Humans are hard-wired to make poor financial decisions. It’s just in our DNA.
Financial wellbeing is a broad topic, covering all aspects of the relationship between money and our long-term happiness. It covers a wide variety of subjects, including how to manage money better, and how to use money to generate wellbeing.
In some ways, financial wellbeing is about getting out of the bad habits we have acquired by linking money with success.
If you want to improve how you make financial decisions, this guide covers six steps to take:
If you have any questions about your financial plan and how to improve your wellbeing, please contact us.
The FIRE movement is a small but growing lifestyle movement. It stands for “financial independence, retire early”, and challenges the traditional path of working until you’re in your 60s before retiring. While the steps FIRE members take can be extreme, it does share some of its core principles with financial planning.
In essence, the FIRE movement involves extreme saving and investing to create a passive income that aims to allow members to retire far earlier than a typical person would. Over the years, several different variations of FIRE have emerged but the goal for all of them is to provide financial freedom which means members can live the lifestyle they want.
Here are five ways FIRE is similar to financial planning.
1. It encourages you to review your spending now
As part of the financial planning process, you will need to look at what your expenses are now. This can help you understand where your money is going and what steps you can take to reach your goals. This may include paying into your pension, adding to your savings, or creating an investment portfolio.
FIRE is an extreme example of this. Members are encouraged to evaluate every expense and purchase they make in terms of the number of hours they’ve worked for it. A common goal of the FIRE movement is to save 70% of your income. This will typically mean adjusting your lifestyle significantly now to secure the future you want.
While both financial planning and FIRE assess what you’re spending now and the effect it will have on your future, financial planning has a greater focus on balance. That means finding a way you can reach short-term goals and live comfortably now, from going on holiday to enjoying hobbies, while still building long-term financial independence.
2. It puts long-term goals at the centre of your finances
The FIRE movement is all about thinking long term, and setting out your goals is part of financial planning too.
In the case of FIRE, the end goal is typically to retire as early as possible while still ensuring you have enough savings to last the rest of your life. For some members, this means they have a goal of retiring in their 30s or 40s and their financial decisions keep this in mind.
When financial planning, thinking long term is an essential part of the process. Your long-term goals may include retiring early, but other things may be important to you too. This could be supporting loved ones financially, travelling the world, or moving into your dream home. Financial planning helps you put these goals at the centre of your financial decisions.
3. It considers retirement early
When should you start thinking about retirement? While most employees will now automatically be paying into a pension, many don’t think about their contributions, or what kind of lifestyle they will enable until retirement is near.
The sooner you engage with a pension, the more likely you are to secure the retirement lifestyle that you want. Even a relatively small increase in your pension contributions while you’re younger can add up.
You may also find you’re missing out on opportunities for your employer to contribute more to your pension or that changing the way your pension is invested makes sense for you.
One of the positive things about FIRE is that it encourages people to start thinking earlier about what they want their retirement to look like.
4. It can provide members with more freedom
Financial independence can give you the freedom to focus on what you want. Having a passive income can mean you’re able to give up work or reduce your hours to spend more time on what’s important to you.
FIRE encourages financial independence through an aggressive saving and investment programme. Members will often have a significant target in mind when building up wealth, such as £1 million or 25 years of income, and will then manage these assets to take a small income that will last throughout their lifetime.
Financial planning can also help you secure greater financial independence. A financial plan helps you reach the goals you’ve set out, but it also considers your financial resilience. This can help protect you from financial shocks and provide you with greater freedom.
By working with a professional, you can have confidence in the steps you’re taking and have someone to talk to if you want to change your lifestyle.
5. It looks at ways to make your money work harder
With such large goals, the FIRE movement has a strong focus on making your money work as hard as possible to build up wealth and then deliver a passive income. This may mean actively reviewing savings accounts to find those with the highest interest rate, and will often mean investing aggressively.
Both of these things can help your wealth grow, but it’s important to review what level of risk is right for you when investing. Financial planning can help you balance risk with potential rewards – all with your goals in mind.
While investments with potentially high rewards can be enticing, they will typically come with higher levels of risk that may not be appropriate. We can help you build an investment portfolio that reflects your risk profile.
Financial planning can help you achieve financial independence and retire sooner if that’s one of your goals while striking a balance to deliver an income that means you can enjoy your life now. If you’d like to talk to us, please get in touch.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
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.
When you’re making financial decisions, who do you speak to? One of these people is likely your partner. Yet, despite seeking financial advice from a partner, research shows it’s often not acted on, particularly when it comes to investing.
Investing is a big decision and there are a lot of factors to consider, from the amount of risk to take to which product to invest through. It’s natural to want to discuss some of these aspects with someone. Almost half (48%) of Brits consult their partner when making investment decisions, but only a fifth act on the advice offered, according to research from Barclays.
Instead, the research shows that potential investors value professional advice. Some 44% of investors said investments were an essential area to seek expert support with. This compares to 41% that said health was an essential area on which to seek expert advice.
Clare Francis, director at Barclays Plan & Invest, said: “While we tend to lean on our partners for emotional support in most aspects of our life, relying solely on their advice when it comes to money and investments can be a little nerve-wracking.”
Expert advice can help you understand investment options and how they suit your goals. However, you don’t have to choose between discussing it with a partner and talking to a financial planner. Working with a financial planner as a couple when investing can be beneficial. Here are three reasons why.
