accurate, up-to-date information and are free of branding
Paul see this as a fantastic way to give something back and help young people as they start their journey to adulthood and begin their careers.
Ethical Investing On The Rise: 3 Investment Strategies To Consider
More people are considering ethical investing. If you're thinking about incorporating values, there are three key strategies that are used, read on to find out which one might be right for you.
The amount of assets that are invested whilst considering the impact it will have has increased. More investors than ever before are taking ESG (environmental, social and governance) factors into consideration to align their portfolio with their values. But what investment strategies are there that allow you to reflect this?
The 5th - 11th October marked Good Money Week, an awareness week that aims to showcase the sustainable and ethical options when it comes to banking, pension, savings and investments. If ethical investing is something you've been thinking about and you want to incorporate your values into financial decisions, now could be the perfect time to do so.
Choosing investments for reasons other than financial gain has been a trend that's gradually gaining traction. Of course, this doesn't mean that you disregard returns, it's about taking multiple factors into account. As a result, ethical investing is sometimes referred to as having a 'double bottom line'; the return it delivers to you and the positive benefit.
According to research:
- Just three in ten men with investments only care if they make money, this figure drops to 15% for women
- However, there is a lack of awareness, just 69% said they had no idea they can request investments that have a 'positive social impact'
So, if you do want to invest with ethics in mind, what are your options? There are three key strategies to be aware of:
- Negative screening
When people talk about ethical investing, this is often the first strategy that springs to mind. It involves divesting and avoiding investing in companies that don't align with your values.
For example, if you're seeking to ensure your portfolio has a positive impact on climate change efforts, you may decide to no longer want to invest in companies with activities in fossil fuels. Alternatively, if human rights are a key concern, you may decide to avoid retailers that have exploitative practices within their supply chain.
When you see 'ethical funds' this is usually the top strategy they'll use, although the criteria can vary significantly between funds. One of the issues with this strategy is that large, multinational companies will often derive profits from multiple industries, particularly when you consider subsidiaries. As a result, funds will often allocate some leeway, for instance, avoiding companies that derive more than 5% of their profits for certain activities.
In terms of your investment and returns, negative screening will potentially mean cutting out entire industries. As always, it's important to keep in mind how balanced your portfolio is and how it aligns with your financial goals.
- Positive screening
In contrast to the above, you don't avoid investing in certain companies when using a positive screening strategy, but actively seek to invest in certain firms. It means investing in businesses that are championing the values you have.
Going back to the climate change example, with a positive screening strategy, it may mean investing in companies that are operating in renewables or researching new technologies that could help. Often, investors will allocate a portion of their investment portfolio to supporting their values.
This has both pros and cons. One advantage is that it means you don't miss out on potential investment opportunities, as you may with a negative screening process. On the other hand, it may mean investing in companies that don't align with your values.
- Engagement
Finally, an engagement strategy is about using shareholder power to encourage change within a company. Due to needing significant shareholder power to influence, this strategy is more commonly used by institutional investors, such as pension funds. However, that doesn't mean it's irrelevant to you. It's still possible to engage with your pension provider, for example, to encourage them to use their influence.
Which strategy is right for you?
It's important to keep in mind that there's no right or wrong answer here.
You may have a preference about which strategy you'd prefer, or maybe you want to blend them. However, it's just as important to look at your wider financial circumstances and how investment decisions will affect your goals. This is an area we can help with. Looking at your existing assets and how these can be adapted to reflect ethical views, can lead to a portfolio that supports both your ethics and aspirations.
Setting out your values
If you're beginning to consider incorporating ethical investing in some way, the first step is to consider your values. What's important to you?
One of the challenges with ethical investing is that it's a highly subjective area. What you may consider unethical, may be acceptable to others. This can make it difficult to find funds that align with your views. Setting out what your priorities are can give you a starting point. According to research from Triodos Bank, the top five industries investors would want to avoid are:
- Manufacturing or selling of arms and weapons (38%)
- Worker/supply chain exploitation (37%)
- Environmental negligence (36%)
- Tobacco (30%)
- Gambling (29%)
Do you agree with these? Before investing your money through an ethical fund, take some time to look at the criteria. There may be instances where you need to compromise, so you should also think about how comfortable you'll be with this.
If you'd like to discuss your current investment portfolio, please get in touch. We'll help you understand how it's currently invested and potential changes that could be made, reflecting your views and financial position.
Please note: The value of your investments 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.
7 Things To Review When Looking At Your Pension
Regularly reviewing your pension is important for ensuring you're on the right track. We've got a checklist of seven things you should know or check about your pension.
Research suggests thousands could be missing out on investment returns in their pension because they haven't updated their retirement age. Remaining engaged with your pension can help you create a retirement income that meets expectations. So, what should you review when looking at your pension?
- What fund are you invested in?
Typically, a Defined Contribution pension will offer several different fund options for you to choose from. When you first join the scheme, you'll automatically be enrolled into one and this will remain so unless you change it.
