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Investment market update: June 2019

Welcome to our June update for the investment markets. We take a quick look at some of the key factors that have been influencing the stock markets and could continue to do so over the coming months. Whilst investors may be hoping for stability, we’re afraid uncertainty continues to be a defining influence.

UK

The UK continued to grapple with the thorny issue of Brexit, which ended the tenure of Theresa May in June. This was followed by rounds of voting to name the next Conservative leader, just Boris Johnson and Jeremy Hunt now remain in the running, with a winner expected to be announced in the next few days.

With Conservative candidates holding opposing views on Brexit, it’s unsurprising that uncertainty has played a major role in the UK investment market in recent weeks.

Another defining characteristic of the UK market has been woes in the retail sector, continuing a long-term trend of a declining high street. Over the course of June:

  • Boots announced it will close 200 stores in the UK, following quarter three results showing a 2.6% decrease in retail sales and a 0.8% dip in pharmacy sales.
  • Arcadia Group’s creditors approved the proposed Company Voluntary Agreement from the retail group, which includes brands Top Shop, Dorothy Perkins, Miss Selfridge and others, after owner Philip Green agreed to put up an additional £25 million
  • Fashion retailer Select announced its proposed Company Voluntary Agreement was approved by the majority of its creditors, meaning no immediate store closures will happen.
  • After falling into administration in April, Debenhams named 50 stores that would close, with Sports Direct’s Mike Ashley taking legal action in June after he fought to buy the chain.
  • Monsoon Accessorize asked landlords to reduce rents on more than half its 258 leased stores in order to keep the company afloat.
  • Holiday firm Thomas Cook continued to struggle after it revealed large debts. The value of the shares has fallen by nearly 90% in the last year.

It’s expected that these two key trends will continue to affect UK stocks in the future. But there is some good news: The FTSE All-Share Index closed the second quarter up 9.4% recovering from losses made in the final quarter of last year.

Europe

Of course, Europe is being affected to some extent by the ongoing Brexit discussions too. With uncertainty on how trade between the UK and member states will change affecting businesses.

In other news, Spanish manufacturers report the worst conditions seen in six years. The closely watched HIS Markit purchasing managers’ index fell by 2.2 points in June to 47.9. With it entering contraction territory due to a challenging economic environment, it could signal the start of a slowdown across the eurozone.

US

The big news coming out of the US this month is a truce on the trade war with China. It all began in 2017 when the US launched an investigation into Chinese trade policies and imposed tariffs on billions of dollars of Chinese products in 2018. China responded in kind. Both US and internal firms have said they’ve been harmed by the trade war.

At the G20 summit in Osaka, Japan, a deal was struck, but the question is: How long will it last?

In more US-China related news, Chinese telecoms giant Huawei has faced increasing scrutiny from the US following concerns about its links with the Chinese government and fears that equipment could be used to spy. However, following the G20 talks, statements from Donald Trump have implied that restrictions could be eased in the future.

The US equity market continues to be characterised by volatility, though at the end of June the US stock market hit record highs.

Asia

Following the victory of the Bharatiya Janata Party in the Indian general election, stock markets rallied. In late May, immediately after the election, the Sensex surged 900 points to cross the 40,000 thresholds for the first time ever. However, volatility has been experienced throughout June, with the stock exchange remaining relatively flat when dips and peaks are smoothed out.

Middle East

Rising Middle East tensions have led to the price of oil increasing. Tensions between the US and Iran have continued to escalate over the last few weeks. Coupled with an agreement to reduce production between OPEC members and Russia being extended for the remainder of the year, it’s a price rise that could have a knock-on effect for many other industries.

Keep an eye on our blog for the latest investment market updates.

If you have any concerns about your investment portfolio in light of recent events, please get in touch.

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.

Ten tips for boosting mental wellbeing

When we think about improving health, it’s often the physical that springs to mind, but mental wellbeing is just as important. Luckily, it’s rising up the list of priorities for many people. Whether you’re feeling stressed about a certain area of your life or you want to be able to relax more, these tips can help boost your mental health and cultivate a positive mindset.