1. It can help you understand you and your partner’s priorities
Priorities play a big role in financial decisions. What you want to do with your money and your long-term goals will affect which investment options are right for you. Part of the financial planning process involves looking at what your long-term aspirations are.
Going through this process as a couple can help bring both your aspirations together and you may realise you’ve overlooked some areas. For example, you may want to invest for early retirement, while your partner is thinking about how you could provide a financial helping hand to children in the next few years.
Investment decisions should focus on what you want to achieve. As a result, an open conversation with a partner about short-, medium-, and long-term goals is essential. In many cases, you can create an investment strategy as part of a wider financial plan that reflects a variety of goals.
2. It can help ensure you both feel comfortable with investment risk
All investments come with some risk and volatility at times. However, not all investments carry the same level of risk and it’s important both you and your partner feel comfortable with the risk that is being taken. Investment risk should link to your goals and other factors, such as the timeframe and other assets you hold.
A financial planner will be able to create an investment portfolio that reflects your risk profile. If you’re making financial decisions as a couple, it can provide added confidence about your financial security and that of your partner. It can also help you answer “What if?” questions about the future, such as what to do if investments perform poorly over the next few years or whether you need to stop regular contributions, for example.
3. It can make investing part of your wider financial plan
You shouldn’t make investment decisions in isolation. Instead, they should be a part of your wider financial plan, but it can be difficult to know how they fit in. Discussing your goals with your partner and a financial planner can help you build a blueprint that suits you and brings together all your assets. It means all your assets are helping you work towards aspirations, whether that’s early retirement, paying off the mortgage, or leaving a legacy for your family.
Please contact us if you’re thinking about investing or would like to review your current investment portfolio. We’re here to help you make investment decisions that reflect your goals and those of the people most important to you.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
The 2020/21 tax year hasn’t even finished yet, but it’s the perfect time to start thinking about the next 12 months. While this time of the year is often associated with using up allowances before the deadline, getting a head start on 2021/22 can be just as beneficial.
The new tax year starts on April 6, with the weeks before the deadline often associated with making financial decisions to use up allowances. From moving money into an ISA, to investing through Venture Capital Trusts, using allowances can help reduce tax liability and make your money go further. In some cases, leaving decisions until the last minute can make sense, but there are reasons to set out a plan at the start of a new tax year. Here are six of the most important:
1. Avoid last-minute decisions
Leaving your financial decisions until the last minute can mean you need to rush, which could lead to mistakes being made or not fully exploring all your options as you simply don’t have the time.
In some cases, how you use allowances will have a significant impact on your finances. If you decided to use your pension Annual Allowance, for instance, you would not be able to withdraw this money until you reached pension age, which could be decades away. It’s important you consider how making use of allowances will affect your short- and long-term plans. Thinking about your plan for 2021/22 now means you have plenty of time to consider your options.
2. No worries about delays
Sometimes things outside of your control can have an impact on plans. Delays with providers and other parties are one example. If you decide to invest through an ISA with just a few days to go until the new tax year, there is a risk that you’ll end up missing the deadline. In some cases, that could mean paying more tax than you need to.
Deciding how you’ll use allowances over the next 12 months means you can minimise the impact of delays or other factors that you can’t control.
3. Spread your contributions across the year
If you plan to put a significant sum of money away, whether in an ISA, pension, or an investment portfolio, spreading out contributions across the full year can make it more manageable.
The ISA annual allowance, for example, is £20,000. If you want to make full use of this, adding around £1,650 per month from your income or other assets can mean it becomes part of your regular outgoings rather than a lump sum you need to find at the end of the tax year.
The same is true for pension contributions. It’s also worth noting that your employer may match or increase their contributions in line with your own when it’s coming straight from your income, but are unlikely to do so if you make a one-off contribution.
4. Benefit from interest and the compounding effect
Not only can spreading out contributions make managing your finances easier, it can also be financially beneficial. If you’re using a cash account, such as a Cash ISA, you’ll receive interest on your contributions. Depositing money sooner in the tax year, whether as regular contributions or a lump sum, means you have more time to benefit from interest. The compounding effect means the longer your money is held in an account, the greater the interest it will deliver over time.
Although interest rates are low, over time the process can deliver sizeable benefits, especially if you’re making full use of allowances.
5. Drip feeding investments could make sense for your financial plan
Much like a cash account, spreading investments across the tax year or adding a lump sum at the beginning can mean you have longer to benefit from potential returns and the compounding effect. However, with investing, spreading your contributions throughout the year can also provide some protection from market volatility.
Investing regularly with smaller amounts means you’ll buy stocks and shares at different points in the market cycle. Timing the market is impossible to do consistently, so drip-feeding investments mean you’ll buy at high and low points, which can balance out over time.
6. Take the opportunity to set goals
Finally, a new tax year provides a good opportunity to review what you want to achieve in the next 12 months and beyond. It can help ensure your financial plan reflects your wider goals and will help you reach them.
Please contact us to discuss your financial plan and the steps you should be taking in the 2021/22 tax year.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Stock markets in 2020 have been characterised by volatility and uncertainty. If you’ve made financial decisions based on your feeling towards this, it could have cost you money.
Whenever we make a decision, we have to weigh up the different options. While reasons and facts should be the basis for any decision you make, emotions play a role too. Where this happens when making financial decisions, this is called financial bias. It can mean you end up making decisions that aren’t appropriate for you.
