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.

Pension changes to be aware of for the 2019/20 tax year

As the start of a new tax year begins, it’s often a time to consider how your financial plan is shaping up and ensuring it’s still relevant for aspirations and goals. You may be thinking about how you’ll use your ISA (Individual Savings Account) allowance this year or how to make the most of investable assets. One key area you should be considering is your pension.

As you plan for retirement, there are three important changes to keep in mind when you’re saving and building an income.

1. Auto-enrolment minimum contributions increase

The auto-enrolment initiative to encourage more people to save for retirement has been hailed a success; with ten million more people saving into a pension. From April 6 2019, workers making the minimum contribution will see their pension contributions rise. This is the latest in a series that aimed to gradually get employees used to the idea of saving for retirement. There are no further planned rises in the future, but they could be announced at a later date.

In the previous tax year, employees were contributing at least 3% of their pensionable earnings. This has now increased to 5%. The average UK employee is expected to pay an extra £30 each month.

Whilst it does eat into the income received and could place pressure on low earners, there are two benefits to the rise. First, by saving more consistently, workers are putting themselves in a better financial position for retirement. Second, employer contributions have increased too, from 2% to 3%, delivering a welcome boost to pots.

It’s also important to note that the Personal Allowance, the portion of income where no tax is paid, has increased to £12,500. This may help to offset some of the income losses for those paying minimum auto-enrolment contributions.

2. Lifetime Allowance increase

The Lifetime Allowance (LTA) is the total amount you can hold in a pension without incurring additional charges when you reach retirement.

The LTA is increasing in line with inflation. This means it’s risen from £1.03 million to £1.055 million for 2019/20. However, it’s still below the high of £1.8 million in 2011/12. If your pension is approaching the LTA, it’s a crucial figure to keep in mind. The additional tax charges placed on your pension can be as high as 55% if you were to make a lump sum withdrawal.

Whilst the LTA can seem high, it’s easier to reach than you might think when you consider how long you’ll be paying into a pension for. If you’re approaching the LTA there may some steps you can take to mitigate the amount of tax you’ll pay. If you have a Defined Benefit pension, the value of your pension is typically calculated by multiplying your expected annual income by 20. For a Defined Contribution pension, the total value will be considered when applying the LTA, this includes your contributions, as well as employer contributions, tax relief and investment returns.

3. State Pension increase

For many retirees, the State Pension provides a foundation to build their retirement income on. Thanks to the triple lock, which guarantees annual rises, those already claiming their State Pension will notice an increase.

Each year the State Pension rises by either the previous September’s CPI inflation, average earnings growth, or 2.5%, whichever is higher. For 2019/20, this means a 2.6% rise to match wage growth. What this means for you in terms of money will vary slightly depending on when you retired, your National Insurance record and, in some cases, the additional pension benefits built up.

If you’ve retired since 6 April 2016, you’ll be on the single-tier State Pension. Should you have a full National Insurance record of 35 qualifying years, your State Pension will rise from £164.35 to £168.60. Over the course of the year, it means an extra £221 in your pocket, helping to maintain spending power.

For those that retired before 6 April 2016, your new State Pension will depend on which tier you fall into. Those receiving the basic State Pension will see a boost of £3.25 a week, taking the weekly amount received to £129.20. If you benefit from the additional State Pension, the maximum cap has risen from £172.28 per week to £176.41.

If you’d like to discuss your pensions and retirement plans, including how changes in the new tax year may have an impact, please contact us.

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

Premium Bonds: What are they and should you purchase them?

Premium Bonds have been around since 1956 but they’ve recently been in the headlines again after the technology behind the popular saving option has been revamped. But before you put your hand in your pocket, it’s crucial to understand what Premium Bonds are and how they can potentially offer you a return.

Firstly, despite the name, Premium Bonds differ significantly from standard bonds. A bond represents a loan, with the investor receiving specified repayments over a defined period of time, interest may be variable or fixed. They are used by companies, governments and other organisations to raise capital. Premium bonds, on the other hand, are an investment product that doesn’t deliver interest or dividend income. Instead, you’re entered into a prize draw to receive tax-free cash each month.