1. Make time for the things you enjoy: When you’re stressed, it’s easy to focus on what’s causing you concern and skipping the things you’d normally do. But having a break and some time to think about other things can be exactly what you need. Doing the things you enjoy can remind you of the things you should be grateful for and deliver a positive boost to your mental health.

2. Be sociable: When we’re worried some people have a tendency to shut themselves off from loved ones and avoid social situations. However, connecting with others has plenty of benefits, from improving your self-esteem to offering a support network if you need it. Making plans with family and friends gives you something to look forward to as well.

 3. Exercise: Exercising might be the last thing on your mind when you have concerns. Whilst it’s associated with physical health, exercise is just as good for mental wellbeing too. Getting your blood pumping releases feel-good hormones that can improve your mood and focus. It doesn’t have to be a lengthy gym session, a brisk walk can be just as beneficial.

4. Get outdoors: With the British weather, getting outdoors isn’t always attractive. But it’s been linked to improving mental wellbeing. An activity outdoors can help alleviate some of the stress that you may be feeling. Where possible, try heading to a park or calm area to help you get away from it all.

5. Practice mindfulness: Modern life often means our thoughts are distracted and we fail to focus on the present. This is where mindfulness can help. Focussing on what you’re doing now, rather than concerns about something that has happened or may occur, can lead to a better state of mental wellbeing and help you appreciate life more.

 6. Understand your triggers: Do you know what leads to you feeling stressed? Understanding what triggers poor mental wellbeing can help you better manage low points. It’s an area that’s personal, keeping a written note of what’s causing you to lose positivity, worry or just generally feel low can help you put together a plan to tackle it.

 7. Eat well: Everyone knows food is important for physical health, but ensuring you get a balanced diet is crucial for mental wellbeing. Foods that are packed with vitamins and minerals can help your body run at its best, giving you more energy, improving concentration, and leading to a better mood or outlook overall.

 8. Get plenty of sleep: Sleep is really important for mental wellbeing. However, if you’re feeling stressed, it can make drifting off far more difficult, creating a vicious circle. If it’s an issue, giving yourself plenty of time to unwind beforehand can help, others find that exercising in the evening can help them drift off too.

 9. Set goals: If you’re stressed about something, in particular, it’s often due to the scale of it. Perhaps a challenge seems too big to overcome or a solution feels impossible. Breaking down the steps you need to tick off into manageable chunks can make you feel far more positive. Being able to track your progress as you work towards a bigger goal can ease worries too.

 10. Don’t be afraid to ask for help: We all need a helping hand sometimes, but asking for help when you’re stressed can still be a difficult thing to do. Whether you simply turn to family and friends or seek professional help, it can greatly improve your mental wellbeing. As the saying goes: a problem shared is a problem halved.

Stress and your finances

There are many areas of life that can cause stress, but one of the most common is money. If you have concerns about your finances, you’re not alone. In fact, according to research from Ceridian 42% of UK employees would describe themselves as feeling stressed about money issues on a regular basis.

Financial worry can occur no matter your wealth. Whilst you might be earning a comfortable income, concerns about what would happen if it stopped, whether you’re saving enough for retirement, or how investments will perform are typical. Taking control of your money and building a financial plan that reflects your goals can improve overall wellbeing. If this is an area you’d like support in, please contact us.

 

Could you start a business in retirement?

When you think of retirement, what comes to mind? Perhaps you’re hoping to travel more, spend time with grandchildren or simply relax. Whilst they’re all plans that are associated with retirement, some are keen to buck the traditional as more retirees turn their hand to launching businesses.

Is it something you could see yourself doing?

If the answer is ‘yes’, you’re definitely not alone. Asking workers what they’d like to do the most when they’re old enough to retire, 10% revealed they had the ambition to launch their own business, research from Aviva revealed.

Additional research suggests it’s not just an idea either, many retirees are following through with plans to become an entrepreneur in retirement. Findings indicate that the over 50s are now responsible for one in nine small businesses. Among those stepping into the world of start-ups when over 50, four in five are starting a business for the first time. From turning a hobby into a money spinner to putting an idea that’s been in the back of your mind into practice, there are endless options.