In recent months, as markets have experienced volatility and economic uncertainty has featured in the news, this may have affected the decisions you’ve made too.
Moving to cash due to Covid-19 cost investors 3%
According to behavioural finance experts Oxford Risk, investors that responded to Covid-19 uncertainty by moving more of their wealth into cash could have missed out. By switching to cash for ‘emotional comfort’ it’s calculated that investors have missed out on returns of 3% or more a year.
Separate research also suggests that investors moved more of their wealth into cash in response to Covid-19. In the first half of 2020, UK households put away £77 billion in cash, taking the total amount saved in cash accounts to £1.5 trillion. While a cash account to cover emergencies is advisable, it’s estimated that nearly £1.2 trillion of this cash isn’t needed for contingencies.
With cash accounts currently offering low-interest rates, it’s estimated that UK households have missed out on £38 billion in potential investment returns.
While investing does come with risk, it can help your money grow at a faster pace than when using a savings account. However, you need to invest with a long-term time frame, a minimum of five years. This provides an opportunity for short-term volatility to smooth out. Investing for a short period means there’s a higher chance that you could lose money due to short-term downturns.
There are many reasons investors held more of their money in cash during the first half of this year. But for some, financial bias will have played a role.
For example, information bias occurs when investors evaluate information, even if it doesn’t relate to their situation. It makes it difficult to assess what information is relevant. The sheer amount of information can be overwhelming. During the pandemic, investors have been bombarded with news, forecasts and opinions about what will happen. With much of this coverage negative, it’s natural that some investors will have had an emotional reaction and decided that cash was safer.
Trying to time the market provides an opportunity for financial bias
It’s not just a trend that is having an impact due to Covid-19 either. When the markets are performing well, it can be tempting to increase how much of your wealth is invested. In contrast, it’s common to want to move your money to ‘safety’ at times when markets are performing poorly or experiencing volatility.
However, this can mean you end up buying assets while prices are high and selling at low points. Oxford Risk estimates this type of financial bias can cost investors an average of 1.5% to 2% a year over time. Over a long-term investment strategy, financial bias can end up costing you significant sums.
While it can be tempting to move money in and out of investments to maximise returns, trying to time the market is difficult. As the above averages show, you’re more likely to miss out on returns than to increase your portfolio’s value. For most investors, a long-term investment strategy is appropriate.
Minimising financial bias: Stick to your long-term plan
Creating a long-term plan based on your goals and sticking to it can help you minimise the impact of financial bias. That can be easier said than done, though, especially at times of uncertainty. Working with us can help you here. A financial planner will be able to help you understand your long-term financial positions and act as a second pair of eyes when you want to make changes. It can mean financial biases can be highlighted and discussed.
That doesn’t mean you should never make changes to your financial plan. After all, circumstances and goals do change, and your financial plan may need to change to reflect this. However, this should be driven by long-term aspirations and be based on evidence.
Please contact us, if you’d like to go through your financial plan and investment strategy.
Please note: The blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
The start of a new year is the perfect time to get your finances in order.
A few simple changes could improve your finances in 2021 and beyond, setting you up for a healthier financial future.
So, whether your finances are in a muddle or you just want to ‘do better’, here are five new year’s resolutions worth sticking to.
1. Create a spending budget
If your bank balance has been getting worryingly low, it’s probably time to take a thorough look at your spending habits.
Creating a budget is a useful exercise whatever stage you’re at in life. And you may be surprised at how easily you’re able to save extra money each month.
The following simple steps can help you create a successful budget:
Work out how much money you take home each month
Add up your monthly outgoings
Calculate the difference
If your expenses are greater than your income, check if there’s anything you could cut back on. We’re not suggesting you scrap all of your little luxuries. However, there may be lots of things you’re spending money on that you don’t actually need, such as unused magazine subscriptions or gym memberships.
If your income is higher than your outgoings, consider adopting the ’50-30-20’ budgeting philosophy. This is where essential expenses comprise half your budget, other expenses make up 30%, and the remaining 20% goes towards savings or paying off debt.
2. Pay off expensive debt
If you’ve racked up a lot of debt, the new year could be a great time to start tackling it.
The higher the interest rate, the more the debt will cost you, so it’s usually a good idea to pay off expensive debts first. These could include credit card and store card debts, unauthorised overdrafts, and payday loans.
Paying off your debts could enable you to save more money for your future, improve your credit score, and reduce any anxieties you’re feeling about your finances.
Some loans come with high early repayment penalties, so make sure you read the terms and conditions before paying them off.
3. Increase your pension contributions
If you’ve got extra money sitting around or recently received a pay rise, it could be worth increasing your pension contributions.
Each time you pay into a pension the government tops it up with 20% tax relief, making it a great way to save for your future.
The chart below shows how quickly monthly pension contributions can add up over time. It shows two £20,000 pensions growing by 5% a year over 30 years. One has £100 paid into it each month, and the other has £300.
It’s never too late to start preparing for your future. However, the earlier you start investing, the better your chances are of living the retirement you desire.
Research by Which? suggests couples need £27,000 a year to live a comfortable retirement, or £42,000 a year to live a luxury retirement that includes a holiday every year and a new car every five years.
Couples would need a pension pot of around £215,450 to produce enough income for a comfortable retirement via income drawdown, or £298,000 through a joint-life annuity. For a luxury retirement, these figures rise to £502,775 and £695,000, respectively.