Introduced over six decades ago by the then Chancellor, and later Prime Minister, Harold Macmillan, Premium Bonds have paid out prizes totalling more than £19 billion. The product was conceived to encourage more people to set savings aside, with the incentive of potentially securing a life-changing, tax-free prize in the process. It’s a strategy that worked, thousands of people use the NS&I product to save.

The evolution of ERNIE

The distribution of the prizes falls to ERNIE; the Electronic Random Number Indicator Equipment.

Every month, ERNIE is fired up and picks which lucky Premium Bonds will win a prize, ranging from £25 to £1 million. The investment product’s recent attention is down to the latest reincarnation of ERNIE being unveiled. Back in the 50s, the original ERNIE was almost the size of a room and took three days to select the random winners. Today, ERNIE 5 is the size of a pea and uses quantum computing to draw three million winners in just 12 minutes.

Since the launch of Premium Bonds, various other products offering cash prizes have launched, such as the National Lottery. But where Premium Bonds differ is that you can withdraw your initial investment, backed by a Government guarantee.

What else do you need to know?

First, for every £1 you invest in Premium Bonds, you’re given a unique number. This is the number you’ll hope ERNIE picks out. As a result, the more money you place in Premium Bonds the greater your chances of winning. NS&I lists the annual prize fund interest rate at 1.4%, but this will vary hugely between different people and even each year on the same Bonds. The odds of winning with a single £1 bond number is 24,500 to 1.

  • You can invest as little as £25 through Premium Bonds
  • The maximum that can be invested is £50,000
  • All prizes are tax-free
  • Premium Bonds can be purchased as gifts, including for children aged under 16

Should your purchase Premium Bonds?

As with all financial decisions, this will come down to your priorities.

Premium Bonds do have a certain pull; the thrill of being in a prize draw for £1 million every month is certainly appealing. However, if you’re looking for a regular income or guaranteed returns, they may not be right for you.

You also need to consider the impact of inflation on your savings. As you won’t be generating any interest on your savings, the value will fall in real terms. Inflation refers to the cost of living rising, which means your spending power will decrease if savings remain static. It’s important to note that in today’s climate of low-interest rates, inflation eating into your spending power should be considered when holding money in cash accounts.

Two of the key initial advantages of using Premium Bonds can also now be found with other savings and investment products.

Security: If ensuring your money is secure, Premium Bonds can be attractive. You know that you’ll be guaranteed the investment you put in when you decide to cash out. However, cash accounts may also suit your needs if this is a priority. Under the Financial Services Compensation Scheme (FSCS), up to £85,000 per person per authorised bank or building society is protected.

Tax-free returns: Choosing to invest in Premium Bonds means any prizes you did win would be received completely tax-free, which can be attractive. But changes to how savings are taxed means it may not be the incentive it once was. The Personal Savings Allowance (PSA) means if you’re a basic rate taxpayer you can earn up to £1,000 in savings income tax-free, or £500 if you’re a higher rate taxpayer. You can also use your annual ISA (Individual Savings Account) allowance, currently £20,000, to save and invest tax-efficiently.

With both these factors in mind, you need to decide whether a guaranteed return is more important to you or a potential ‘big win’ you have a chance of being picked for with Premium Bonds. If you’d like to discuss Premium Bonds in the context of your wider financial plan and goals, please get in touch.

Please note: The Financial Conduct Authority does not regulate NS&I products.

The cost of opting out of a Workplace Pension as minimum contributions rise

Millions more workers are now saving into a pension thanks to auto-enrolment. The retirement saving initiative saw minimum contributions rise at the start of the 2018/19 tax year. While it may be tempting to opt out in light of this, it could mean you’re hundreds of thousands of pounds worse off once you reach retirement.

Whilst you may not be affected by auto-enrolment, it’s likely that someone in your life is, perhaps children or grandchildren. The majority of workers are now automatically enrolled in their employer’s pension scheme in a bid to improve financial security once they give up work. If you know someone that’s thinking about opting out of their Workplace Pension, speaking to them about the potential long-term impact could help.

Why is opting out a concern now?

