Could your property boost your retirement fund?
Property is increasingly being seen as an asset that's vital for funding retirement. It's no surprise, after all, our homes are often one of the largest assets we have, but what are your options and the drawbacks of doing this?
The value of property has grown enormously over the last few decades. If you're approaching retirement now, you've likely benefited from this at some point. According to figures from Nationwide, the average home cost £59,534 at the beginning of 1989. Over a 30-year period, it increased to £212,694. As a result, property has become an integral asset to consider when planning for retirement or thinking about how you'll pass your estate on to loved ones.
Property and retirement: A growing trend
Some retirees are already exploring how they can use property wealth to enhance their lifestyle and supplement other financial provisions. Research suggests it's a trend that's set to continue. According to analysis by Canada Life younger generations are three times more likely to plan to use property wealth to fund retirement:
- Almost one in ten (9%) people aged between 16 and 54 expect the wealth stored in their homes to be their main source of income in retirement
- This compared to just 3% of those aged over 55
Alice Watson, Head of Marketing and Communications at Canada Life Home Finance, said: It is good the younger generation recognises that they can unlock wealth from their property in retirement. This openness is likely driven by the reality that many under 50s will receive less generous pensions under the Defined Contribution scheme, compared to the majority of the older generation on the Defined Benefit plan.
Notably, the research also illustrates the evolving profile of retirement income, and lends further weight to the argument that Equity Release is moving into mainstream financial planning.
The findings suggest the majority of over 55s are confident in their financial security. Half believe their State or Workplace Pension will provide sufficient income, whilst one in five are relying on savings. However, with 21% underestimating how long they'll live for, more could be reliant on property wealth than expected in the future.
What are your options?
With a significant portion of your wealth likely locked in property, it's natural to wonder what you can do to access it should you need to.
One of the most obvious answers here is to downsize. Selling your home to purchase a cheaper property to spend retirement in can free up some of the investment you've made in property. This used to be the traditional route retirees went down. But what if you can't or simply don't want to move? Or what if downsizing wouldn't release as much capital as you need?
Equity Release is an option that more retirees are choosing. There are several different types of Equity Release products, but they typically allow you to take either a lump sum or several smaller sums though a loan secured against your property which you pay interest on. This money is then repaid when you die or move into long-term care, as a result, you don't usually make payments to reduce the loan during your lifetime, though some products allow you to pay off the interest.
Equity Release can seem like a fantastic way to fund retirement, but there are some crucial things to consider; it isn't the right option for everyone.
- As you don't usually pay the interest, the amount owed can rise rapidly
- Accessing the equity may mean you're liable for more tax and affect means-tested benefits
- You may not be able to move in the future or face a high cost for doing so
- Equity Release will reduce the inheritance you leave behind for loved ones
- You will not be able to take out other loans that use property as security
Before you look at Equity Release products it's important that you explore the alternatives to ensure it's the right route for you. There may be different options that are better suited to your circumstances and goals.
Building a retirement income that suits you
Whilst property wealth is set to play a growing role in funding retirement, it's important that other sources aren't neglected. Retirement income is typically made up of multiple sources and may include:
- State Pension
- Workplace and/or Personal Pensions
- Investments
- Savings
- Property
Choosing property over contributing to a pension can be tempting if retirement still seems far away, especially when you factor in property growth over the last 30 years. However, once you consider tax relief, employer contributions and investment returns, as well as tax efficiency, pensions should still play an important role in holistic retirement planning.
If you're starting to think about retirement, whether the milestone is close or you want to understand how your current contributions will add up, we're here to help. We'll work with you to help you understand the different income streams that could provide a comfortable, fulfilling retirement that matches your aspirations.
Using your savings to achieve aspirations
What's on your bucket list? Whether incredibly exciting experiences, exotic travel destinations or something entirely different features on your list, it's likely finances will play some role in how achievable they are. Could your savings be used to tick a few of your aspirations off?
You may have been saving with specific goals in mind or simply putting money to one side for the future. However, dipping into savings can be something people find difficult. To have built up a healthy savings fund you've likely established good money habits and accessing savings can go against this. However, it may mean you miss out on opportunities to achieve aspirations, even if you're in a financial position that allows for it.