4. Invest in a Stocks and Shares ISA
Investing in a Stocks and Shares ISA has several benefits. Your money grows free of Income Tax and Capital Gains Tax, and you can withdraw money whenever you like without paying tax.
This makes ISAs a useful vehicle for holding money that you might need to withdraw before retirement. Money inside a pension can’t be accessed until you’re at least 55-years-old, rising to 57 in 2028.
Additionally, because ISA withdrawals are tax-free, they can be a tax-efficient way of taking income in retirement. With a pension, you can withdraw up to 25% tax-free and the rest is taxed at your marginal Income Tax rate.
You can pay up to £20,000 into ISAs in the 2020/21 tax year. Keep in mind that when investing, your capital is at risk. You should invest with a minimum five-year timeframe in mind.
5. Make a will
Making a will is an essential financial exercise, yet research by Royal London suggests 57% of UK adults don’t have a will in place.
If you die without a will, it could cause immense stress and financial hardship for your family. In a worst-case scenario, your loved ones could inherit nothing and become embroiled in bitter disputes.
By making a will, you can ensure:
Your money and assets end up in the right hands
Your children are cared for by people you know and trust
Your unmarried partner and stepchildren are provided for
Your family can continue living in their home
Your estate doesn’t attract unnecessary Inheritance Tax
Writing a will can give you the peace of mind that your loved ones will be protected long after you’ve gone.
Get in touch
If you want advice on getting your finances in order, we can help. From helping you create a financial plan to organising your pensions and other assets, we’ll ensure your new year is off to a flying start. Please contact us to arrange a meeting.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
The Financial Conduct Authority does not regulate will writing or estate and tax planning.
Hello out there. It’s the weekend again. Where did that go?! I hope you’re all well and safe, spirits up and eager to learn of your next investment opportunity. This week I’m going to take a look at tax and more importantly saving it. It’s topical this week thanks to dear old President Trump and what seems like a great team of advisers he has. $750 income tax for a man of his wealth. Wow! Firstly though, I have a confession to make. The title of this post may be a little misleading. I am no magician and I’m not prepared to be ‘creative’ with the truth – that would be illegal. So, if you are a billionaire expecting me to get you a £750 tax bill this year, you will be sorely disappointed.
For most people out there however, spanning from those with a modest nest egg to those with millions, there is hope. Plenty of ways exist in which you can very legally keep your hard earned cash away from the dreaded tax man. This isn’t dodgy. This is just about making use of the allowances available to each and every one of us.
This list certainly isn’t exhaustive and should not be taken as individual advice, but here are a few of the main ways that you could get a little bit closer to paying tax like Trump…
1. Use your ISA allowance
OK, cash ISA’s offer very little return at the moment. I know. In fact, in some cases if all you can do is cash, you may be better off without the ISA – but only if you have relatively modest savings and don’t invest outside of cash at all. Otherwise, you should consider making use of your full allowance if you can do so. Why? Two reasons.
Firstly, because it’s a use it or lose it situation. You may not think the ISA is worth it now, but the returns will always be tax free (subject to no rule changes). That’s a very valuable benefit for those that have managed to, or are likely to, build more substantial sums.
Secondly, ISA’s can make use of many more investments than just cash. Most offer you a much better potential for return if you are prepared to accept even a cautious amount of risk and invest for a little bit longer. This can substantially increase tax free income.
2. Use your pension allowances and tax reliefs
By using a pension to save for retirement, you’ll also avoid paying some tax. That’s because your pension contributions qualify for tax relief. So if you’re a basic rate taxpayer, you’ll qualify for tax relief at a rate of 20%. Meanwhile, higher rate taxpayers qualify for tax relief at a rate of 40%.
Do you own your own private company? Great news, pension contributions in most cases will count as a business expense, therefore a saving of 19% corporation tax can be made.
You should note that the amount you can contribute to your pension is now limited to £40,000 a year, but your allowance for a limited number of previous years can be carried forward, so where funds exist this can be a substantial win. But this again could be classed as a use it or lose it situation.
Pensions grow tax free too, so they are are a great way to build up a tax-free nest egg for your retirement. That said, once you start to claim your pension income, you will have to pay income tax. Don’t worry! You do get the first 25% of your pot to withdraw tax free and you can structure your income appropriately – more later.
3. Use your personal income tax allowance.
Every one of us currently has a personal tax allowance, a nil rate tax band if you like, of £12,500. If you are part of a couple (that is in a good place I should add!) this presents you with a couple of opportunities to use it!
Firstly, just taking the pension issue a little further, it may be useful to structure some of your contributions to reflect that this allowance can be used by you both when you start to draw retirement income, but only if you’ve got sufficient funds to draw. This could be a useful tool for example if you are both directors of a family company or have excess income.
Secondly, if you are married or if tax and personal circumstances allow, you could transfer any income producing assets to his/her name and receive a nil or lower tax rate by using his/her personal allowance.
This means that for a couple, with the right investments and structuring of contributions to pensions, in retirement you could bag yourself an income of £25,000 before you start paying any tax and this could be drastically increase by also having a properly structured investment portfolio.
You can find info about personal tax allowances here.
4. Use your other allowances – all of which most people have!
Savings Allowance
Since April 2016, savers have been able to grow their money tax free, thanks to the ‘personal savings allowance’. This allows you to earn interest up to £1,000 interest tax-free if you’re a basic-rate (20%) taxpayer, or £500 if you’re a higher-rate (40%) taxpayer. Additional-rate taxpayers don’t receive a personal savings allowance, so if you earn more than £150,000 each year, you’ll need to pay tax on all your savings.