When auto-enrolment was first announced there were concerns that a high level of employees would decide to opt out. However, these concerns proved unfounded and millions of workers have embraced saving for their future. Even following subsequent minimum contribution rises, opt-out rates have remained relatively stable.

As the new tax year started on 6 April 2019, the last of the currently planned increases came in. Employees now pay 5% of their pensionable earnings into their pension, an increase of 2% when compared to the last year. For the average worker, this means losing around £30 from each pay cheque.

Whilst that sum may seem small, it’s come at a time when many workers are facing low wage growth and a rising cost of living. As a result, it’s understandable that some may be considering leaving their Workplace Pension when the increased contributions are realised. However, it’s a decision that could significantly impact retirement income.

The cost of opting out of a Workplace Pension

Employer contributions: First, when you pay into a Workplace Pension, so does your employer. Should you decide to leave your pension scheme, it’s highly likely your employer will also halt contributions. In the new tax year, minimum contribution levels for employers also increased to 3%. It’s an effective way to boost your pension savings with ‘free money’.

Tax relief: Again, tax relief offers you a boost on your pension savings that could make your retirement far more comfortable. It means that some of the tax you would have paid on your earnings is added to your pension in a bid to encourage you to save more. Assuming you don’t exceed the Annual Allowance, tax relief is given at the highest rate income tax you pay. So, if you’re a basic rate taxpayer and add £80 to your pension, this will be topped up to £100. Higher and additional rate taxpayers can benefit from 40% and 45% tax relief respectively.

Investment returns: Typically, your pension is invested. This gives it an opportunity to not only keep pace with inflation, but hopefully outpace it too. As you usually save into a pension over a timeframe that spans decades, you should be able to overcome short-term market volatility and ultimately profit. As all returns delivered on investments in a pension are tax-free, it’s an effective way to invest with the long term in mind. When you start a Workplace Pension, you’ll often have several different investment portfolios to choose from, allowing you to pick the one that most closely aligns with our attitude to risk.

Compound interest: The effect of compound interest links to the above point. As you can’t make withdrawals from your pension until you reach at least 55, investment returns are reinvested, going on to generate greater returns. This effect helps your pension to grow quicker, building a larger pension pot for you to enjoy when you decide to retire.

It can be difficult to balance short, medium and long-term financial needs. Often the different areas you need to save for can seem conflicting. This is where creating a financial plan that reflects personal aims, both now and in the future, can help. If this is an area you’d like support in, please contact us.

Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

Workplace pensions are regulated by The Pension Regulator

Your guide to purchasing an Annuity

Are you thinking about purchasing an Annuity to fund your retirement lifestyle? It’s crucial to understand the product and shop around for the best deal as research suggests that many retirees could secure a better income.

An Annuity is a way of creating a guaranteed income throughout retirement if you have a Defined Contribution (DC) pension. Should you decide it’s the right option, the money accumulated in your pension is used to purchase an Annuity. Typically, the money paid out from an Annuity will be linked to inflation, maintaining your spending power throughout retirement, though this isn’t always the case.

In the past, an Annuity was the most common way to access pension savings. However, since the introduction of Pension Freedoms in 2015, taking a flexible level of income has grown in popularity. While more pensions now enter Flexi-Access Drawdown, there are still advantages to choosing an Annuity. For many, the security of a guaranteed income provides peace of mind.

Of course, there are drawbacks to weigh up too.

Among the downsides of purchasing an Annuity is the inflexibility. Alternatives to creating a retirement income may allow you to adjust your income, reflecting differing income needs as you go through retirement. However, an Annuity will provide you with a fixed income that won’t change. For some, this inflexibility will mean an Annuity isn’t the right option for them.

It’s important to remember that if you have a DC pension, you don’t have to select a single way to build a retirement income. If some level of flexibility is a priority, you could use a portion of your savings to buy an Annuity, accessing the remainder flexibly. This hybrid approach can provide you with a reliable, base income to offer peace of mind and allow you to adjust income when needed.

Finding the right Annuity for you

There are many different providers to choose from when purchasing an Annuity. It can make searching for the right product for you difficult. However, it’s an important task and one that’s worth investing some time in; after all, it will affect your income for the rest of your life.

