The World In A Week - Nine Lives
Another week where politics dominated the markets. It started with news that the US and China had reached a 'phase one' trade agreement, which boils down to being a truce. For the time being the US has agreed to suspend the increases in tariffs and China has agreed to increase their agricultural purchases. The key date is the Asia Pacific Economic Cooperation (APEC) summit in mid-November, where the deal is set to be concluded.
It is good news that the trade war is de-escalating, however we do expect further bumps along the way, especially as the US has just passed legislation supporting the pro-democracy protests in Hong Kong. Will this political disagreement complicate the delicate trade negotiations?
When it comes to complicated, the UK is building a monopoly. Having already lost eight commons votes since becoming Prime Minister, Boris Johnson made it nine with defeat on Saturday, a record not seen since Lord Rosebery in 1894.
Without the will of the politicians, any deal is doomed to failure. The addiction to avoid decision has become the modern malaise and with the narrow defeat on Saturday, Boris Johnson was forced to write to the EU to request an extension to Article 50. Even that simple task was laced with confusion and ulterior motives.
What we do know, is that geopolitics is not going to get any clearer any time soon. We know we have a US Presidential election next year, but the outcome is far from clear. While in the UK, we do not know what next year has in store; a referendum, a general election or some clarity over our exit from the EU?
That is why our investments continue to be appropriately diversified in these interesting times.
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 the 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.
The World In A Week - Inching Towards A Deal
It was a rather lively week in financial markets, from the perspective of a UK-based investor. Sterling strengthened considerably against all major currencies, as markets anticipated a break-through in the long march to a Brexit deal. As Sterling strengthened, Global Equities as measured by MSCI ACWI were down -2.7% in GBP terms and the FTSE All Share index of UK Equities rose +1.61%. On the Fixed Income side of our portfolios, Global Bonds hedged to GBP returned -0.9% - but this considerably outperformed Sterling Bonds which returned -1.75% for the week.
Market developments were primarily driven by tentative advances in negotiations surrounding two prospective deals. Of major global importance, is the ongoing trade dispute between China and the US. Markets reacted favourably to news on Friday that the US had agreed a limited phase one trade deal with China which would delay tariff increases scheduled for this week. The agreement was positive, but light on detail and is widely seen as a truce in the ongoing trade war.
Closer to home, an outburst of optimism regarding the possibilities of a Brexit deal shot through financial markets towards the end of the week. The Irish Taoiseach, Leo Varadkar, met with Boris Johnson in 11th hour talks. Much was made of the reaffirmation of the possibility of a Brexit deal, even at this late stage. Sterling and UK assets rallied strongly on the news, and we expect volatility to persist into next week following the Queen's speech on Monday.
The World In A Week - Elephant In The Room
Last week, ISM data was released, this is a measure of new orders, production, employment, supplier deliveries and inventories; in essence, a measure of productivity. The key number to be cognisant of is 50, above 50 indicates an economy is in expansionary territory, below 50 indicates contraction and potential recession. Data for US and China did not make for happy reading, with German manufacturing data especially worrying, falling to 45.7 from 47.
While contraction has been evident for several months in bond markets, it has taken some time for this to filter through to equity markets, which had a negative week; in Sterling terms, most indices fell sharply midweek, limping back towards positive territory by Friday. In the US, ISM data plumbed the lowest depths in 3-years, heightening expectations of a further interest rate cut of 25bps this month, and a fourth rate cut probability of 50-50 by year-end.
On the tedium that is Brexit, there was little news. The next key date in the Brexit calendar is 19th October, when a deal must be agreed by Parliament; MP's are expected to agree to a no-deal Brexit, which we believe is highly unlikely and will result in the Benn Act being employed, which will anger hard-Brexiteers. The Benn Act was passed last month and requires the Prime Minister to ask for an extension to the Article 50 negotiating period, which would avoid a no-deal Brexit on 31st October.
Chinese equity markets reopen this week following celebrations marking the 70th anniversary of the Popular Republic. Investors will be keenly focussed on US-China statements ahead of their meeting on 10th-11th October in Washington, where trade talks will recommence.