All interest from savings is now paid gross, which means tax will no longer be deducted by your bank or building society. At today’s rates you could have a fair amount invested in cash before you start paying tax on the returns. I would of course suggest that this is a terrible idea given inflation would eat away at your capital quite readily. All is not lost however, as some investment funds offering higher potential returns (with some risk) are also ‘interest’ producing. This means you can structure your investment portfolio accordingly to make use of this allowance.
Dividend Allowance
Everyone has a tax free dividend allowance of £2000 per year. This means that for owners of private limited companies taking company profits as dividend, or investors in public shares receiving dividends this is a valuable allowance.
Taking regular dividends over time from an income producing share portfolio or share based fund portfolio can add a healthy amount onto your retirement income. These could be phased into ISA’s over time, further reducing tax and giving you a slice of the profit from the great companies of the world. For the well informed investor this strategy is a must.
Capital Gains Tax Allowance
You only have to pay Capital Gains Tax on your overall gains above your tax-free allowance (called the Annual Exempt Amount). The Capital Gains tax-free allowance is £12,300. This gives you the opportunity to purchase investments with readily available capital at any time and then phase them, as detailed above, into more tax efficient environments such as ISA’s.
This also gives you the ability to realise amounts of capital for one off expenditure, such as those kitchens, cars and cruises!
So what now?
OK so that’s it. Nothing hard there at all?! But even with some of the more experienced savers and investors out there, in most client meetings I can usually manage to save some tax. It’s all about structure and it’s all better off in your pocket than with the tax man.
If however what you’ve just read means nothing to you, but you have pensions and other assets that you’ve worked hard to build over time, you could probably use some advice. Structuring your future wealth and income properly could quite literally save you thousands and I always find it is well worth it.
I appreciate some of you may like to see this in practice, so at the end of this post I’ve added a case study example. It’s an easy one I know and I fully appreciate that everyone is different and the world is not ideal. So why not drop me a line? I am always on hand to answer any questions you may have – just email advice@agileifa.co.uk or use our contact form and we will gladly contact you.
Thanks for reading . Until next week.
Chris @ Agile
Case Study David & Rachel, both 66. Target after tax income – £30,000.
David and Rachael are ready to retire, they have just celebrated their 66th birthdays. They each have money purchase pension pots, David has a sum £200,000 whilst Rachael has £150,000. Their children left home a while ago and since then they have done a great job at saving. They also inherited a small amount from parents. Having managed to fund ISA’s to some extent for a number of years they recently decided these should be invested rather than held in cash given terrible cash rates. They are currently worth £75K each. They like to keep a cash buffer too, so have £50,000 in a savings account paying 1%.
Knowing that their spending habits will change now that they are no longer working, Rachel set out to create a budget that would fit their lifestyle in retirement. They no longer have a mortgage so it’s really as simple as day to day spending, the occasional holiday and social. This comfortably comes within £2500 per month.
The zero tax solution…
David
Rachael
Tax
Notes
State Pension
£9,110
£9,110
£0
Within Tax Free allowance
Pension Drawdown Income
£4,520
£4,520
£0
Uses remainder of personal allowance as taxable income and includes the tax free cash available on the payment.
ISA 3% Withdrawal
£2,250
£2,250
£0
Income and capital gains both tax free
Savings Interest
£250
£250
£0
Within personal savings allowance.
Total Income & Tax
£32,260
£0
This allows them to live comfortably to their lifestyle and have money left in pensions and investments for the ‘big things’. Of course, if you are younger than state pension age great – just replace it with private pension withdrawals. They’ve even got a little Brucie Bonus on top of their desired 30K. Happy days!
Hello again readers! I hope you are all well and getting to grips with the second new normal. Over the last few months we have been trying to ‘control the virus’ and I have been trying, probably with more success, to ensure that this temporary blip in the road doesn’t lead to irrational investor behaviour. What I’m failing at is the urge to link these posts to coronavirus. I’ll stop soon I’m sure, but for now, here’s another insight that could help you to use the impending further lock down to take positive steps for your financial future. This week the topic is inflation, the silent killer of your nest egg.
What’s your number?
Everyone should have a number. For everyone it’s different. What number? Your number. The one that represents the amount of money you’re going to need for retirement. The one that let’s you answer ‘yes’ to the question ‘am I going to be OK’? The number is the answer to the sum of your life. It’s based on the lifestyle you want in the future and have become accustomed to after your years of toil. So what if slowly and silently the value of the money it represents was siphoned off? So sneakily and slowly that you never realised, until all of a sudden you hit 70 and find that your three weeks in the Caribbean have turned into a caravan in Cleethorpes?
There are a few predators that can deviously devour your retirement nest egg if they aren’t kept in check. Some of these you can control, such as the charges on your investment portfolio. There are others such as tax, which you can control to a certain extent, by making use of your tax efficient allowances such as ISA’s and pensions. Don’t worry, I intend to delve deep into these topics on future blog posts so sit tight! For today however, I will concentrate on one killer that you unfortunately have absolutely no control over – and that’s inflation.
Headline returns
Every investor hopefully wants to generate real returns after charges and tax and should do everything in their power to keep these as low as possible. This is just a no brainer. But what else? The media spends much of it’s time giving us headlines and never more than over the last few months. I’ll give you two examples of this.