According to research from Just Group, up to two-thirds of Britons going into retirement could receive a higher income, affording a more comfortable lifestyle.

One of the key factors influencing this figure is that providers aren’t consistently asking retirees about their health and lifestyle. Certain health issues could qualify retirees for an Enhanced Annuity, which would pay out more. For example, you could receive a greater income if you have high blood pressure or cholesterol. The full impact would depend on your personal circumstances and the provider chosen. However, figures from Hargreaves Lansdown can give you an idea of the difference disclosing health issues can make. A £100,000 pension is estimated to provide an annual income of:

  • £5,456 for someone with no health issues
  • £5,477 for someone with high blood pressure and cholesterol
  • £5,930 for someone who smoked 10 cigarettes a day
  • £6,276 for someone who is diabetic
  • £6,618 for someone that had previously had a stroke

Of course, even if you don’t have health issues, it’s important to shop around. The rates offered when purchasing an Annuity can vary significantly between providers.

Five steps to take if you’re considering an Annuity

1. Speak with a financial adviser: A financial adviser can help guide you throughout the process of purchasing an Annuity, from the initial point of seeing if it’s right for you. By seeing how your income needs will change throughout retirement and getting to grips with whether an Annuity is right for your circumstances, you can have greater confidence in your decision.

2. Understand the different Annuity products: There are many different types of Annuity products available, so it’s important to understand which one would suit you. For many retirees, a Lifetime Annuity is preferred, this would pay a defined income until you die. However, there are fixed Annuities too, which will be an income for a defined period of time.

3. Don’t make quick decisions: When you’re searching for an Annuity, it can be tempting to make a snap decision when you’re offered a rate that seems attractive. However, take a step back and give yourself some time to think. Once you’ve purchased an Annuity there is no going back, so it’s important to make sure you’ve secured the best deal possible.

4. Secure multiple quotes from providers: With two-thirds of retirees potentially receiving a lower income due to choosing the wrong deal, securing multiple quotes to compare should be considered a critical step. There are comparison tables available online that can help you with the initial research. Deciding on the type of Annuity product you want first can help you gather comparable results.

5. Explore other options: An Annuity used to be the most common way to create a retirement income. However, retirees today have far more choice and different products available. Be sure to look at the alternatives before you make a decision to proceed. You may find that a more flexible income is needed when you’ve considered your aspirations.

To talk about building a retirement income that suits your lifestyle goals and savings, please contact us.

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

Planning for your golden years: New experiences top priorities

In the past, retirement may have been associated with slowing down and taking it easy. But that’s no longer the case. Thousands of retirees are looking forward to giving up work to enjoy an exciting pace of life and gain new experiences. With more freedom and choice than ever before, it’s becoming more important to plan carefully for the retirement you want.

When Pension Freedoms were introduced in 2015, those approaching retirement age were given far more flexibility in how they create an income. As the meaning of retirement for each person is different and evolving, this greater flexibility allows more people to achieve their aspirations. Whilst your parents or grandparents may have been focussed on kicking back and spending time with family, these may not be your top priorities.

In fact, research conducted looking at how Pension Freedoms had affected retirement in 2017, suggested that relaxation was often far from the minds of retirees.

A survey from LV= found that half of retirees find the new phase of life exciting, with discovering new skills and travelling further afield at the top of their retirement wish list.

  • 64% of those that stopped working in the years following Pension Freedoms, said it opened new opportunities for them
  • 55% invested time in hobbies
  • 46% took the opportunity to holiday in places they hadn’t visited before, with the Caribbean, Australia and cruises proving a popular choice
  • 20% devoted time to learning new skills

What does this mean for your income?

Traditionally, expenditure has decreased as you leave the world of work and gradually over time as you settle into retirement. However, with more retirees now looking forward to embracing opportunities further afield, it’s a trend that could change.

This will depend entirely on what your plans for retirement are. If you’ve been envisioning grand plans of travelling to new destinations, keeping your skills up to date or investing in a hobby, you could find your outgoings each year actually increase. If your retirement goals follow this modern approach it means you’ll need to take a far more active role in managing your income throughout the length of your retirement.