5 staycation destinations perfect for autumn
With summer over, the nights are already starting to draw in and the colder weather is arriving after months of record-breaking temperatures. That doesn't mean you have to shelve your UK holiday plans until the spring though. Throughout autumn, there is still plenty of places to head without having to step on a plane when you want to enjoy a break.
Whether getting outdoors to take in the stunning autumn views or being cosy inside with a cup of tea is your idea of an excellent autumn break, these five staycation destinations may be just what you're looking for.
1. Aviemore, Scotland
Scotland is known for its breathtaking scenery and Aviemore is beautiful. Surrounded by mountains and the Cairngorms National Park. If you love to be outdoors, it's the perfect place to consider for your staycation. You can try your hand at skiing, canoeing and even dog sledding. There are gentler outdoor pursuits to take in, from trails around its stunning national park to wildlife watching.
When the weather turns or you want to head indoors, there are more than enough options for dining, shopping or stopping to have a drink. You can watch, or even take part in, traditional ceilidh dancing too. There's a chance to step back to the 1700s at the Highland Folk Museum or enjoy a trip on a steam train by taking the Strathspey Railway.
2. Dartmouth, Devon
Dartmouth is situated on the mouth of the River Dart and is one of Devon's most popular towns thanks to its historic streets and scenic location. As it's surrounded by countryside, it's in an excellent location for taking a brisk autumn walk and there are many traditional English pubs to stop at for lunch or dinner to get your energy back too.
Other landmarks to keep an eye out for when you're exploring Dartmouth include the 14th-century castle, which offers views of the estuary and Baynard's Cover Fort, which dates back to the 16th century. If you love the picturesque views of the water, why not head out onto the river? The Dartmouth Paddle Steamer is one of the last coal-fired steamers in the UK. Along the way, you'll be able to take in many iconic Dartmouth landmarks at a leisurely pace too.
3. Whitby, Yorkshire
Why not head to the seaside on your next staycation? Whitby might not offer warm Mediterranean waters this autumn, but it's got plenty more going for it. Strolls along the coast are guaranteed to offer great views and are even better when you have traditional fish and chips at the end too. The harbour is a great place to end up, the atmospheric Abbey towers, which is said to have inspired Dracula author, Bram Stoker, over the cobbled streets as you walk along the beach.
Not too far from the harbour is a whale bond arch that was erected sometime after 1853, paying homage to the history of Whitby. If you're lucky, you may even get a chance to see whales in the wild too. In autumn, vast shoals of herring migrate to the Yorkshire coast, attracting a plethora of other animals. Head out on a boat and you could spot seals, whales, dolphins and much more.
4. Stratford-upon-Avon, Warwickshire
Celebrated for being the birthplace of playwright William Shakespeare, you'll find plenty of history and attractions at Stratford-upon-Avon. The market town is easy to navigate if you want to walk the Shakespeare trail, taking in plenty of sights, including his wife's Anne Hathaway's cottage, the family home, which is now a working museum, and his final resting place in the Holy Trinity Church.
Don't worry though, it's not all about the famous playwright. Amongst the other things to do at Stratford-upon-Avon include the MAD museum, a butterfly farm and the 18th-century mansion of Compton Verney, which is home to an award-winning gallery and museum, is just a 20-minute car journey away and set in 120 acres of parkland.
5. Cambridge, Cambridgeshire
Cambridge is synonymous with the university in the city, but it isn't just students that will love visiting here. The stunning building that seems unchanged for centuries makes it the ideal place for an autumn walk as you take in the view. Walking alongside the River Cam, where you can find many college gardens, are Backs as they're known, is a must. Of course, if you're visiting Cambridge for the first time, you should go punting on the river too; wrap up warm and relax as a guide navigates.
If you're a fan of delving into history, a university tour is a great way to explore the nooks and crannies of the world-famous institution. There are several arts venues to take in too, including the Fitzwilliam Museum, as well as plenty of traditional pubs and shops to browse.
4 reasons ISAs are still worthwhile
Changes to how savings are taxed means ISAs (Individual Savings Accounts) may not be as attractive as they once were. However, there are still plenty of reasons why ISAs should be part of your financial plan.