Why start a business in retirement?

Launching a business certainly isn’t a traditional pursuit associated with retirement, but it is part of a wider trend. With healthier, longer lives, many approaching retirement age are finding they aren’t ready to step away entirely from the world of work. Instead, they are favouring a transitional approach that sees them with more free time, but still retaining some working commitments. Of course, finances are playing a role in the decision, but other factors are often just as prominent.

Being your own boss gives you an opportunity to set out a work-life balance that suits you as you reach retirement age. Technology advancements mean it’s easier than ever to work flexibly and still drum up business. It means it’s possible to mix starting a business with other retirement aspirations, including spending some time abroad.

Aside from this, there are other reasons why retirement may be the perfect time to launch a business too:

  • Greater financial security: Hopefully your financial security has improved as you’ve gotten older, giving you more freedom over the years. With pensions and other assets earmarked for retirement, you may not have to worry about where your next pay cheque is coming from as you did in your 30s or 40s. If this was a worry that’s held you back in the past, dipping your toe in entrepreneurship in retirement could be right for you.
  • Fewer responsibilities: Linking with the point above, most retirees find they have fewer financial commitments than they did previously. Perhaps you’ve paid off your mortgage, no longer need to run two cars or your children have grown up and moved out. With fewer responsibilities, you may be more inclined to invest some of your money into getting your business off the ground.
  • More free time: Starting a business before retirement may have meant a period of trying to juggle ambitions with your career as you test the waters. Retirement will often bring you more free time to invest in creating a successful business. With fewer priorities eating up time, you can focus on building up skills, contacts and the know-how that’s needed.
  • Confidence: Many people think about starting a business at some point in their life, but few take the plunge. If that sounds like you and confidence was holding you back before, it may be something that’s less of an issue today. As we gain life experience, we often find that confidence in our own ability grows too.
  • Skillset: Whilst you may not have launched a business before, you’ve inevitably picked up some useful skills along the way. Decades of working and learning from managers, CEOs, experts in their field and others puts you in a position to make use of a variety of skills. Recognising where there are gaps in your expertise and where help should be sought is just as important too.

Launching a business in retirement and your finances

If you’re thinking about launching a business in retirement, there’s a lot to consider. Among the areas to think about is how it’ll affect your personal finances. Financial planning can help you understand how your savings can help you live the retirement lifestyle you want whilst building a business. For example:

  • Can you afford to use retirement savings to invest in your business?
  • How long will your retirement savings provide the lifestyle you want for?
  • Would a business change your tax liability?
  • How could business profits enhance your retirement lifestyle?

Starting a business in retirement can be a dream, but it comes with challenges too. Knowing your personal finances are in order can give you the confidence needed to face them.

Five benefits of estate planning

Planning how you’ll pass your estate to loved ones can be challenging, both practically and emotionally. But taking some steps to understand how you can efficiently achieve your goals, can make them more likely to become a reality.

From writing a will to discussing potential inheritance with loved ones, estate planning is a task that many put off. However, it should be considered an essential part of your financial plan that’s just as important as putting money into pensions or checking the performance of investments.

There are many benefits of estate planning, among them:

1. Understand the value of your estate better

Financial planning should help you understand the value of your estate and how this might change in the future. Taking a look at what assets you have to leave behind for loved ones and considering how they’d be distributed can help with this. Cashflow modelling can show you how wealth and assets will be depleted over time. This can help give you an understanding of the inheritance that you can leave or where you may want to make lifestyle changes in light of this.

2. Minimise potential Inheritance Tax

Is your estate likely to be liable for Inheritance Tax (IHT)? If the total value of all your assets exceeds £325,000 IHT may be due, reducing the amount loved ones will receive from your estate. However, there are often things you can do to reduce or eliminate an IHT bill. However, this requires a proactive approach and you should take steps to do so as soon as possible. From setting up a trust for some assets to gifting to charity, an effective estate plan can mean leaving more behind for loved ones.