As a result, it's important to understand your savings and how dipping into them will affect your plans, giving you the confidence to make decisions.
If you have big plans ahead, from helping younger generations get on to the property ladder to a once in a lifetime trip, there are a few things to consider. Your savings are likely to be spread across multiple products, how do you know where you should take the money from and when should you do it? Among the areas to consider are:
- Accessibility: When looking at various savings, the first step should be to see how accessible they are. Are any of them fixed term accounts? Or are some of them invested? If you're planning ahead for a few years' time, accessibility is less likely to be an issue, but if you want the money soon, it may limit your options. Be sure to check that you won't lose any of your savings, interest or returns by taking money out. Some accounts may lower interest rates, for example, if you make a withdrawal before a set date.
- Tax efficiency: Would accessing your savings affect your tax position? There are some instances where taking a lump sum from savings may mean an unexpected tax bill. Let's say you decide to use some of your pension after the age of 55 savings to kick-start retirement; the first 25% can usually be withdrawn tax-free, but, take out more than this and it may be considered income for tax purposes. If you sell stocks and shares, you may be liable for Capital Gains Tax too. Looking at the tax efficiency of different options allows you to maximise your savings.
- Allowances: As you've been saving for the future, you may have made use of allowances. Your ISA (Individual Savings Account) allowance means you can save £20,000 each tax-year tax-efficiently. If you take money out of an ISA, you can't return the money without using the current year's allowance, which may limit you. In some cases, allowances will have little impact on your decisions, but in others they are important. This will depend on your personal circumstances and plans.
- Potential for future growth: Which of your saving pots has the biggest potential for growth in the future? Accessing savings that are invested over a cash account with a low-interest rate may not be in your best interests financially when you look at the long term, for example.
The impact on your long-term financial security
Of course, it's important to consider what impact using savings now will have on your long-term financial security. If you're worried about how taking money out of savings could affect future plans, this is an area financial planning can help with.
Often people find they're in a better financial position to start accessing their savings than they first think, but it's normal to have some concerns. Cashflow modelling can help you visualise the short, medium and long-term impact of using your savings. It can also model how taking savings out of different saving products will have an effect, allowing you to choose the right option for you.
It's also an opportunity to weigh up how your financial security will be affected. Would using a portion of savings mean your emergency fund is depleted, for example? Understanding the long-term implications gives you the tools needed to decide how much and when you should make a withdrawal from your savings. Taking the time to consider the long-term impact of your decision means you can proceed with confidence and really enjoy spending the money on turning aspirations into a reality.
If you're thinking of accessing some of your hard-earned savings to work through your bucket list and have concerns, please contact us. Our goal is to work with you to help you get the most out of your money by creating a financial plan that reflects aspirations and boosts confidence.
Just a fifth of investors stuck to their plan during 2018 volatility
2018 proved a difficult year for investors. Volatility meant many saw the value of their investments fluctuate and it led to the majority tinkering with their long-term financial plans amid concerns. However, it's a step that may not be right for them and could mean lower returns over the long term.
During a year that was characterised by global economic concerns and uncertainty, from Brexit to a trade war between the US and China, investment markets were volatile. In the last quarter of 2018 alone the MSCI World Index fell by 13.9%, the 11th worst quarterly fall since 1970. As a result, it's not surprising that some investors felt they had to respond by changing plans they'd initially set out.
Responding to market volatility
Whilst investing should form part of a long-term financial plan, research from Schroders indicates that many investors decided to take action after experiencing volatility in the short term. Just 18% of investors stuck to their plans in the last three months of 2018. Seven in ten investors said they made some changes to their portfolio risk profile:
- 35% took more risk
- 56% moved into lower-risk investments (36%) or into cash (20%)
Despite many making changes to their plans, more than half of investors said they have not achieved what they wanted with their investments over the past five years. Interestingly, many attribute their own action or inaction as the main cause of this failure. The findings indicate that investors may recognise that deviating from long-term plans can have a negative impact, as well as judging decisions with the benefit of hindsight.
Claire Walsh, Schroders Personal Finance Director, said: No-one likes to lose money so it is not surprising that when markets go down investors feel nervous. Research has repeatedly shown that investors feel the pain of loss more strongly than the pleasure of gains. That can affect decision making.