A big part of this is how you’ll access the money saved into pensions and when. Under Pension Freedoms, most people can access their pension from the age of 55 onwards. You’re free to choose at which points you’ll make a withdrawal. However, this is just the start of the decisions you’ll need to make. Would your retirement plans benefit if you:

  • Made a lump sum withdrawal
  • Access your pension flexibly throughout retirement
  • Purchase a guaranteed income using an Annuity
  • Or a combination of the above?

There are pros and cons to each option, but the key thing to keep in mind is how they could fund the retirement lifestyle you want.

Setting out your plans

With the above in mind, it’s important to set out your plans as you approach the milestone. Whilst these aren’t set in stone it’s an exercise that can help you understand how your income needs will change over the course of retirement and whether your aspirations match up with the financial provisions you’ve made.

Without a plan, retirement can offer much but fall short of expectation. Often, retirees discover they’re in a better position financially than they thought when all assets are considered. Without taking the time to assess what you want and how to achieve it, some may believe that attainable aspirations are out of reach.

Alternatively, flexibly accessing your pension presents the very real risk of running out of money. Not understanding that there could be a shortfall, could leave you financially vulnerable in later years. Recognising this during the planning phase gives you a chance to adjust plans accordingly or take action to make up the gap.

Planning ahead has other benefits too, for instance:

  • Giving you confidence in your retirement finances
  • Planning for unexpected events
  • Considering the potential cost of care
  • Estate planning

Balancing retirement aspirations with your financial provisions can be difficult and there are many questions to answer, from how long your pension will need to last to the most efficient way to access it. Whatever your aspirations, these should be placed at the centre of your retirement plans. If this is an area you’d like support with, please contact us.

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

Why planning for the unexpected is important in retirement

During your working years, you may have actively planned for the unexpected. Perhaps you set aside some of your income each month to cover emergencies or took out a protection product to act as a safety net. However, some find as they enter retirement these good habits fall to the wayside, but it’s still important to continue to plan for the unexpected.

It’s easy to see why some retirees don’t have a plan. As you approach retirement, you hopefully thought very carefully about your plan for life after work, from how you’ll take an income to what your goals are. It’s true that life in retirement is often more settled and you may want it to follow the path you’ve already set out. But it’s still worthwhile having a plan B and some form of buffer in place.

If you need some reasons why planning for the unexpected is still important, here are five.

1. Unexpected events can still occur

Even the best-laid plans can go off course. Your retirement life may be less hectic and less likely to be influenced by outside factors when you compare it to your working life, but the fact is, unexpected events can and do still happen.

Do you know how your lifestyle would be affected if your investments were to underperform? Or whether you have access to liquid assets to cover essential house repairs if needed? Planning for the unexpected, even in retirement, can help give you peace of mind.

Not all unexpected events should be viewed negatively either. You may find that you have more disposable income than planned in retirement following an inheritance, for example.

2. Your aspirations may change

While your financial plan may have been the best option when you entered retirement, is it still? Over the years, your aspirations and goals may have changed. It can lead to some unexpected outgoings and a need to adjust the decisions you’d made.

For some retirees, the shift in focus can be unexpected in itself. Realising what this means for your finances can be challenging. Planning how changes may impact your income when you reach retirement can help give you the certainty you need to follow the path to the retirement that you want now and in the future.

3. Financial risks may still be present

How much financial risk you’re exposed to will depend on the retirement choices you made. If, for example, you used your pension savings to purchase an Annuity, you’ll be less exposed. However, if you opted to use Flexi-Access Drawdown, where your pension usually remains invested, or rely on an investment portfolio to deliver an income, it’s wise to prepare for the value of your savings fluctuating.

Over the long term, investments typically deliver better returns than alternatives such as cash. However, it does mean that your savings, and in some cases your income, will be affected by short-term volatility. If your pension decreased, could you still afford to pay for essentials and the luxuries to maintain your lifestyle?