3. Calculate the sustainability of your income

You might have a clear idea of what you’d like to leave behind for family and friends. If so, how does this correlate with the income you’re already taking or plan to take? Estate planning can help you reconcile your income with legacy plans. It’s also an opportunity to assess how sustainable your income is over the long term. If your expenditure remains the same, how much would you leave behind if you lived ten years beyond the average life expectancy, for example?

4. Help loved ones plan for the future

Research from Royal London suggests that almost 6.5 million adults refuse to discuss their will with loved ones. Whilst it can be difficult to talk about your estate plan, it can help loved ones prepare for the future. Letting beneficiaries know how much they can expect to receive through inheritance can improve their personal financial security. Without a discussion, they could make inaccurate assumptions that affect them long term. It’s a step that can give you peace of mind about their future too.

5. Support loved ones now

As you look at what you’re likely to leave behind for loved ones, you may realise you’re in a position to offer financial support now rather than leave an inheritance. As life expectancy rises, some beneficiaries are finding that inheritance is coming too late to help them tick off financial milestones, such as paying off the mortgage. Providing support to children and grandchildren now could have a larger impact than receiving an inheritance. Of course, you need to ensure that offering gifts won’t have a negative impact on your lifestyle in later years and you should consider the IHT implications.

When should you review your estate plan?

You might think once complete an estate plan is finished, but, like any other part of your financial plan, it’s important to keep going back to it. Over time, your aspirations and financial positions will change, which should be reflected in your estate plan. From needing to pay for care costs to welcoming grandchildren, your initial plan may be very different from what you want in five years’ time. As a result, it’s wise to review it regularly alongside other financial plans and make adjustments where necessary.

If you’re thinking about how you’ll pass wealth on to loved ones, please contact us. Our goal is to give you complete confidence in your financial situation now and in the future.

Please note: The Financial Conduct Authority does not regulate estate and Inheritance Tax planning.

What influences your risk profile?

Risk profile is something we mention a lot when looking at investments and other key financial decisions. But what has an impact on your risk profile?

Investing naturally comes with some level of risk and values will rise and fall over time. However, the amount of volatility experienced varies hugely. Typically, the greater the level of risk and volatility you take on, the higher the potential returns, but there is a greater chance that values will fall. For some, the potential returns of a higher risk profile will outweigh the drawbacks, whilst others will prefer the relative stability of lower risk investments, even if potential returns are reduced.

It’s important to keep in mind that all investments involve some risk. But you also need to look at the long-term picture where volatility is considered. Over the years, stock markets have experienced significant dips, which can be a cause for concern for investors. However, historically, markets have recovered to deliver returns over the long term.

There are five key factors to consider when weighing up your risk profile:

1. Your goals

The first area to think about is what you’re investing for. Having a clear goal in mind, allows you to build an investment portfolio that suits you.

What you’re investing for is likely to have a significant impact on how you feel about risk. Let’s say you’re investing to pay for a child’s education, security may be a priority for you and investments with a relatively low risk may be more attractive because of this. In contrast, if you’re investing to enhance your lifestyle in retirement, but you know you already have the assets to be comfortable, you may decide to increase exposure to volatility.

2. Investment time frame

This one links directly to what your goals are; when do you plan to access your initial investment and the returns it’s hopefully generated?

As a general rule of thumb, you shouldn’t invest if your time frame is less than five years. This gives you an opportunity to ride out dips in the market and recover from potential downturns. In turn, if your time frame is longer, you’re in a better position to take on more risk when you take a long-term view. Investing for retirement is a good example of when a long time frame may mean a higher risk profile is appropriate. When you first start saving for retirement, it’s likely to be a milestone that’s decades away. As a result, short-term volatility should have little impact when you focus on the end goal.

3. Other assets

Financial decisions shouldn’t be made in isolation. They should look at your overall financial plan and the other assets you have. This will influence your risk profile too.