Savings rates
We are always aware of changes in the Bank of England rate and the subsequent change in savings rates. During the first few weeks of recent government support for firms and individuals, some of the best rates around could be found at National Savings. I never thought I would be saying to clients that for funds held in instant cash (and this should only be your emergency funds people!) they should use premium bonds. Alas, the amazing return of 1.4% has now come to an end and has reduced to a mere 1%. It was only kept high because the government needed your money. Now it appears they want it less and last week has seen commentators jump all over this.
The markets
For the investors out there (and even if your only asset is a workplace pension you are an investor) you may have been paying more attention to the level of the stock market. We have recently had daily headlines of ups and downs, sometimes in the region of 9%. You always hear about the downs more than the ups! Of course you shouldn’t have been giving this more than a passing glance. These are temporary falls. If this ever isn’t temporary, capitalism will have failed. We will have much more to worry about.
For the financially informed, the stock market (and by this I mean global businesses) represent the best long term return available. You just have to be well behaved and accept the ups and downs, but I invite you to look around you right now. You are surrounded by everyday products that represent your support for global businesses. Do you plan to stop buying things? Do you think anyone else does? Why wouldn’t you want your share in the profit of all of our spending, magically compounded over time? I’ll leave that thought with you.
Inflation should be much more of a worry for you now, but we don’t tend to spend a lot of time talking about inflation rates. BBC and Sky news don’t show us a lovely inflation graph every day, but they should. Why don’t they? Because it’s not a headline, it’s just there every day, slowly and sneakily stealing the buying power from your wealth.
Inflation isn’t like it used to be
The 1970s to the 1990s were a time of high inflation, but by and large this has been off the table as an issue for investors since then. Just have a think back to this time though. In 1990 the rate of inflation was a whopping 9.46%, but if you were savvy you could get interest on a bank account of 14%. That is a real return. From cash. Who would believe that now! Let’s take a look at today. We have an RPI inflation rate of 1.5% and the most you can get from a bank account (if you are lucky) is 1% and that’s for premium bonds or locking your money away for a lengthy amount of time. The majority of cash accounts now pay next to nothing.
I refer to RPI specifically, because this is the rate of inflation more related to the things we spend on a day to day basis. You may also hear the term CPI also used. Why is this important? CPI usually measures lower, but RPI is your main concern! Confused? Check out this handy ONS explainer.
Why you should be concerned
A lot of savers these days are holding large cash balances in the hope of riding out current market volatility. The problem is, with the return on cash hovering around 0% in nominal terms and -1.5% in real terms, this puts investors in a pretty deep hole. If you believe the inflation predictions this will only get worse.
The reality is unless you are getting over 1.5% net (current rate of RPI) then you are guaranteed to lose money. So, if you’ve got your maximum £50K in premium bonds this means a real loss per year from now of at least £250. This may not seem so bad to you. But if your remaining 50K is paying no interest at all, in total you are losing £750 a year in real terms. £100K in a normal savings account paying nothing? You’ve lost £1500.
Inflation is by far the biggest investment risk over your lifetime
Take a step back and say to yourself. “I put my money in the safest place I thought I could and I’ve lost a grand.”
Does this sound mad? Are you hearing yourself right? Yes, you damn well are.
This is money that would and should have been spent on you. It was part of ‘your number’ and was for whatever makes you happy. It’s been stolen. It hasn’t been taken away from your balance on paper, but ‘your number’, that amount you need for a great life, just went up. Same difference. This is the wrong kind of compounding, the reverse of what you have become accustomed to.
The answer
So, what can you do about it? This is very simple in principle. You can have a proper financial plan. A plan which carefully considers your current and future lifestyle. One with a carefully selected set of investments designed to provide you with access to capital and income exactly when you need it. A plan which includes a long term investment strategy that can allow your nest egg to create real returns. It should pin down and focus on what you want out of life and make certain that you’ll have ‘your number’.
It doesn’t matter where you are in your financial life or where your capital is invested at present. A plan is a mandatory, crucial and responsible thing to do if you want to ensure the continued prosperity of your family isn’t pilfered by inflation. If you’re thinking about getting something together you can find some things to think about in our retirement blog post.
The best time to make your plan was 20 years ago. The second best time is now.
Thanks for reading.
Until next week…
Chris @ Agile
I’ve been trying to think of things you might associate with the number six. Six eggs. Six pack – ha I wish! Six geese a laying. Six of one and half a dozen of the other. Some readers, I’m sure, will remember spending a sixpence in their younger years, otherwise known as a ‘tanner’. Given that’s the number of the now, we should all try and remember it somehow.
I wouldn’t want any readers to inadvertently breach the new rule of six and bag a £100 fine. That would be a terrible move for the health of your finances and the nation. Even if you think that’s a price worth paying to visit grandma with the kids, or the local rave if that’s your thing, I wouldn’t recommend it. So, in order to keep the number firmly on your mind, here are six things to (potentially) avoid if you want to maintain healthy finances for a lifetime…
1. Slacking on saving
Most people tell me that they have managed to save more recently, perhaps more than ever. We obviously haven’t had as much to spend our money on! Holidays are a risk, there was no point in new summer clothes and getting out and about to shop or socialise has been much more of a chore. But as the new normal starts to materialise, we are all going to be compelled to loosen the purse strings a little.