4. You may want to offer support to loved ones

While an unexpected event may not happen to you, it’s likely your loved ones will experience one at some point. Parents and grandparents are increasingly using their retirement income to provide financial support to the younger generation. If your loved ones faced an unexpected bill or were not able to work for an extended period of time, would you be in a position to help? Having reserves can help safeguard both your future and that of those you care about.

5. The potential need for care

Rising life expectancy means more of us need some form of care as we reach our later years. For many, the burden of meeting care costs will fall to them. It’s an outgoing that can cost tens of thousands of pounds each year. If it’s not something you’ve anticipated, it can place you under financial pressure. It could mean that some of your aims are now out of reach and increase stress.

Of course, there’s often a lot of uncertainty when determining if you may need care in the future. As a result, it’s also wise to have a plan for what you’d like to happen to the money set aside for care costs if you don’t need to use it.

How does financial planning help safeguard against the unexpected?

Financial planning helps you understand your finances in relation to your aspirations and goals. It’ll help you see the steps you can take to maximise your wealth and get the most out of it, with your lifestyle in mind. However, to be effective, it also needs to look at the unexpected.

Financial planning can help you visualise how your finances may change, and, as a result, how your lifestyle would be affected should something unexpected occur. Cashflow planning can help give you a visual representation of how your money and ability to achieve goals would change. For example, if you’re worried about how your partner would cope financially should you pass away, financial planning can demonstrate the impact it will have. This puts you in a position to plan for events that are outside of your control using relevant data and information to create an accurate picture as possible.

If you’d like to discuss your retirement, please get in touch. We can help you understand how your current retirement plan protects your future, including those unexpected events.

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.

What should you consider when weighing up your investment risk profile?

One of the key decisions you need to make when investing is how much investment risk you want to take.

Weighing up the level of risk you’re willing to be exposed to can be challenging. It’s often one that’s ruled by emotions and your personal attitude to risk. While these factors should play a role, they aren’t the only areas you should be considering. Whether you’re reviewing your pension or building a personal investment portfolio, balancing risk is a crucial part of the process.

If it’s a step you’re taking, keeping these six points in mind can help.

1. Investment goals

Your investment goals should be at the centre of any decision you make. If your goal is to ensure your savings keep pace with inflation, for example, you may be able to achieve this with a relatively low-risk profile. If, on the other hand, you want to grow your money as much as possible, taking a greater amount of risk could help you achieve your aims.

As a general rule of thumb, the greater the level of risk an investment poses the higher the potential return. However, you do, of course, have a greater risk that your investment will decrease in value.

Your motivation for investing will undoubtedly have an impact too. If you’re investing to help pay for your child or grandchild’s education, you might want to take a more cautious approach. In contrast, if investment returns will be used to fund luxuries in retirement, taking on more risk may be appealing.

2. Investment timeframe

How long will your money be invested for? This is a factor that is likely to be linked directly to your investment goals, and it should also influence the level of risk you’re willing to take.

Stock markets do fluctuate. However, when you look at the long-term trend, investments have risen at a pace above inflation. Ultimately, the more risk you take on, the more volatility you should typically expect. So, if you’re investing for a short period of time, a more cautious approach might be advisable. However, if you’re looking to invest for a longer period, you’re in a better position to overcome the dips.

Generally, you should look to invest for a minimum of five years.

3. Capacity for loss

When you think about the money you want to invest, what would happen if it decreased in value or you lost it? Your capacity for loss should play a crucial role in deciding how much investment risk you want to take.

Clearly, if you’re in a position where you have enough disposable income to invest and don’t have to worry about the immediate impact volatility might have on your lifestyle, you’re likely to be in a better position to take more risk.

4. Diversify

The saying ‘don’t put all your eggs in one basket’ certainly applies to investing. Diversifying your portfolio can be important. As a result, taking a look at the existing investments you hold should inform your decision.

Diversifying gives you an opportunity to create a balance that suits you. If you hold potentially high-risk global equities, for example, you may choose to partially invest in bonds that are usually deemed lower risk. This might offer more stable growth, that could help to offset stock market uncertainty.

If you’d like help reviewing your current investment portfolio to understand how to diversify, please contact us.