As our study shows even just three months of rocky markets led many investors to make changes to what should have been long-term investment plans. That could potentially lead them into making classic investment mistakes. These include selling at the bottom when things feel bad or moving their money into cash in an attempt to protect their wealth, but then leaving it there too long where it can be eaten away by inflation over time.
Why should investors have held their nerve?
It's easy to see why investors might be tempted to tinker with financial plans after seeking investment values fall. But, for many, it's likely to have been the wrong decision.
Investing should be done with a long-term outlook, generally a minimum of five years. Volatility is a normal part of investing and any financial plan should have considered how the ups and downs of the market would affect your goals. A long-term outlook allows for dips and peaks to smooth out. Changing your position whilst experiencing volatility could mean selling at low points and missing out on a potential recovery in the future.
Of course, there are times when it's appropriate to change your investment position. For example, a change in your income or investment goals may mean that your risk profile has changed. However, changes shouldn't be made in response to normal investment volatility alone, they should consider the bigger picture.
Creating a financial plan that considers volatility
When you create a financial plan, it's impossible to guarantee the returns investments will deliver. However, your decisions should consider potential volatility and what's appropriate for you. With the right approach, you should feel confident in the plans you've set and hold your nerve next time investment values fall.
Among the areas to consider when building a financial plan with a risk profile and level of volatility that suits you are:
- What are you investing for?
- How long do you intend to remain invested?
- What is the risk profile of other investments or assets that you hold?
- How likely is it that your situation will change in the short or medium-term?
- What's your overall attitude to risk?
If you're worried about investment volatility, please get in touch. Our goal is to work with you to create a long-term financial plan that you have confidence in, even when markets are experiencing a downturn.
Please note: The value of 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.
Ethical pensions: Considering where your money is invested
Considering ethics when investing has slowly been on the rise over the last couple of decades. However, even if it's something you think about with your investment portfolio, you may not have factored in your pension(s). As contributions are often deducted from your salary automatically, they can slip your mind.
Yet, whether you have one or multiple pensions, they're likely to be one of your largest assets. After all, employee contributions typically span decades over your working life, coupled with employer contributions, tax relief and investment returns. As a result, if ethical investing is something you're interested in, including your pension in such decisions is worthwhile.
What is ethical investing?
Put simply, ethical investing is about incorporating your personal views into how and where you invest. Much like ethical shopping means actively choosing some products and avoiding others for ethical reasons, it's the same concept with investing, Whilst you might choose the Fairtrade fruit at the supermarket, for example, you'd choose the companies that pay a fair wage to invest in.
It's about having a goal that goes beyond simply delivering returns on your money. For example, encouraging green energy innovation, fairer working practices across the global supply chain, or reducing environmental degradation. Some refer to ethical investing as having a double bottom line; the returns and the positive impact you hope it will encourage.
Ethical investing is often filled with jargon and you may have heard the practice of incorporating values into investing as sustainable, responsible or green investing; they all broadly mean the same thing. Ethical investing can then be broken down into three key areas, referred to collectively as ESG:
- Environmental: These link to sustainability and the depletion of resources. Environmental considerations may be using energy efficiently, managing waste, or reducing deforestation.
- Social: The social issues that relate to how a company treats people. This could cover relationships in communities where they operate, diversity policies, and labour standards throughout supply chains.
- Governance: This term focuses on corporate policies and how a company is run. Among the areas covered are tax strategy, executive remuneration and protecting shareholder interests.
When it comes to pensions, incorporating ethics may mean switching to a different fund or actively selecting ethical investments if you have a SIPP (Self-Invested Personal Pension).
Growing interest in Ethical Pensions
Research conducted by Invesco highlights a growing demand for pension products that reflect ESG principles in some way:
- 82% of people would favour part of their pension(s) automatically going to a company which meets a certain ethical standard
- 72% of defined contribution (DC) pension members want their scheme to include ethical investments in its default fund
- 46% would choose a fund that only invests in 'socially and environmentally responsible companies' with returns of 6%, rather than a fund that delivers returns of 6.5% but invested in all types of companies
- If a fund only investing in 'socially and environmentally responsible companies' and one investing in all types of companies both had the same historic returns of 6%, 60% would rather invest in the responsible option
The drawbacks of investing ethically
Whilst ethical investing does allow you to back companies that align with your values, there are drawbacks to consider.