For example, if you hold a significant amount in cash and other low-risk assets, you may decide to take a higher risk with new investments. It’s important to keep in mind here that not all your investments should be the same in terms of risk. Diversifying and holding a range of investment assets, with various risk profiles, can help smooth out market volatility and limit potential losses.

4. Capacity for loss

No one wants to think about losing money when they invest. However, it’s an important consideration to make. If your investments were to perform poorly and decrease in value, how would this impact your lifestyle?

You shouldn’t invest capital that you can’t afford to lose. However, there’s more to it than that. If your investments were to fall, would it devastate your future plans? Or would it simply mean that some small adjustments would need to be made to ensure your lifestyle was sustainable over the long term?

5. Overall attitude to risk

Whilst the above four factors are influential, your overall feelings about risk are too. You should feel comfortable with all the financial decisions you make, including the level of risk taken when investing.

It’s natural to worry about potential losses when investing and if you think you’re being too conservative, taking some time to understand how investment markets operate over the long term can help. On the flip side, an aggressive approach to investing isn’t always appropriate even if you’re comfortable with it. Working with a financial adviser can help you reconcile your feelings on investment risk with your financial position.

Regularly reviewing your risk profile

Remember, your risk profile can change. The level of risk you were willing to take in your early 20s when you likely had fewer responsibilities, is probably very different to the risk profile you had after you were paying a mortgage or had a family. As financial security improves or you approach retirement, the level of risk you’re willing and able to take will change again.

As part of your annual financial review, risk profile should be one of the key considerations that’s discussed. It’s also an area to review following big life events, such as marriage, divorce or starting a family, and when your financial position changes significantly.

If you’d like to discuss your risk profile and how this should be reflected in financial decisions, 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.

Peer to peer lending: What you need to know

In recent years, the peer to peer (P2P) lending market has grown rapidly. As you’ve looked for ways to maximise your savings, you might have come across opportunities and may even have been tempted. But, whilst it’s a sector that’s growing fast, it’s crucial to understand what it means and the associated risks.

With interest rates still low following the 2008 financial crisis, savers are looking for a home for their money that offers returns. With potential interest rates significantly higher than what you can find at high street banks, P2P lending can certainly seem attractive. However, as with all financial decisions, it’s essential that you understand what P2P lending involves and the risks.

What is peer to peer lending?

P2P lending is a relatively new asset class that started gaining traction in the last decade or so. It offers a way for people to lend money to individuals or businesses via a loan that interest is paid on. As a P2P investor, you’re effectively acting as a lender.

Most commonly, P2P lending is conducted through marketplace style platforms that connect lenders with borrowers. There are numerous platform options to choose from and they don’t all operate in the same way. However, there are two main ways to get involved with P2P lending through a platform:

  • A managed option will pool your money with other lenders’ assets, which will then be used to provide loans to a range of businesses and individuals. This can help diversify your investment to spread risk and you can take a more hands-off approach if you prefer. Some platforms will only offer a default managed option, whilst others may provide you with a choice with varying risk levels.
  • Alternatively, you can manually select which potential borrowers you’d like to offer money to. This route allows you more flexibility in building a portfolio that suits you. However, you’ll need to take responsibility for assessing the level of risk and be more involved during the whole process.

Returns from P2P lending are derived from the interest paid on the loans. As a result, they vary significantly, typically ranging from 4% to 20%. Compared to interest rates on savings accounts, these potential returns may be attractive. However, the risk is greater and, typically, the higher the potential return the more risk you’ll be taking on.

What are the risks?

Receiving a return on P2P loans is entirely dependent on the borrower’s ability to continue to meet repayments. Should they be unable to pay and default on the loan, you may not get back the amount you put in. There’s also a risk that repayments will be late. As a result, P2P lending is considered riskier than alternative options, such as investing through stock markets.

As with investing, there are P2P opportunities with various levels of risk. Those offering lower interest rates will generally be considered lower risk when compared to those offering higher rates. Where the borrower is offering high-interest rates in comparison to loans or credit cards available on the high street, it’s beneficial to consider why this is. It could suggest they have a poor credit history, for instance.