It doesn’t matter how rich you are, your fear of missing out on the best phone, best car, best clothes and other important (?) luxuries can have a serious affect on financial planning for the future. You may have heard the wise Chinese proverb that says “The best time to plant a tree was 20 years ago. The second-best time is now.” Well that pretty much applies to saving too. While the best time to start saving may have been 20 years ago, don’t panic. There’s plenty of time to control the FOMO and direct some of your cash into a long term savings plan.
I’m all for having a great lifestyle now, but as humans we are compelled to black out the future. Thinking of today and putting off until tomorrow creates one thing – uncertainty. It’s my job to remove it. So read on…
2. Prioritising other people
Only you are responsible for your financial future. That’s it. Fact. There are fewer final salary pension schemes these days. The state pension gets further into the future by the year, and if you haven’t already, I advise you to check when you will get yours here. To top it all off, your company pension usually needs to be invested with care and diligence in order for it to provide you with the retirement you deserve. That’s because it’s got risk attached to it and guess what? The risk is yours.
Why then do people often set priorities that are the total opposite of good financial planning? I often see people paying tens of thousands for children’s education, weddings, house deposits, cars and so on. Are you creating a future problem?! Yes, if you are forced to move in with those kids to survive in later life or if your holidays move from Barbados to Blackpool!
I’m not saying that you shouldn’t help out the kids, far from it, but the ‘bank of mum and dad’ needs a prudent manager. One that can put the outlay into the context of your wider financial planning, make sure it’s affordable and won’t affect your future. There are ways to fund education, such as student loans. There are government incentives to fund housing, such as help to buy. Then there are of course the more traditional ways to fund this stuff like good old fashioned responsible saving… theirs I mean. These options can all be exhausted before your nest egg is.
3. Declining to defend
“It will never happen to me.” Well maybe it won’t, but as we are all too aware these days, it can and will. No-one knows how or when. That’s why you need to consider two key things that can soften the blow when disaster strikes.
Firstly, you need an emergency fund. A few months expenditure in a relatively accessible place that can help you deal with a disaster. If you lose your job this will give you some breathing space. If your boiler packs in, you need the money to sort it.
Secondly, you should consider insurance to cover anything that can’t be paid for with your emergency funds. If you will eat into your retirement savings to fund a disaster, such as loss of income or in the worst case due to a death in the family, then it should be covered with insurance. Why? Because if it isn’t covered and the worst happens your retirement could end up looking much less rosy.
Yes you will pay a monthly premium and it’s a cost. Put that cost into the bigger picture and in the majority of cases, if something does go wrong, it will be a much lower cost. You don’t want to affect your retirement through spending your nest egg. You shouldn’t be forced to damage your health further by the need to work to pay the mortgage. Cover it.
4. Selling not staying
What is a ‘paper loss’? Let me explain. Let’s say you buy a house for £300K and then 6 months later it’s valued at £250K. Have you lost £50K? No. You still have the house and the loss is on paper. You’ve only made a loss if you sell the house!
This also applies to investments. Often when investments fall in value people panic, their gut instinct tells them to sell and without someone (like me) to steady their nerves their paper loss turns into a real one. What’s more, they typically then try to time the markets, miss out on gains and are left in a much worse position. Do this a few times in your investing life and your financial plan will catch more than a cold! You can read more in my post on timing the investments markets here.
The main thing to remember is that you should only be selling investments to create cash that you will absolutely need in the short term. Otherwise sit tight and do absolutely nothing!
5. Living too much life
We all become accustomed to a lifestyle. It’s inevitable that as we hopefully increase our income we will use some of that to enjoy the finer things in life. However, once you’ve got this lifestyle you are going to want it to continue, for life.
The problem is that one day you are going to want (or need) to slow down a bit. Less work means a loss in income and that needs to be replaced. That’s going to have to come from savings or pensions, both of which need to be contributed to now.
Some of you may have heard of a famous investor, the one and only Mr Warren Buffet. His quotes get banded about quite often but always aid good financial planning! I make no apologies for highlighting the following two…
“Do not save what is left after spending; instead spend what is left after saving.”
“Investing is an activity in which consumption today is foregone in an attempt to allow greater consumption at a later date.”
Thanks Warren. Enough said.
6. Passing on the professionals
This can be a big problem. There’s a reason why we use professionals to do jobs we think we might be able to do ourselves. My oven recently decided to start indiscriminately burning everything to a crisp – so I bought a new one. It was lockdown, it could not be fitted by the well known appliance firm for health reasons and to top it all off they would only leave it at the bottom of the drive. “OK Chris” I said to myself, with the oven up the drive and steps, two coffees down and much head scratching later, “you can do this.”
I enthusiastically began work removing the old oven. Three hours and many expletives later I had finished the whole task. Along the way there was an argument with my other half re positioning, the unnecessary removing and then refitting of the cabinet housing and the dislodging of the gas pipe to the hob. After the final screw had been turned and the oven was proudly in place, I found the protective plate, to be fitted to the electrics at the back, right there on the kitchen side. This was as well as all the other minor issues, you know the ones, “where is that screw?”. You get my point. I’m a great financial planner but I’m terrible at fitting ovens. This would have been a safer and shorter job with a pro.
A less stressful alternative…
Many people go it alone when it comes to financial planning, but often they don’t know what they don’t know. As a result, they can’t fix what they don’t see. Like the oven debacle, it could cause much stress, mistakes and in the case of financial planning , retirement doom. Luckily I could hear and smell the gas. You can’t hear and smell lost investment returns.
