28 November 2017

The Financial Crisis - Ten Years On

It is ten years since the big disruption known as The Financial Crisis. That's when we saw the end of Northern Rock, interest rates start their nosedive, banks having to be propped up, and a general large dose of uncertainty.

A bit of history...

It was the first time that the Bank of England had reduced the base rate below 2%. Quantitative Easing was introduced which had the result of reducing the income (yield) on fixed interest bonds - and they have continued to fall. Stock markets fell, too - 30 - 40% generally - with Europe and Japan particularly badly hit. Ongoing Euro uncertainty was one result of all this.

Banks in the US and elsewhere with exposure to unsafe lending found they had been putting profits before prudence, sales before security.

And the long term impact?...

Fixed interest bonds had been the mainstay of pensions, providing a secure income for the long term. But with falling income, that has become problematic, with many defined benefit pension schemes struggling and closing to new members, and retirees with defined contribution pensions finding that annuities would not provide the return they were expecting.

After the stock market falls, recovery was reasonably fast, though, partly helped by lower interest rates which encouraged company growth. The UK stock market is now around 80% higher than it was at the end of 2007 (dividends reinvested). This meant that many investors switched their attention from fixed interest to equities. Much less certainty exists in that market, but for the time being many felt that you do what you have to!

Changes were introduced to pensions in particular to allow for more flexible access to pension money, such that "Flexi-access drawdown" is often seen as the new norm for taking a pension income.

Lessons to learn?...

The wrong thing to do when a crisis hits is to cut and run. Anyone who sat tight is likely to be substantially better off now, and almost certainly better off than someone who sold to cash.

Active and intelligent management of a portfolio has also been important to take advantage of the changing landscape. A well-spread portfolio investing across different types of asset provided protection from the worst of the falls in 2007-08 and is likely to do so again.

Don't assume it won't happen again. Closer monitoring of institutions and markets, including "stress tests", will help, but next time it will be sufficiently different that yet again we won't see it coming.

Oh, ... and don't rely on the banks! The jury is still out on whether they have learned their lesson on unsafe lending, and other dubious practices. 

30 September 2017

Should I Defer Taking my State Pension?

This is my second blog with this title - the first being in 2012. But things have changed so it's time for an update...

The trigger for asking the question is that the government allows you to say "I don't want to take my State Pension yet". If you do that, then they will pay your a higher pension in due course. So, if you are still working when you reach your State Pension Age, or simply don't need the extra income, should you defer it like that?

If you reached your State Pension age before April 2016, then there was a good deal on the table - every 5 weeks that you deferred gave you an additional 1% on your State Pension. Even so, my comment back in 2012 was that it would probably not be a good thing for many people.

Now it will take you 9 weeks to earn that extra 1% (equivalent to 5.8% for a year), and it is even less likely that it will be a good thing to defer.
 
It all comes down to the fact that you will have missed out on X years of income. I previously calculated that it would take between 15 and 25 years to catch up on the basis of the total income received (depending on how long you deferred). Now it's even longer than that, and some people may never catch up - in other words you will have voluntarily given up that income for ever.
 
There will always be specific situations that are different - which is why this blog can never provide financial advice. For example, there may be some reason why the Income Tax which results from the extra income is particularly unwelcome.

But the general case will remain the same ... for most people, deferring the start of your State Pension doesn't make sense.

22 August 2017

How (and Why) to Avoid Probate

Probate is the process of sorting out someone's assets when they die - their estate. In some cases their executors need a "Grant of Probate" before they can pass on the assets according to the Will. But this takes time (and form-filling) so if it can be avoided it is worth doing so.

It is possible to apply for probate yourself, but most people use a solicitor or a probate service. If a solicitor or a bank has provided the Will then they may have written themselves in to provide the probate service (often with a hefty charge), so watch out for that.

If there is any Inheritance Tax (IHT) to pay then probate will be necessary. But for smaller estates it is worth avoiding the need for it. Here's some ways to do that:

1. Put assets into trust - a Probate Trust is not difficult and you can still benefit from the assets if IHT is not an issue. That wouldn't work for ISAs, though, since they can only be owned by an individual.

2. Give up your ISA and investments. That sounds drastic, but if your only individually owned asset is an ISA it may be more cost-effective to lose the tax advantage and avoid probate.

3. Give it away or spend it - then it's not yours and you don't have to account for it!

4. Own it jointly - typically with a spouse. Then it just passes over 100% to the other owner. BUT there are other issues with this to think about, like tax. And if one spouse loses mental capacity the joint account could be frozen while the bank confirms that you are entitled to continue to use the account.

5. Pensions and Death in Service Benefits - make sure the trustees know who you want to pass these on to if you die, otherwise it could become part of your estate and trigger a requirement for probate.

6. Ask your bank what their limit is to require probate. Above a certain value across all your accounts - typically in the £5,000 to £15,000 range - the bank or building society will require probate before releasing those funds.

In spite of those tips, what is right for one person is not necessarily the best for someone else, so taking professional advice may be the best thing you can do.

14 August 2017

How to Take Income from Investments

Broadly speaking there are two reasons to invest money: to grow your capital or to take an income. The second of those is the more tricky one, with various options available. 

Traditionally, holding dividend-paying investments has been the first port of call, with the hope that you will also get some capital growth - enough to protect against inflation, at least. But the approach I tend to prefer is a "total return" approach whereby any dividends are reinvested, and a regular amount is paid out by withdrawing from the investment. 