Again, as with investing, it’s important to consider how risk is spread with P2P lending and avoid putting all your eggs in one basket.

It’s also worth noting that P2P lending is not covered by the Financial Services Compensation Scheme (FSCS). If a borrower defaults on a loan or the platform used ceases trading, the FSCS will not help you recoup losses.

What’s the secondary market like?

A key consideration before plunging into P2P lending is the possibility to sell the loans you hold. There is a secondary market for P2P lending, however, it’s relatively small and limited. It can be incredibly difficult to sell loans and you may find there’s little market for it. As a result, you should consider P2P lending an illiquid asset.

How important the secondary market for P2P lending is will depend on your personal circumstances. Let’s say you loan a sum for a 36-month period, is there a chance you’ll need access to that money before three years are up? If the answer is ‘yes’ you should carefully explore what your options would be if you needed to sell the loan and look at alternatives.

What are the tax implications?

The returns generated through P2P lending are considered income. Therefore, profits may be liable for tax if you exceed your Personal Savings Allowance (up to £1,000).

If you’re interested in P2P lending and are likely to pay Income Tax on the returns, one option to consider is an Innovative Finance ISA (Individual Savings Account). ISAs offer a tax-efficient way to save and invest, with the Innovative Finance ISA designed specifically for P2P lending. Returns generated through an Innovative Finance ISA are tax-free. Each tax year you have an ISA allowance of £20,000, this can be spread across several different types of ISA or deposited in just one.

Is it an option for you?

For most people, P2P lending isn’t the most appropriate option for growing their money. P2P lending should be considered a high-risk asset, which will not be suitable for the majority of investors. The potential returns on offer can be tempting but it’s important to weigh this up with the likelihood of a borrower defaulting on their loan.

If you’d like to discuss P2P lending in the context of your personal circumstances, please get in touch. We’ll identify whether it’s an option that suits your financial circumstances and aspirations, as well as exploring other options.

Please note: As an investor, your capital may be at risk and you may not receive back all the money you invested should a business not be able to fully repay its loan. Your money is not protected by the Financial Services Compensation Scheme. Past performance is not a reliable indicator for future results.

Bank of Mum and Dad: Can you afford to support family?

The Bank of Mum and Dad has become essential for many first-time buyers struggling to scrape together a deposit to secure a mortgage. However, research indicates that children and grandchildren are increasingly relying on financial support for a variety of reasons.

Whilst you may be keen to provide as much help as possible to loved ones, you may also be worried about the impact it will have on your own financial security. Understanding whether you’re in the financial position to offer some form of monetary help can give you the confidence and peace of mind to do so.

So, how are parents and grandparents providing support for adult offspring? Offering a helping hand when purchasing a house makes up a sizeable chunk of the money handed over, however, it’s not the only area where financial support is sought.

  • Research from Legal and General suggests that in 2019, up to £6.3 billion will be taken from the Bank of Mum and Dad to fund thousands of property purchases. By offering up sums to act as a deposit, parents are financing around one in five transactions in the UK property market. The average amount received for this purpose is £24,100.
  • Relatives are also putting their money into the entrepreneurial ventures of children too. A survey conducted by Worldpay indicates that around one in ten small business owners asked their parents to invest in their idea. With under-35s twice as likely to seek family support than older generations, it could be a growing trend.
  • Finally, figures from SunLife found that more than half of people aged over 55 are financially supporting their children. Around a fifth are providing more support than they had planned to. This is despite some feeling as though their own finances are being squeezed as a result.

What’s causing the trend?

There are many reasons why children or grandchildren could benefit from financial support, some of which may be personal. However, generally speaking, wage growth has remained low whilst expenditure, including property, has continued to rise. As a result, younger generations are often finding it a struggle to balance the books and still reach life milestones, from buying a first home to starting a family, without risking financial instability.

It’s natural that as a parent or grandparent, you want to provide support to help loved ones live comfortably. Whilst your heart may be saying ‘yes’ when they ask for help, your head may have some reservations. That’s normal too. After all, if you place your own financial security at risk you won’t be in a position to provide support at all.

