During March there were reasons to be optimistic. In fact, the Organisation for Economic Co-operation and Development (OECD) raised global growth forecasts following Covid-19 vaccination and stimulus package news around the world. It’s now expected the global economy will expand 5.6% this year.

Despite the pandemic dominating headlines, a survey from the Bank of America suggests Covid-19 is no longer the biggest risk worrying investors. Instead, their focus is on inflation. With low-interest rates set to continue, in order to support countries’ economies, interest rates could play a significant role in wealth management over the coming years.

UK

The big news in the UK this month was the Budget. Chancellor Rishi Sunak unveiled a range of measures to support economic recovery following Covid-19 and to pay back the money borrowed over the last year.

For individuals, the Budget means freezes on many taxes and allowances, such as the Capital Gains Tax annual exemption and pension Lifetime Allowance. While the freezes mean taxes won’t rise immediately, they will have an impact in real terms over the next five years. From a business perspective, Corporation Tax will rise from the current 19% to 25% in 2023 for the largest companies.

The Budget also included support for aspiring homeowners, with the government revealing plans to back 95% mortgages. This led to a boost for homebuilders, with Persimmon and Taylor Wimpey seeing stock prices rise by 6% and 5.7%, respectively, when the news was leaked to the press.

While introducing the Budget, the chancellor was optimistic about growth forecasts and returning to “normal” over the coming months. This sentiment was echoed by Bank of England governor Andrew Bailey, who said there was a “growing sense” of economic optimism.

Consumers are becoming more confident about the future too. According to an Ipsos MORI survey, 43% of Britons think the economy will improve over the next 12 months, an increase of 14% from February.

Data that tracks economic growth suggests there are good reasons for this optimism.

According to IHS Markit, factory output is slowing but the manufacturing Purchasing Managers’ Index (PMI), which tracks new orders, input costs, and employment, has increased. This could signal a growth in demand. The services sector is also nearing growth. In a measure where readings above 50 indicate growth, it scored 49.5 in February. While still in contraction territory, it’s a sharp rise from the 39.5 recorded just a month earlier.

As retail and hospitality businesses prepare to reopen, news from the high street highlights the challenging circumstances firms are operating in:

• High street favourite John Lewis revealed losses of £517 million in 2020, its first-ever full-year loss. Alongside the announcement, the department store said it would be permanently closing an additional eight stores, placing 1,500 jobs at risk.
• Chocolatier Thorntons announced plans to permanently close all of its stores nationwide. The firm will continue to operate an online store.
• Bakery Greggs posted its first annual loss since floating on the London stock market in 1984. Like-for-like sales were down 36% in 2020, resulting in a pre-tax loss of £13.7 million. This compares to a pre-tax profit of £108 million in 2019.

As well as Covid-19, Brexit continues to present challenges for businesses on both sides of the English Channel. Exports to the EU from the UK fell by 40% (worth £5.6 billion) in January. This represents the biggest monthly decline in British trade for more than 20 years. Imports from the EU also fell 28.2%, representing £6.6 billion worth of trade.

Europe

According to the service sector PMI, the eurozone could be on track for a double-dip recession. Activity and new orders fell in February, with a reading of 45.7 indicating a contracting sector. However, factory growth, with a PMI reading of 57.9, could help balance this out.

Lockdowns and social distancing restrictions haven’t harmed all businesses; Danish toymaker Lego, for example, has benefited from more families playing together, with consumer sales increasing by 21% in 2020.

USA

There was good news for some businesses affected by the trade war between the US and Europe, including Scottish whiskey firms. The US and UK agreed to a temporary four-month suspension of the tariffs resulting from an ongoing dispute between the US and Europe over government aid to support Boeing and Airbus. It’s hoped the agreement signals that a quick post-Brexit trade deal can be reached.

Asia

China’s banking regulator issued a stark warning for investors, saying a bubble was building abroad. Guo Shuqing, head of the China Banking and Insurance Regulatory Commission, said: “I’m worried the bubble problem in foreign financial markets will one day pop.”

He added that gains in the US and European markets, enabled by loose monetary policy, have “seriously diverged” from reality. He went on to say there was a bubble in China’s property market too, adding it was “very dangerous” for people to buy homes for investment or speculative purposes.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

In 2020, the government spent an unprecedented amount supporting the economy through the Covid-19 pandemic. The economic consequences are expected to be felt for years to come and will no doubt influence policy that will affect personal finances.