ISAs were first introduced 20 years ago in a bid to encourage more people to save. An ISA is essentially a tax-efficient wrapper for your savings. You don't pay tax on the interest or returns generated within an ISA. Over the years there have been new ISA products introduced, which may offer additional incentives to save. You can either choose a Cash ISA, which will pay interest, or a Stocks and Shares ISA, where your deposits will be invested.
Since their introduction, the ISA allowance has gradually increased. You can currently place up to £20,000 into ISAs each tax year. This allowance may be used for a single ISA or spread across several accounts. If you don't use your ISA allowance by the end of the tax year, you lose it.
Why are ISAs less attractive now?
ISAs remain popular products; official statistics show that around 10.8 million adult ISA accounts were subscribed to in 2017/18. However, this is down from 11.1 million during the previous tax year.
One of the reasons for this is the introduction of the Personal Savings Allowance (PSA). Introduced in 2016, the PSA means individuals can earn up to £1,000 in interest tax-free if they're a basic rate taxpayer or £500 if they're a higher rate taxpayer. For those saving using a cash account, it may mean that using an ISA has lost one of the main benefits.
Complexity around choosing an ISA product may also mean the saving vehicle is falling out of favour. This is an issue that's been highlighted by AJ Bell, with the investment platform calling for the rules around ISAs to be simplified.
In a letter to the new Chancellor Sajid Javid, Andy Bell, Chief Executive of AJ Bell, states: ISAs started life as a very simple, tax-efficient savings products. Over the years, various changes and additions to the products have made them unnecessarily complicated, with at least six variations in existence depending on how you look at it. People now have to choose which ISA suits their specific needs and often they can't decide, which leads to them doing nothing and not saving.
We believe a much simpler system, based around a single ISA product would mean that the only decision people need to make is to open an ISA and start saving.
So, why should you still make an ISA part of your financial plan?
1. Take advantage of tax-free interest and returns
Whilst the PSA means this advantage isn't as appealing as it once was, it'll still be attractive for many people.
First, if you're an additional rate taxpayer, you don't benefit from the PSA. As a result, an ISA can provide you with a tax-efficient place to deposit your cash savings. Even if you're a basic or higher rate taxpayer, depending on your level of savings, you may find you exceed the PSA. An ISA can boost how much you can earn in interest tax-free.
Secondly, the PSA does not cover investments. In contrast, investing through a Stocks and Shares ISA can deliver returns that are free from Capital Gains Tax.
2. Potentially access additional bonuses
As well as offering interest and returns on deposits, some ISAs may offer additional bonuses. These aren't available to everyone and may not match your saving goals. However, if you're saving for your first home or retirement, they are worth considering.
The Help to Buy ISA is available for all aspiring first-time buyers. It offers a government bonus of 25% on deposits. You can open an account with up to £1,200 and can contribute up to £200 each month. You can add up to £12,000 to a Help to Buy ISA, leading to a maximum bonus of £3,000. You apply for the bonus when you're at the point of buying a property. Help to Buy ISAs are a type of Cash ISA, so you receive interest.
A Lifetime ISA (LISA) may be an option if you're saving for a first home or retirement. Each tax year, you can place up to £4,000 into a LISA, receiving a 25% bonus. You must be aged between 18 and 40 to open a LISA, and can continue to pay into it until you turn 50. This means the maximum bonus available is £33,000. The bonus is applied at the end of each month. A LISA can either be a Cash or Stocks and Shares account. However, there are some restrictions to keep in mind. Should you make a withdrawal before the age of 60 for a purpose other than buying your first home, you'll lose the bonus and may get back less than you paid in.
3. Start investing with small amounts
If you want to start investing, a Stocks and Shares ISA can be a good starting point. You won't have to pay tax on the returns generated and there are multiple options to suit how hands-on you want to be. A Stocks and Shares ISA may be right for you if you want to gradually grow your investment portfolio by adding regular, smaller sums over the long term.
For beginner investors and those that want a more hands-off approach, there are platforms that will make investment decisions for you. You'll usually be asked some questions relating to your attitude to risk, investment goals and what you can afford to invest.