Making it part of your financial plan

Whether you want to offer ongoing support, to cover school fees for grandchildren, for example, or a one-off gift, you should make it part of your financial plan.

This gives you the insight needed to understand how your finances will be affected in the short, medium or long term. Would taking a £25,000 lump sum out of your savings to act as a house deposit mean you could run out of money in later retirement, for instance? By building gifts and monetary support into your financial plan you can make an informed decision based on your circumstances.

Often, potential benefactors find they’re in a better position to help than they first thought. Using financial planning to fully understand the long-term consequences of gifting means they decide in full confidence and with complete peace of mind.

It’s not just confidence that financial planning can help with either, but deciding which assets to use:

  • Would your long-term wealth be impacted more by withdrawing from investments or cash savings?
  • What is the most tax-efficient way to access large lump sums?
  • Will the support potentially be liable for Inheritance Tax?
  • Could you replace the money at a later date if you choose to?

Financial planning can help you answer the above questions and more to create a solution that’s right for you.

If you decide you’re not in a position to offer financial gifts, there are likely to be alternative options too. You could, for example, act as a guarantor on a mortgage to allow for a lower deposit or provide a lump sum on a loan basis. Financial planning can help you better understand what other routes there are to explore.

To discuss your financial situation and aspirations for helping loved ones find their feet, please get in touch.

Retirees risk pensions running out ten years early

Do you have enough money in your pension to see you through retirement? Research indicates there’s a very real risk that UK retirees will be short of more than a decade’s worth of money.

As we start making withdrawals from a pension and even when saving into one, it’s crucial to think about the kind of lifestyle it’ll afford and how long for. Without this vital bit of information, there’s a chance you’ll be left with a shortfall that could mean a retirement that promised much, leads to disappointment or struggles in later years.

Measuring the gap between savings and lifestyle

A recently published report from the World Economic Forum set out to calculate how financially secure retirement will be. It notes, pension systems around the world are facing the common problem of trying to deliver existing promises whilst life expectancy has increased. It’s a challenge that is expected to become even more significant over the coming decades.

The findings indicate that the average UK woman will run out of money 12.6 years before she dies. For men, it’s 10.3 years. With a vital source of income drying up a full decade before passing away, some retirees could face struggling to get by on the State Pension alone. It could mean lifestyles need to be adjusted if dreams are to be realised.

Between 2015 and 2050, the report predicts the gap will grow even further, suggesting struggles are ahead for generation X and millennials. In 2015, it was estimated there was an $8 trillion (£6.2 trillion) shortfall in UK pensions, rising by 4% annually to $33 trillion (£25.8 trillion) by mid-century.

The risk of running out of money later in retirement is particularly troubling when you consider the potential need for care. Longer lives mean more people are requiring some form of support, from home visits to moving into a residential home. Most retirees will be required to pay at least a portion of care costs themselves until total assets are depleted to £27,250 in Scotland.

On top of this, the risk of running out of money is further compounded by the hope of retiring early. Research suggests that two in five savers hope to retire before they reach the age of 65. Given that the State Pension age is already steadily increasing, it’s a dream that could place further pressure on finances. If you do want to retire before the traditional age, it’s crucial to think about how those extra years will affect the savings earmarked for retirement.

How much is enough to retire?

This is a question that often comes up when people start thinking about retiring. However, there’s no straightforward answer, it’s very subjective.

Research indicates that covering the basics in retirement, such as food and utility bills, along with a few extras like eating out and entertainment, will set retirees back by almost £230 each week. Over the course of the year, the figure mounts up to more than £11,830, 35% more than the State Pension provides. The findings suggest that retirees need their personal provisions to pay out a minimum of £3,062 a year. That may not sound like a lot, but when you think retirement can last 30 or 40 years, it may be easier than you think to run out of money. When you factor in the luxuries you might be looking forward to in retirement, such as holidays, the risk rises even more.

As you think about how your own pensions will pay for retirement, it’s important to consider the type of lifestyle you hope to achieve. It’ll have a direct impact on how much you should be saving whilst working and whether you’re at risk of falling short.