There are a few reasons why you may want to change which fund your pension is invested in. Often, they will have varying levels of risk, allowing you to choose one that suits your attitude and goals. In addition, many pension providers also offer an 'ethical' fund if you want your pension to be invested in a way that reflects your values.
It's usually easy to change which fund your pension is invested in, either by updating it through an online portal or contacting the pension provider.
- What does it assume your age of retirement is?
Pensions are usually invested. Traditionally, the level of risk these investments take decreases as you approach retirement age automatically. However, if the assumed retirement age doesn't align with your plans, you could miss out on returns.
According to analysis from Aviva, an average earner in an automatic enrolment scheme could miss out on more than £4,000 in their person by sticking with a default retirement age of 65, when they intend to retire at 68. If the default retirement age is set at 60, this rises to almost £10,000. With retirements becoming more flexible, this could be a growing issue.
It's also worth noting that, depending on your assets and retirement plans, de-risking investments as retirement approaches may not be the best option.
- Are you receiving the correct level of tax relief?
Tax relief is one of the aspects that makes saving into a pension valuable. It's a helpful way to boost your contributions. The amount of tax relief you receive on pension contributions is linked to the highest rate of Income Tax you pay.
The basic-rate of 20% tax relief is automatically applied. However, if you're a higher or additional-rate taxpayer, you will need to claim the additional tax relief through tax returns. It can seem like a chore, but it's one that's well worth doing. To increase your pension by £100, you'd need to add £80 if you're a basic-rate taxpayer. However, this falls to just £60 and £55 for higher and additional-rate taxpayers respectively.
- How much are you contributing?
If you're not sure, it's a good idea to look at how much you're paying into your pension each month. Under auto-enrolment, this will be a minimum of 5% of pensionable earnings. However, you can increase this. Even a small increase can have a big impact over the long term, particularly when you factor in tax relief and investment returns.
- What is your employer contributing?
Your employer will also be making contributions to your pension. As a minimum, this will be 3% of pensionable earnings. However, some employers do pay in more or will increase their contributions if you do. It's worth checking what your company policy is on this as employer contributions are essentially 'free money' that could boost your future income.
- What returns are investments delivering?
As stated above, pensions are usually invested. The returns these investments deliver can help your contributions grow over your working life. As a result, taking a look at how investments are performing at part of a regular review can help you see whether the investments are right for your goals.
It's important to look at the bigger picture here. Investments are often volatile when looking at just a snapshot of figures. Instead, you should look at how your investments have performed over the long term to gain a more accurate understanding.
In addition to returns, take some time to look at the fees you're paying, as these will eat into the returns.
- What is the projected value at retirement?
Finally, how much will your pension be worth when you want to access it? Your pension provider should give you an estimate of this figure, although it's important to keep in mind that this can't be guaranteed.
Understanding what your pension is projected to be worth gives you an opportunity to see if expectations align with reality. If there's a shortfall, the earlier you spot it, the better the position you're in to make necessary changes. Alternatively, you may find you're in a position to retire earlier than expected if you want to.
If you have any questions about your pension or other assets that will be used to fund retirement, please get in touch. Our goal is to help you get the most out of your finances and have confidence in your financial future.
Please note: A pension is a long-term investment. The fund value may fluctuate, 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 in the future.
Bonds: How Do They Fit Into Your Investment Portfolio?
Bonds are often an integral part of an investment portfolio; here we take a closer look at what they are and what you should consider when creating a balanced investment proposition.
Bonds are a common feature in many investment portfolios, alongside stocks, shares and cash assets. But how do they fit into your investment portfolio and what percentage should be allocated to bonds?
What is a bond?
Before diving into purchasing bonds, it's important to understand exactly what they are and, therefore, how they can be beneficial to you.
A bond is essentially a loan made by an investor to a borrower, which may be a government or business, as a way to raise money. As a result, bonds are sometimes thought of like an IOU. There are two ways that a bond can pay out:
- Final payment is made when the bond matures
- Or smaller payments are made during the term
By the end of the maturity date on a bond, the original loan amount must be paid back or risk defaulting. When you purchase a bond think of it as buying the right to future payments, whether this is a lump sum or smaller amounts. The yield on bonds depends on these amounts in comparison to how much you paid. Typically, bonds that have a longer maturity date will pay a higher interest rate.
Bonds are linked to interest rates too. When interest rates are low, bond prices tend to be higher. As a result, the current economic climate of low-interest rates means you can expect to pay more for bonds.
Many corporate and government bonds are traded publicly and give you a chance to sell bonds within your investment portfolio before they reach maturity. However, this isn't always the case and the secondary market will vary depending on the borrower.
How do bonds fit into your investment portfolio?
Investment portfolios should be diversified to spread risk. This includes the types of assets you hold.
Bonds can provide your investment portfolio with a balance in terms of risk. Generally speaking, bonds are considered to pose a lower risk to investors than stocks and shares, though higher than cash assets.