First, ethics are highly subjective. Whilst your pension provider may offer an ethical fund to choose from, it might not align with your values. As a result, you may have to compromise.
Second, considering ethics is a growing trend among businesses, but you will be limiting your investment opportunities. This may mean that returns are lower due to choosing ethical investments.
Finally, validating claims that companies make in their corporate social responsibility (CSR) reports can be difficult, as can measuring the positive impact of investments.
As demand for ethical investment continues to grow, it's likely these issues will become smaller. However, they are worth considering if you're interested in investing your pension ethically. Remember, your pension should provide you with an income throughout retirement. Other factors need to be considered alongside ethics too.
Investing your pension ethically
If you decide you want to invest your pension ethically, how you do so will depend on the type of pension you have.
- If you have a Workplace Pension, you'll be automatically enrolled in the default fund. However, many providers now offer an ethical option that you can easily switch to, often through logging in online. Here, you should be able to see the ESG criteria set out, as well as historic performance.
- A Personal Pension typically works in the same way as a Workplace Pension, except you can choose which provider you want to use. As a result, you can screen out those that don't offer an ethical fund.
- If you have a SIPP, you can either choose investments personally or select a fund, giving you far more control over the ESG elements you want your investment to incorporate.
- With a Defined Benefit pension, you don't have control over how your pension is invested. However, many have begun to embed some ESG practices into their investing principles, having responded to action from members to do so.
If you'd like to discuss how your pension is invested and the income it's projected to deliver at retirement, please contact us.
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 World In A Week - Thucydides' Trap
Last week we wrote about the deterioration in outlook and this week we write about the actual fallout. We saw safe havens rallying as fears of a recession increased markedly; gold hit a six-year high and US stocks had their worst trading day in 2019.
This was led by lacklustre economic data for global manufacturing and exports. Commodity prices continued to fall, and inflation pressures remained low. Escalating trade tensions threaten to turn into a full-blown currency war, as China retaliated from Trump's threat of additional tariffs beginning next month. Global recession risks are firmly on the mind of central banks, if not the markets, which is why the interest rate cuts from New Zealand, Thailand and India came as a surprise.
What does this have to do with Thucydides' Trap? Thucydides was a Greek historian who wrote about the inevitable war between Sparta and Athens, which was caused by the growth of the latter and fear of the former. The trap is being replayed between the rise of China and the fear of the incumbent US, which initially manifested itself as a trade war and looks set to evolve into a currency war.
To add to the current climate of woes, the UK's economy contracted for the first time in seven years. The second quarter shrunk 0.2% compared to the previous three months, predicated on increasing Brexit concerns, stock-piling ahead of the original Brexit date and of course and the effect of global trade tensions. The signs could not be clearer for the Conservative government not to take any undue risks with the economy.
There are some silver linings if you dig deep enough. The weak second quarter was payback for a strong first quarter, which saw manufacturers accelerating production ahead of the March Brexit date. These inventories have now unwound, as well as many factories scheduling routine maintenance for April, all of which reduced output for the second quarter. The contraction cannot be fully laid at the feet of Brexit though, as manufacturing and services globally are struggling, amid the trade war tensions and mixed signals from the Federal Reserve.
What is clear though, is the obvious solution for the government in order to give the UK economy a restorative boost, is to avoid the precipice of a no-deal Brexit.
The World in a Week - Dialling Down
The US Federal Reserve was in the limelight last week; Fed Chairman, Jerome Powell, delivered an unsurprising rate cut at his press conference, the first reduction in a decade. The 25bps clip was termed a 'mid-cycle adjustment' with Powell emphasising that the cut was not part of a steady trajectory of rate reductions and was merely a means of 'insurance'. Markets fell sharply on this news, which was not the 50bps that some had hoped for. While markets initially took a dive, towards the end of his speech, Powell clarified that this did not mean further cuts are completely ruled out.