5. Other assets

On top of your existing investments, take some time to look at your other assets. From savings accounts to your home, understanding your wider financial position can help you see whether investing is the right option for you and, if it is, the level of risk that’s appropriate.

If your finances and lifestyle are relatively secure, you may find that you’re in a better position to take greater investment risk. However, if your comfort would be affected should investment values fall, or you want to withdraw your money in the short term, taking a more cautious approach or an alternative route entirely may serve you better.

Remember that investing isn’t your only option. Depending on your circumstances and goals, you may find that alternatives, such as using a Cash ISA (Individual Savings Account), is more appropriate for your needs.

6. General attitude

While thinking about how much you can afford to invest and what your other assets are, consider your general attitude to risk. Some of us are more inclined to take a large risk for the chance of a larger reward at the end. Others will prefer a more cautious approach to life and their finances.

You need to feel comfortable and confident in your investment decisions, including the level of risk you’re exposed to. Your risk profile should reflect both your situation and your goals.

If you’d like help to understand risk profiles and the options open to you, please get in touch. We’re here to help you weigh up the pros and cons of taking investment risk and what it could mean for your finances.

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.

saving goals button

Matching saving goals with products crucial for maximising returns

As interest rates remain low and the cost of living continues to rise, it’s important to get the most out of your savings. While many of us are diligently saving and have saving goals, if you haven’t chosen the right product with your goals and needs in mind, you could be missing out.

Despite figures from the Office of National Statistics (ONS) indicating that saving is a habit that’s falling out of fashion, a new survey suggests the average saver does build up their fund annually. The ONS figures found that the average UK household spent or invested around £900 more than they received in income in 2017, amounting to almost £25 billion. It marked the first-time annual outgoings outstripped income since 1988.

But a survey conducted by Charter Savings Bank suggests that, on the whole, people end the year with more than they started with; even when they raid savings.

On average, savers put away £2,906 but withdraw £924 of this for a range of purposes. While the figures signal a positive trend in saving, it also highlights why choosing the right saving product is important. One in eight savers raid their account every month and two-thirds make a withdrawal from their saving accounts at some point during the year.

  • On average, savers estimate they withdraw about a third of their savings
  • But 21% admit to taking out at least half of the total
  • Just 9% never touch their savings

The reasons for using money stashed away varied:

  • Purchasing big ticket items (30%)
  • Covering unexpected bills (27%)
  • For an emergency (25%)
  • Running out of money at the end of the month (12%)
  • Reaching their saving goal (6%)

For the most part, using your savings isn’t necessarily ‘bad’. After all, you may have been saving to cover unexpected bills or pay for a holiday in the first place. But it does highlight the need to think about where you save. An emergency fund that needs to be readily accessible should be held in a different product to a fund you’re building up to travel the world when you reach retirement age. Choosing the wrong product could mean you’re missing out on valuable incentives and interest.

Some accounts, including regular saving accounts, for example, may cut the interest you receive if you dip into your savings. As a result, separating your finances and holding multiple saving pots can be more efficient. It’s a move that can help you reach your goals too.

The way that you save should be tailored to your goals and the timeframe you plan to achieve them. While every savings strategy should be tailored, they can be broken down into four broad areas.

Emergency fund: An emergency fund should be built-up to help you cover the unexpected, from an unanticipated bill to a loss of income. Ideally, this should be between three and six times your monthly expenditure. This money should be in an account that is readily accessible should you need it. As a result, it’s unlikely to benefit from competitive interest rates.

Short-term savings: Covering expenses that you’re saving for in the short term, such as a city break or home furnishings, a short-term savings account is likely to need to be easily accessible. As with an emergency fund, interest rates are likely to be relatively low.

Medium-term savings: If you’re not going to need to use the money in the near future, you may want to consider using a fixed rate account. You won’t be able to access your money for a defined period of time, but the interest rates are higher as a result. If you’ll be contributing to your savings regularly, a regular savings account can also be beneficial.

Long-term savings: If you’re investing for the long term, you’ll have access to the more competitive interest rates. One place to start looking is ISAs (Individual Savings Accounts), as they are tax efficient. You can deposit up to £20,000 a year into an ISA. As you’re planning for the future, you’re in a position to lock money away for a longer period of time, boosting the rates you can choose from too.