Of course, bonds aren't entirely risk-free. There is a chance that the borrower will default on the payments and you won't receive your initial investment back. Whilst bonds are generally considered lower in risk to stocks and shares, it's important to check the reliability of the borrower when conducting research.
Creating an investment portfolio that suits you
Whilst bonds are often an important building block when creating a suitable investment portfolio, the allocation level should consider your financial situation. For some people, a higher portion of investments in bonds can help create stability and reduce volatility. For others, a high portion of bonds won't offer the potential to create the returns they're looking for. The allocation of your investment portfolio should always be tailored to suit you.
When creating or reviewing your investments in terms of allocations, some of the areas to consider are:
- What are your investment goals?
- How long do you intend to remain invested for?
- What is your capacity for loss and overall attitude to risk?
- How comfortable are you with investment volatility?
- What other assets do you hold and what risk level are they?
These types of questions can help you gain an understanding of your current financial circumstances and the level of risk that's right for you. This can be challenging to calculate with so many different factors playing a role. However, it's a critical step towards assessing how bonds will play a role in your portfolio.
If you'd like to discuss your investment portfolio, please contact us. Our goal is to help you build an investment proposition that matches your aspirations and financial situation.
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 To Consider When Investing For A Child's Future
If you're thinking about investing for your child's future, you may be worried about how to go about it. These five questions can help you identify the level of risk and product that's right for your goals.
Children born today have a one in four chance of celebrating their 100th birthday. It's progress that should certainly be celebrated but one that also leads to financial questions. How do you prepare for a life that could span ten decades?
Many parents choose to put some money aside for children to give them a helping hand when they reach adulthood. Whether you'll be making regular payments or adding money on Christmas and birthdays, you'll want to ensure you get the most out of your deposits. But choosing how to build up a nest egg for a child can feel more complex than making decisions about your own financial future.
One question to answer first is: Should you place the money in a cash account or invest?
Why consider investing your child's savings?
It's natural to want to protect the money you're putting aside for your child's future by choosing a cash account with little debate. However, there are reasons why investing may prove to be more efficient.
Even on a competitive child current account, interest rates are low. This means once you factor in inflation, savings lose value in real terms over the long term. If you begin saving whilst your child is very young, this can have a significant impact on the spending power of the money.
Investing provides an alternative, with returns potentially higher than interest rates. However, it's not as simple as that. Investing does come with some risks, as there's no guarantee how investments rise and fall. But investing is something you should consider when you're planning for your child's future.
If you're unsure whether a cash account or investing is right for your goals and circumstances, please get in touch.
Should you decide to invest money earmarked for your child's future, there are some questions that can help you pick out the right vehicle and investment opportunities.
- How long will it be invested for?
When you start saving, it's important to have a deadline in mind. If this deadline is below five years, it's usually advisable that you choose a cash account. This is because investments typically experience volatility in the short term and, as a result, values can fall. This may be an issue if you're investing for a short period of time.
However, should you have a time frame that is longer than five years, investments may provide you with a way to potentially achieve returns that outpace inflation. This is one of the factors that link to investment risk. As a general rule of thumb, the longer you're investing for, the higher the level of risk you can take. Of course, other factors influence appropriate risk levels too.
- What is the money intended for?
You probably have an idea of what the money will be used for. Perhaps you hope it will be used to purchase their first car or support them through further education. You may be looking even further ahead to your child purchasing their first home. What the money is intended for will have an impact on the time frame. But it will also influence how comfortable you are with taking investment risk.
It's important to remember that if you're saving the money in the name of the child, they may be able to take control of the account when they reach 16. Whilst you might have an idea of what you're saving for, they could have very different goals. As a result, speaking with them about the savings and how it might be used can help align your views.
- How comfortable are you with investment risk?
It's also important to think about how comfortable you are with investment risks when it comes to your child's savings. This may be very different to your views on taking investment risks for your own nest egg.
Whilst you need to feel comfortable with risk and the level of volatility you can expect investments to experience, you also need to ensure it's a measured decision. Our bias can mean we take too much or too little risk when financial circumstances are factored in. Speaking to a financial planner can help you understand what your risk tolerance is. Getting to grips with what level of risk is appropriate can boost your confidence.
- Do you have other savings for your child?
Do you have multiple saving accounts for your child? Or are other loved ones also building up a nest egg for their future?
Assessing what other nest eggs they will receive when they reach adulthood may mean you're more comfortable taking investment risk. If, for example, you know grandparents are adding to a cash savings account, this may balance out the risk associated with investments. Answering this question can work in the same way as assessing your other assets when you consider your own investment portfolio.
- How hands-on do you want to be?
Finally, do you want to select which companies the money will be invested in? Or would you prefer to take a hands-off approach? There's no right or wrong answer here but thinking about it can help ensure you pick the right investment vehicle for you.
If you want to take steps to improve the financial future of your child, please get in touch. Whether investing is the right option or not, we'll work with you to create a plan that you can have confidence in.
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.