For the 2020/21 tax year, public sector net borrowing – the difference between public spending and total receipts from tax and other sources – was £394 billion. That’s a huge £339 billion higher than anticipated when Covid-19 restrictions were first put in place in March 2020.

The significant deficit is down to a combination of changes in the economy and paying for government measures, like the Coronavirus Job Retention Scheme.

According to the Institute for Government, £82 billion has been used to support households, £71 billion has gone to supporting businesses, and an additional £127 billion has been used to deliver Covid-19 public services.

However, on top of these expenses, restrictions also affected the economy, leading to tax revenues falling by £106 billion. This includes taxes falling in a range of areas, from business rates falling by 39% to fuel duty falling 21% as families were told to stay at home. The UK now faces its largest deficit in peacetime.

Over the coming years, the government will have to make some tough decisions about how they’ll repay the amount borrowed.

Covid-19 restrictions led to the worst recession in 300 years

The social distancing restrictions put in place to limit the spread of the virus forced many businesses to close or severely restrict operations. This caused economic activity to plummet in the second quarter of 2020 by 22% when compared to the end of 2019. Overall, 2020 economic activity was 9.9% lower than the previous year.

The most significant recession before this was over 300 years ago, when temperatures in the UK plunged to around -12˚ Celsius. This “Great Frost” of 1709 caused widespread flooding, devastated agriculture, and caused further hardship.

While we don’t have to contend with flooding after the pandemic, there will be other challenges. The Office for Budget Responsibility (OBR) predicts a long-lasting impact. Even in 2025, the economy is expected to be 3% smaller – around £40 billion less – than it would otherwise have been.

The ongoing impact is despite the government’s decision to spend now to limit long-term costs. For example, by supporting businesses through the Job Retention Scheme (furlough scheme) it’s hoped that the economy will be able to recover quicker as restrictions ease and job losses are minimised. If the economic output was to shrink by 3% despite these steps, national income would fall by around £70 billion.

Of course, the pandemic is still affecting lives and the economy now. The vaccine programme has meant the UK has started to lift restrictions, but further waves could mean more time in lockdown. As a result, it’s difficult to predict how Covid-19 will affect the economy in the long term or even this year.

Paying back the cost of Covid-19

As the vaccine is rolled out and health concerns lessen, attention is now turning to how the UK will pay back the money.

Despite rumours, the chancellor did not increase taxes affecting personal finance in this year’s Budget. However, he did bring in widespread allowance freezes for five years, effectively increasing taxes in real terms. It’s important these freezes are part of your financial plan as they could affect your tax liability in the coming years.

It’s still expected that some taxes will have to increase once the pandemic has passed to plug the gap left in public finances.

In his Budget speech, chancellor Rishi Sunak said: “The amount we’ve borrowed is comparable only with the amount we borrowed during the two world wars. It is going to be the work of many governments, over many decades, to pay it back. Just as it would be irresponsible to withdraw support too soon, it would also be irresponsible to allow our future borrowing and debt to rise unchecked.”

While we can’t predict how allowances and taxes will change in the coming years, it is important that individuals ensure their financial plans continue to reflect announcements. Making use of allowances to manage tax liability and ensuring you’re on sound financial footing can put you in a strong position even as we start to pay back the cost of Covid-19. It’s important you carry out regular reviews of your plan to incorporate any changes that are announced.

If you’d like the help of a finance professional when reviewing your plan or have questions about what changes mean for you, please give us a call.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Technology has made investing far more accessible. You can now invest and make changes to your portfolio with just a few taps on your smartphone. While more people investing for their future is a good thing, technology is instilling bad habits in some investors.

Far from investing with a long-term goal in mind, some investors, according to a report published by the Financial Conduct Authority (FCA), are opting for high-risk investments for the “challenge, competition and novelty”.

Dubbed “having a go” investors in the report, these investors are keen to take control of their portfolio. However, the findings suggest they could be making mistakes that cost them money in the short and long term.

When asked their reasons for investing, emotions and feelings played a greater role than “functional reasons”. Their decisions are influenced by the thrill of trading and social factors, like the status that accompanies a sense of ownership in the company they invest in. For some, these reasons were more important than functional reasons, like wanting to make their money work harder or to save for retirement. In fact, 38% did not list a single functional reason for investing in their top three responses.

It’s easy to see why investing can be thrilling for some – daily market movements and “winning” when investment values rise can make tinkering with an investment portfolio addictive. However, this attitude and strategy could cost investors financially.

What’s the worst that could happen?

High-risk investments aren’t suitable for most investors, yet many are overlooking this fact.