Should you consider investing?

While savings are an important part of every financial plan, it’s just as important to look at other options too. If you’re at the point where you have a comfortable safety net built up in cash reserves, it may be time to consider investing.

With interest rates still low for most accounts, cash savings may actually be losing value in real terms. This is because inflation is higher than the returns interest rates are generating. Investing in stocks, shares and investment funds can offer an alternative that allows you to outpace inflation, albeit with added risk. Investing isn’t the right choice in all circumstances but it’s an area that’s worth thinking about once you have a good level of savings.

If you’d like support organising your finances, including savings and investments, please get in touch. We take the time to understand what your aspirations are and how your money can help you achieve these, picking out the right financial products for you.

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.

state pension age graph

Do you know your State Pension age?

Retiring is a milestone many of us look forward to as it draws near. The prospect of leaving the world of work behind and having more free time to dedicate to the things you enjoy is certainly appealing. But research suggests that many of those approaching retirement don’t know when they can expect to receive their State Pension, putting their financial security and plans at risk. Do you know your State Pension age?

The State Pension age has gradually been increasing for women over the last few years and it’s now increasing for all. Yet research commissioned by Age UK, suggests that many of those approaching retirement aren’t aware of the changes. The poll found:

  • One in four people aged between 50 and 64 don’t know when they can claim their State Pension
  • Almost a fifth found their State Pension age was higher than expected
  • Three in ten people have never checked their State Pension age

Caroline Abrahams, Charity Director at Age UK, said: “Clearly, there is still much confusion about the age at which people can expect to receive their State Pension and our worry is that many who have few resources to fall back on are in for a nasty shock.”

While you can choose to retire before collecting your State Pension, it’s important to understand the level of income you can expect to receive and how it will change over time. As a result, knowing your State Pension age and how much you’re entitled to should be considered a priority.

The State Pension has changed a lot in recent years.

In 2010, the State Pension age was 65 for men and 60 for women. However, women’s State Pension age has gradually been increasing and in November 2018 equalised with men. Gradual increases mean that by October 2020, both men and women will need to be 66 before they’re entitled to the State Pension. Further plans mean it’s expected to reach 67 in the next decade. As life expectancy rises, it’s likely that further increases to the State Pension age are on the horizon.

There have also been changes to the State Pension itself. The new State Pension system affects those reaching State Pension age on or after 6 April 2016. The amount you receive under the new system is dependent on the number of National Insurance (NI) credits you have.

Checking your State Pension

Luckily, it’s relatively simple to check your State Pension.

The government’s calculator lets you check when you’ll reach State Pension age and your Pension Credit to calculate your income. You can find the tool here.

There have been several news stories recently that have highlighted the importance of understanding your State Pension.

Women born in the 1950s have been affected by the equalising of the State Pension, leaving some struggling financially as they were unprepared or uninformed of the changes. It’s led to a campaign group representing women affected urging the government to give women born in the 1950s the State Pension they would have received if the changes had not occurred. It’s a situation that’s currently under judicial review following a High Court ruling.

You may also have heard of parents having less NI credits than expected due to not applying for Child Benefit when they were taking time off work or working reduced hours to raise children. To maintain a NI record when bringing up children, parents must apply for Child Benefit, even if they know they’re not eligible to receive it.  It means some parents could receive less State Pension than anticipated.

As a result, keeping track of your State Pension age and projected income is crucial for effectively planning your retirement.

Why your State Pension age is important

Even when you’ve made other retirement provisions, your State Pension age is crucial.

For many, the State Pension offers a foundation to build your retirement income on. It can provide a base level of income and security as you enter retirement. Your State Pension is likely to be an important part of your financial plan as you give up work, whether you want to wait until your State Pension age, retire early, or even continue to work. It’s a factor that should inform the decision you make about other income streams and your overall retirement aspirations.

If you’d like to discuss how your State Pension age affects your retirement plans, please contact us. We’ll help you put your projected State Pension income into the context of your wider retirement goals and other provisions you’ve made.