  • When paying into a pension: Taking the time to consider how much you’ll need to fund retirement whilst you’re still paying into a pension puts you in a better position to secure the lifestyle you want. The further ahead you start to think about this, the better. Uncovering a shortfall with a decade still to go gives you an opportunity to increase contributions where necessary. Here it is crucial to consider how long you’ll spend in retirement to calculate your target sum as accurately as possible.
  • When taking an income from savings: Changes to how we access pensions in 2015 means more retirees are now opting to withdraw from their pensions in a flexible way. The ability to increase and decrease withdrawals can be valuable. However, you need to carefully balance the amount you’re taking out with how long it needs to support you for. Taking sums that are unsustainable now may leave you struggling in the future.

If you’re worried about how your retirement savings will match up to aspirations, please contact us. We’re here to help you understand how long provisions will last with your lifestyle in mind.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.

Calculating your investment risk profile

The investment market has been experiencing volatility lately and it may mean you’re considering whether your current risk profile is still appropriate. All investments carry some risk but there are numerous different risk profiles to consider; what’s right for one person can be very different from another.

Calculating the level of risk you can afford to take with your investments can be complex, there are numerous different factors to consider, including these six:

1. Timeframe: One of the first things to consider is how long you’ll remain invested for; the minimum timeframe should be five years. Historically, markets have delivered returns over the long term, but in the short term, values can rise and fall. The longer you’re in the market the more time you have to ride out these dips and reduce the risk of losing some of your capital. Therefore, as a general rule of thumb, the longer you plan to invest for the more risk you can take. Of course, this isn’t the only factor you should consider when you’re making investment plans.

2. Capacity for loss: All investments carry some risk, as a result, you should ask yourself how you’d feel if you were to lose some of your capital. No one wants to think about losing money they’ve invested, but understanding the potential implications of doing so and your capacity for loss is crucial before you forge ahead. If investment values decreasing could harm your financial security, it’s typically a good idea to look at alternatives to investing.

3. Investment goals: What do you want to get out of investing? Do you want to grow your wealth as much as possible or create a portfolio that will deliver a reliable income? These two goals are likely to lead to very different investment strategies, so it’s important to define what you want to achieve through investing early on. Whilst goals are important, they shouldn’t be the sole focus. Taking a high-risk strategy because you want the opportunity to realise significant returns could seriously affect your financial security if you don’t have the capacity for loss, for example.

4. Current investments: If you already have investments, these should play a role in any new investments you plan to make. Your entire portfolio should consider diversification and spreading risk as much as possible. Holding a significant portion of your investment portfolio in a single industry, for instance, would mean any downturns in this area would have a far greater impact. On the other side, spreading risk means you have a chance to take advantage of more opportunities too.

5. Other assets: As recent market conditions have highlighted, investments can and do experience volatility. This can mean the value of your investments decreases at points. Should you need to, do you have other assets you can fall back on? Ideally, you shouldn’t invest without first building up an emergency fund at least. Looking at what other assets you have is critical for calculating your overall financial resilience and therefore the level of risk you can afford to take.

6. Overall attitude to risk: Whilst it’s important to keep the above factors in mind, it’s also important that you feel comfortable with any financial decisions you make. Taking the time to understand how and why the above influence should play a role in investment decisions can help you make the right choice for you. Ultimately, though, your overall attitude to risk and investing will play a role too. You may be in a position to accept a higher level of risk, but if this leaves you feeling worried and concerned about your financial security, for example, there may be alternatives that are better suited to your views.

Remember; regularly reviewing your investment risk is important. As priorities and goals change, investments that were once right for you may no longer be. Likewise, you may find that as your wealth increases, there are new investment opportunities to be taken advantage of. Your investment strategy should be reviewed in line with your wider financial plan and aspiration to ensure it still accurately reflects your goals.

If you’d like to reassess your current investment portfolio or have further assets to invest, we’re here to help you understand how your risk profile should influence decisions.

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.