Other key news from Powell's press conference was the Federal Open Market Committee announcing that they would bring quantitative easing to a standstill, selling off bonds previously bought in quantitative easing purchases. Originally, this move was scheduled for September but has been brought forward to August, Powell was clear that this move was to demonstrate that the Fed were exercising prudence, and not with a view that a potential recession was looming. The US economy remains in rude health, although trade wars continue to weigh on general sentiment.
On the topic of Trade Wars, Trump confirmed a further 10% of tariffs on £300bn worth of Chinese imports to the US, effective on 1stSeptember 2019, which was delivered by tweet, of course. Markets reacted badly, stocks and commodities, notably oil, toppled, on the gloomy implications this could have for economic growth. It is uncertain how China will respond, but given their intervention in their currency market, firstly preventing the currency from strengthening too quickly, and more recently, weakening too quickly, currency could well be China's chosen method of retaliation or more fittingly, their Trump card. As we write, the symbolic level of 7 Yuan to 1 US Dollar was breached, this is the lowest level since the Global Financial Crisis, which indicates at best a Superpower showdown and at worst, a full-blown trade war.
The question we are asking ourselves is whether Trump's recent increase in tariffs, was a strategic move to force the Fed to cut interest rates further and stimulate the US economy, the fallout of this action will be seen in the coming weeks.
The World In A Week - The Greatest Showman?
Headlines were dominated by the Conservative Party leadership contest, which saw the expected outcome of a victory for Boris Johnson. In his inaugural speech as Prime Minister, Johnson said his priorities were to deliver Brexit, unite the country and defeat Jeremy Corbyn.
With around 14 weeks in which to deliver Brexit, Johnson wasted no time in reshaping the Cabinet, culling 15 ministers in order to surround himself with a team that share his views. There will be a lot of hard worked required, for both the UK and EU, to find a resolution in just three months that could not be achieved over the past three years. Particularly when Parliament is only scheduled to be in session for around 21 days during this period and the EU already reiterating its hard stance.
When it comes to rhetoric, Mario Draghi has the crown amongst central bankers. The current head of the European Central Bank (ECB) signalled that he would be prepared to cut interest rates in order to tackle a slowdown in the eurozone economy. He said the risk of a recession was low, however the outlook is worsening, blaming the trinity of Brexit, trade wars and geopolitical uncertainty. His comments also marked the seventh anniversary of this infamous I will do what it takes speech, in which he pledged to keep the eurozone intact in the summer of 2012, the height of the sovereign crisis that was sweeping throughout Europe. These words were enough to see off the spectre of collapse and action did not have to follow for several years. However, the ECB's greatest showman has his final curtain call, stepping down in October, but looking to leave a clear path for this successor.
The final showman is also a central banker. Jerome Powell, the chair of the Federal Reserve, meets with his fellow members of the Federal Open Market Committee on Tuesday and Wednesday. Having spent the previous week building expectations for a significant rate cut, last week saw this being walked back with the art of managing expectations being stretched beyond creditability. Prospects are for a 0.25% cut to US interest rates, given us some substance to the continuing and increasingly confusing rhetoric over the past seven months.
Politicians have always been showmen of a sort, but now we have the heads of the world's most influential central banks joining them on the front burner. We expect to be inundated with forward guidance during the summer, but it is autumn that we need to see action with Brexit as well as the central bankers.
The World in a Week - Quarterly Earnings Season For US Banks
The biggest US banks reported their second quarter earnings of 2019 last week and it was generally a robust quarter for them all, although Morgan Stanley and Goldman Sachs disappointed a bit by being the only major US banks to have revenues, net income and earnings-per-share all fall compared to a year earlier.
JP Morgan has the highest revenue at USD 29.6 billion although this is to be expected as it is the largest US bank. It also achieved the best year-on-year growth in revenue at 4%. JP Morgan's year-on-year growth in Net Income was up 16% too which was only surpassed by Wells Fargo at 20%.
Morgan Stanley disappointed with its year-on-year revenues down 3.5%, net income down 9.7% and earnings-per-share down 5.4%.
Goldman Sachs also disappointed with its year-on-year revenues down 1.8%, net income down 5.6% and earnings-per-share down 2.8%.