In client conversations I often uncover blind spots in estate planning, tax and investment strategies that were hiding in plain view. That’s as well as acting as a great sounding board for all of the financial decisions that get thrown at me, whilst always making very clear the effects of these on the longer term plan.
A good financial planner can serve as a guide to help you see your blind spots and help you avoid sabotaging your financial future. It’s about helping you make the right decisions and avoid costly mistakes. If you’re thinking that’s a great idea, I know a good one.
Thanks for reading.
Until next time…
Chris @ Agile
A common saying in financial planning is “it’s about time in the markets, not timing the markets.” But why is this?
When investments start to fall I often take calls from clients who are rightly worried and want to try and time the market. Some reassurance on how markets operate can often put their mind at rest. In this post I’ll take a look at why timing the market is something I would rarely recommend.
The ups and downs
Markets carry a lot of unknowns.
While steep falls can be unnerving, it’s important to bear in mind that ups and downs are actually a good thing. Short-term volatility is the price you must pay for the chance of higher long-term returns. Extremely low volatility is worrying – it often suggests investors are being complacent.
Short-term market movements are often the result of changes in sentiment – how investors feel about the stock market. You need a crystal ball to predict this! Particularly recently, we’ve seen volatility on a daily basis.
This is in contrast to long-term market movements, which are the result of changes to companies’ fundamental worth. This is more predictable.
What is timing the market?
Nobody I’ve ever met wants to lose money, so it’s natural to feel uneasy when markets move significantly. This is why some people suggest trying to time the market.
Timing the markets involves trying to second-guess the ups and downs in the hope that you will buy when prices are low and sell when they are high. This can be lucrative if you get it right consistently, but this is very difficult to do. Getting it wrong means locking in losses and missing out on gains and I rarely find this strategy goes well.
Selling out of volatile markets
Some people prefer to sit out during periods of volatility, waiting for conditions to improve. This could be by selling all of your investments or holding back from investing new money. I’ve had more requests for this, particularly political issues such as Brexit or the Covid-19 pandemic causing stock market volatility. I don’t believe this is a good idea for most people. Here’s why…
Missing the best days when timing the market
Not only is timing the market difficult to get right, it also poses the risk of missing the ‘good’ days when share prices increase significantly. Historically, many of the best days for stock markets have occurred during periods of extreme volatility and straight after falls.
Anybody who pulls money out in the early stages of a volatile period and particularly after a fall could miss these good days and will be locking in losses. For instance, between May 2008 and February 2009 in the depths of the global financial crisis the MSCI World index dropped by -30.4%. By the end of 2009 it had bounced back +40.8%.
The risk of inflation when timing the market
Inflation is a risk when keeping your money out of the stock market. It’s power can be seen in the steady increase in the price of goods – from a pint of milk to a brand new car.
When your money is kept in cash, it will not keep pace with inflation. You won’t lose money on paper, but you’ll actually be losing in ‘real’ terms via a loss of spending power. Investing money outside of cash has the potential to outpace inflation and give you a ‘real’ return over the long term.
‘Time in’ the market is important
“The best time to plant a tree was 20 years ago. The second best time is now.” Chinese Proverb
The quote above also rings true for investments. Instead of trying to time the market, spending more ‘time in’ the market is likely to give you better returns over the long term. At Agile, our investment decisions are based on what works long-term, rather than short-term market noise.
This does mean experiencing the ‘rough with the smooth’, but markets and wider economies have a tendency to go up over time. This applies to everything from share prices to the price of goods.
The following chart shows the long term performance of the FTSE World Index, FTSE All Share Index (UK), UK Retail Prices Index and money market cash. Look around you right now, I guarantee that you are surrounded by products of companies who’s shares will be found in some of your pensions and investments. It might not be surprising, therefore, that global shares have been the better performer. This of course cannot be guaranteed to happen again in the future.
The chance of losses reduces over long periods of time
Although the past can’t be taken as a reliable indicator of the future, investing for longer periods of time decreases the chance of overall losses. On top of this, it suggests that short-term stock market volatility tends to cancel itself out over longer periods of time. This gives the possibility of more consistent long-term returns.
Compounding is your friend!
“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” Albert Einstein
One of the reasons that long-term investing has the potential to deliver such great returns is the power of compounding. It’s essentially the snowballing effect of your returns generating more returns over time.
It is mainly seen through the reinvestment of dividend payments into more shares – to subsequently receive more dividend payments and buy even more shares. However, you can also see its effect when companies reinvest their profits in advertising, more staff or better services and subsequently see their profits increase.
How we invest at Agile…
I believe in the power of investing for the long term, and the key aspects of the investment philosophy are that we…
Take the long view, analysing the long term fundamentals. Timing the market is something we refuse to get involved in!
Use our investment committee to set asset allocations aligned to our clients view on risk.
Independently research the market to find the leading fund managers and review these constantly.
Look to find our investors real returns, bearing in mind effects of inflation, fees and tax.
Don’t let emotions, cognitive bias or short term noise cloud our judgments.
Believe in designing portfolios that have the highest potential returns for a given level of risk.
Find the level of risk that clients are comfortable with, we will never encourage more than is necessary.
If you would like to understand more about how we manage our investments and how we may be able to help you create a long term investment strategy then please get in touch. Alternatively, I’m always happy to give an opinion on how you have things set up. Our initial discussions are completely free, but may just result in a strategy that can stand the test of time!