The advantage of that approach was illustrated recently with a client who moved into a care home and needed to increase her income. That's not possible with the traditional approach - dividends pay what they pay - but with a total return approach we could adjust the income for her quite easily. 

As ever, there is no one size that fits all; investor objectives need to be considered as does tax, and taking withdrawals at an appropriate level is very important. But overall it tends to give a better level of control over your money.

24 July 2017

I don't want anything risky

I'm always interested in articles about investment risk, since it is such an important part of getting investment choices right. Risk and return go together (at least that's what the theory says), so the aim is normally to go for investments with the highest return consistent with the level of risk you can cope with.

The "standard" financial adviser approach to assessing risk with clients continues to evolve, but I have never been satisfied with the simple 1 to 10 scale which many use. That's partly because there is a lot more to risk than volatility - which is what that scale refers to.

"Capacity for loss" is now something I consider with clients as well - if a particular sum of money is the only money you have to retire on, even though you might consider yourself a high risk investor you shouldn't be investing in anything high risk. That's because you don't have much capacity for losing it!

And it does seem that investing gives you a higher number of "very low" probability outcomes than you would expect - think of 2008 when we saw a number of "once in 500 years" events (or whatever it was). On the other hand there is lower number of "low" probability outcomes than you'd expect. To put it another way investment returns stay closer to what you might expect for much of the time, but when they go awry, they really go awry!

All of which tells me that risk profiling is very much an individual thing, and it depends on someone's circumstances, future plans, other assets, and general outlook on life.

3 July 2017

Charity Giving Can Help Your Family

I have mentioned before the financial planning benefits of charitable giving, and the Gift Aid system is fairly well known. That's where a gift to a registered charity can result in the basic rate tax you have already paid on that money being reclaimed by the charity. Higher rate tax can be reclaimed by you.

But let's focus on a different area - leaving to charities in your will. The Inheritance Tax (IHT) regime has some very useful incentives to do that, not only exempting gifts from IHT (normally 40%), but also reducing the tax rate for the whole of your estate down to 36% if you give at least 10% of your estate to charity.

If you were thinking of making such a legacy, then it could pay not only the charity but also your family to ensure that you reach the 10% threshold.


No-one is going to advocate giving to a charity if you don't support what the charity does. But if you do, then your support can help your family as well as the charity.

13 June 2017

Protect your State Pension - Parents of young children could lose out

Since Child Benefits were means-tested in 2013 many young families have given up claiming the benefit - why claim if you know you won't receive the benefit, after all?

The answer is that the act of claiming preserves your entitlement to State Pension. Without claiming, you could lose £231 per year from the State Pension when it is eventually paid, according to Royal London - although it may be possible to make it up later.

This applies to families who were not claiming already before the rules changed in 2013. So anyone with a first child born since 2013 take note!

Since the connection between Child Benefits and the State Pension has not been publicised by the Government, they are currently saving £278m per year in State Pension entitlements.

23 May 2017

Retirement Planning Pitfalls - don't make these mistakes

Financial planning for retirement is pretty significant, given that decisions made are likely to be with you for the rest of your life - perhaps 30 years in retirement.
 
But there are some common mistakes and misconceptions which could cost you. Here's some of them...

1. Ignoring inflation - it's not very significant at the moment but the long term average in the region of 2.5% means that halfway through a typical retirement a fixed income will only be able to buy you two thirds of what it did at the beginning, and only half after 30 years.

2. Expecting to die young - most people seem to expect to die prematurely! In practice that runs the risk that you run out of money too soon.

3. Not expecting to die! - a Will is an important part of the planning process and avoids causing your family problems. If you are retiring you should certainly have an up to date Will. A Lasting Power of Attorney is also well worth considering.

4. Over-reacting to short term economic changes

Understandably I am often asked about the likely effect on investments of the latest economic or political news. Without wanting to appear blasé and unconcerned my normal response is "don't worry about it". You certainly don't want to sell all your investments to cash at the first sign of bad news, and usually the best thing to do is just sit tight.

2 May 2017

Managing Your Money is Easy!

I was looking back at the history of our family finances recently. At one stage in the 1980's when interest rates were 15% or more our mortgage payments took up 40% of our income.

And on another occasion the technology company I was working for told us not to come in the next day since they had run out of money and couldn't pay us!

But we coped by following four rules which are still valid for keeping anyone's finances on an even keel:

1. Spend less than your income
2. Keep a rainy day fund
3. Make regular savings for your future (especially a pension)
4. Insure against the things you can't afford to have happen

- if only that were taught in schools!

Once you have those habits you can start to improve your situation further by improving your savings, starting an investment, arranging things so that less tax is due, and so on.


The basics of managing money is easy!

25 April 2017

Planning Your Retirement Income - not too much and not too little

It's been a year since I last added a blog! Life has been busy with lots of people needing advice, but here we go again... A schoolfriend of mine recently told me he's retiring. Retirement is often seen as giving you a whole lot of extra time to fill, but clients often tell me that it is not like that - some even say that they don't know how they had the time to go to work.

So I suggested to my friend (who spent his life in the world of physics) that if Einstein had worked a bit longer he would have followed his Theory of Relativity with a Theory of Retirement. That would have said that time moves faster once you are retired - and you don't have to be moving near the speed of light for that to happen after all.

Anyway, it did get me thinking about how you plan your retirement. If there are things that you want to achieve they will need planning in.

And on the finances front some rethinking is needed - both to ensure an ongoing income, and to avoid dying eventually with a lot of money left over and a large Inheritance Tax bill.

The message is - don't just let retirement happen. Make it work for you.

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