Share prices did not move much on their respective reporting days. However, Wells Fargo's share price fell 3.2% on Tuesday despite achieving the best year-on-year Net Income growth. The reason for this is that all banks rely heavily on Net Interest Income (essentially their lending rates minus their deposit rates) and Wells Fargo's Net Interest Income was down USD 216 million from the first quarter of 2019 and this predominantly caused its share price to fall 3.2%.
Decreased Net Interest Income is likely to be an issue for all US banks going forward though as the Fed is likely to reduce the Fed Funds Rate on July 31st 2019. If this occurs, the lower rates will directly squeeze the banks' Net Interest Income and thus their total Net Income too.
At the time of writing, using the Fed Fund Futures market, there is a 75.5% chance of a 0.25% cut in the Fed Funds Rate on July 31st. If a cut occurs it would prompt investors to be more cautious about US banking stocks, but it would be beneficial for US equities in general though.
One last bank to mention is the Bank of England as they announced on Monday that Alan Turing, the Bletchley Park mathematical genius, will be the face of the new £50 bank note in 2021.
The World In A Week - Fact & Fiction in the Far East
Markets were quite sedate last week, with global equities as measured by the MSCI ACWI Index falling -0.2% in GBP terms. UK shares were down -0.6%, while Europe Ex-UK was down -1.1% and the S&P 500 in the US bucked the global trend by being up +0.4%. Emerging Market equities were down -1.2%, led by the Asia Pacific Region. Global Investment Grade Bonds in GBP (hedged) fell -0.4%, while High Yield fell -0.2%. Emerging Market Local Currency Bonds continued their strong run this year and are now up 11.6% for the year to date in GBP terms.
The main item to hit the newswires this Monday morning was the release of Chinese GDP data for the second quarter. The reading of 6.2% annualised growth was the lowest such result for the last three decades. Consensus is that these numbers were impacted by the ongoing trade war with the US, while strong domestic consumption averted an even deeper slowdown. This growth figure was in line with Analyst expectations. While it is good news that Chinese growth is less reliant on exports and more reliant on domestic demand, Chinese GDP statistics in the abstract are highly dubious and need to be treated with due scepticism. The numbers are liable to political manipulation, in order to allow the Communist party to meet its target of doubling the size of its economy in 2020 relative to 2010.
Nonetheless, the slowdown in China coupled with wider global growth concerns is impacting the path of global central bank activity. Chairman Powell at the Federal Reserve affirmed the path of easier monetary policy in front of Congress last week. This enhances our view that one should remain invested, but cautiously positioned.
The World In A Week - When less is more (Italy's income tax)
Is it possible for a government to increase its total tax receipt by cutting taxes?
Italy's government believes this is the case and they risked incurring a EUR 3 billion fine from the EU last Tuesday for pursuing it. In the end, the EU abandoned the fine but it remains sceptical of Italy's approach.
The issue is that Italy's debt-to-GDP ratio is 132% and this is an infringement of the EU's 60% limit. As well as this, the EU projects Italy's 2.1% budget deficit to surpass its 3% limit thus exacerbating the debt problem.
With Italy's economy at near recessionary levels (for example it edged into recession in the last half of 2018 and had a limp 0.1% growth in the first quarter of 2019) it is very difficult for Italy to generate the tax receipts needed to reduce its debt. The Italian government argues a fresh, dynamic approach is needed.
Italy is run by the coalition of Northern League (Lega Nord) and the Five Star Movement. The government advocates a flat income tax rate of 15% for those earning less than EUR 50,000. As reported by the Daily Telegraph, the Lega leader, Matteo Salvini, said 'If Italians had more money in their pockets to spend, the economy would receive a kick-start and the national debt would be reduced.'
In 1974 the economist Arthur Laffer proposed that it is possible for income tax rates to be reduced and still increase overall tax revenue. He suggested that reducing income tax rates to an optimal level incentivises spending and investment, creates more jobs and taxpayers and thus increases total tax revenue. It has worked before, for example the UK government in the 1980s adopted this proposal and slashed income tax rates and total tax revenue grew.
The most important thing though is the optimal rate as cutting tax rates below the optimal rate will have the undesired effect of decreasing total tax revenue. It will be extremely interesting to see if cutting income tax rates to 15% for the masses works for Italy.