If you're confident making investment decisions, you can choose your own investments that will be held within an ISA wrapper. You'll need to take responsibility for researching investments, building a portfolio and keeping track of performance, as well as aligning decisions with your financial plan.
4. Shop around for the best interest rate
For the last decade, interest rates have been low. It may mean that your cash savings are struggling to keep up with inflation, effectively decreasing in value in real terms. Saving into an ISA doesn't automatically mean you'll access better rates, but it's worth including them when you're shopping around. Typically, a fixed rate ISA, where your money is locked away for a defined period of time, will offer the best returns.
Remember, if you don't use your ISA allowance, you will lose it. If you'd like to discuss why it should be part of your financial plan and how it fits in with other options, please contact us.
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.
Are you taking enough risk financially?
When you think of financial risk, it's probably potential investment losses that come to mind. But not taking enough risk with your wealth can be just as damaging financially.
News that UBS, the world's largest wealth manager, will introduce a penalty for clients that hold a large portion of their assets in cash accounts gives the perfect opportunity to look at whether you're taking enough investment risk.
From November, wealthy clients of UBS will face an additional annual fee of 0.6% on cash savings of more than ‚Ǩ500,000 (£458,000). The penalty rises to 0.75% for those with savings that exceed two million Swiss francs (£1.7 million). The minimum fee is ‚Ǩ3,000 (£2,746) a year. A UBS client holding two million Swiss francs in cash would face an additional annual charge of 15,000 francs (£12,624).
The negative interest rates set by the Swiss National Bank and the European Central Bank are behind the decision for the new penalty. Negative interest rates mean cash deposits incur a charge for using an account, rather than receiving interest.
Whilst the UK does not have negative interest rates, they have remained low since the 2008 financial crisis. The Bank of England base rate is just 0.75% and has been below the 1% mark for the last decade. As a result, it's likely your cash savings are generating lower returns than they may have in the past.
Why cash isn't always king
You've probably heard the phrase 'cash is king' but this isn't always the case.
Cash is often viewed as a safe haven for your money. After all, it won't be exposed to investment risk and under the Financial Services Compensation Scheme (FSCS) up to £85,000 is protected per person per authorised bank or building society. If you're worried about the value of your assets falling, cash can seem like the best option.
However, that's a view that fails to consider one important factor: inflation.
The rising cost of living means that your cash effectively falls in value in real terms over time. In the past, you may have been able to use cash accounts to keep pace with inflation. But low-interest rates mean that's now unlikely. Over time, this means the value of your savings is slowly eroded.
At first glance, the annual inflation rate can seem like it will have little impact on your savings. But, over the long term, the effect can be significant. Let's say you had a lump sum of £10,000 in 1988. To achieve the same spending power 30 years later you'd need £26,122. If you'd simply left that initial lump sum in a cash account generating little interest, it'll be worth less today.
Of course, that's not to say there isn't a place for cash accounts in your financial plan. For an easily accessible emergency fund, a cash account may be the best home for your savings, for example. Yet, in some cases, taking the right level of investment risk is essential for not only growing but maintaining wealth.
How much investment risk should you be taking?
Whilst holding your wealth in cash is potentially harming the outlook of your financial plan, you may be wondering how much investment risk you should be taking.
Unfortunately, it's not a question we can answer here. It's a decision that's personal and should be made taking your circumstances and aspirations into account. For some people, investing in relatively low-risk investments that aim to match inflation will be the right path. For others, taking greater risk will be considered worth it when the potential for higher returns is considered.
When deciding how much risk your investment portfolio should take, areas to think about include:
- The reason you're investing
- How long you'll remain invested for
- Other assets you have and the risk profile of these
- Your capacity for loss
- Where investing fits into your wider financial plan
- Your overall attitude to risk
Understanding the level of investment risk that's right for you and the portion of your wealth that should be invested can be challenging. This is where we, as financial planners, can help you. We aim to work with you to create a financial plan that puts your short, medium and long-term goals at the centre of decisions. If you're unsure if you're taking enough, or indeed too much, risk financially, please get in touch.
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.