The FCA paper found six in ten (59%) people investing in high-risk products say a significant investment loss would have a fundamental impact on their current or future lifestyle. Your capacity for loss should play a role in not only the investments you choose but whether you should invest at all. If losses could have a significant impact on your lifestyle, other alternatives may be more appropriate.

Worryingly, the findings also indicate that many investors are unaware of potential losses. More than four in ten did not view “losing some money” as one of the risks of investing. This is despite all investments coming with some level of risk and the potential for investment values to decrease.

When investing, you should always ensure investments match your risk profile and be comfortable with the amount of risk you’re taking.

Avoid the investment “hype”

One of the reasons investors are getting a thrill for high-risk opportunities is that they are “hyped”. These investments are spoken about widely or appear frequently on social media, which gives the impression that everyone is investing in, and benefiting from, a particular company. In some cases, these investments then become viewed as “safe”.

The findings demonstrate how financial bias can have an impact on our decisions. “The bandwagon effect” refers to the phenomenon where people think or act in a certain way because other people are doing the same. When it comes to investing, that may mean investing in certain assets or companies so that your actions align with those of the group. When an investment is hyped, the bandwagon effect can encourage investors to follow the crowd, even if it’s not right for them.

So, how can you avoid investment hype?

• Set clear, functional investment goals. Ask yourself why you want to invest and what you want to achieve.
• Focus on the long term. Investment values fluctuate, rather than following daily or even weekly movements, so look at the bigger picture.
• Don’t make snap investment decisions. Instead, spend time thinking about opportunities and how they fit into your wider profile with your goals in mind before moving forward.
• Understand your risk profile and what investments are appropriate for you.
• Remember: an investment that is right for a friend, colleague, or anyone else isn’t necessarily right for you.

Working with us can also help you avoid investment hype and select investments that are right for you. Sometimes, another pair of eyes can help highlight where bias is occurring or point out why an investment opportunity isn’t appropriate. We also work with our clients to put a long-term plan in place that’s tailored to them. This can provide you with confidence about your future, so you’re not tempted to reach for an investing app that is swayed by market movements.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

When discussing investments or reading the news, you may have heard the phrase “rebalancing”. It’s an important part of making sure your portfolio continues to reflect your goals, but it can be overlooked or misunderstood. Read on to learn what rebalancing involves and why it’s part of investment strategies.

Investing: A long-term game

Before we start looking at rebalancing, it’s important to understand how and why we invest with a long-term strategy.

It can be tempting to buy and sell stocks to try and maximise profits, especially during periods of high volatility. It seems like a good idea to buy low and sell high, but timing markets consistently is impossible. So many different factors influence stock prices that you can end up missing out or losing money.

Between 1989 and 2019, if you’d invested £1,000 in the FTSE 100 but missed out on just the best 30 days because you’d tried to time the market, it’d have cost you £19,000, according to research from Schroders. This is a good reminder of why the saying “it’s time in the markets, not timing the markets” is so common.  

Instead, a long-term buy and hold approach is more suitable for most investors. As the name suggests, you buy stocks that match your long-term goals and risk profile and hold on to them. While values may fall at times, this strategy aims to deliver growth over the investment timeframe. Investors need to be patient as, historically, stock markets have risen, and so they will benefit over the long term.

Yet, a buy and hold strategy doesn’t mean you never need to make changes to your portfolio – this is where rebalancing comes in.

Evaluating your portfolio: Ensure it continues to match your strategy

When you first start investing, you create a portfolio with a certain risk profile in mind. This will consider your investment timeframe, goals, and financial position. However, over time, even if you don’t buy or sell assets, your initial investment position can change due to market movements.

Let’s say you set up a portfolio holding 50% stocks and 50% bonds. Following a period of stocks performing well, your stock allocation could have risen, changing the weighting of your portfolio. It may mean you’re now taking more investment risk than is suitable for you. In this case, rebalancing your portfolio would involve selling stock and buying bonds to achieve the original target allocation.

It’s not just asset allocation that should be considered when rebalancing portfolios. You should also consider the level of risk and diversification. Assets performing well in a certain sector, for instance, could mean you need to rebalance.

So, while you are buying and selling assets when rebalancing, it’s not about timing the market or making knee-jerk decisions based on its movements. Rather, it’s about ensuring your portfolio continues to reflect your circumstances and goals.

There’s no set timeframe for when you should rebalance your portfolio, but it is advisable to do a regular review, for example, annually. Rebalancing may also occur after significant market movements, such as the volatility caused by Covid-19.

Update your portfolio as your plans change

It’s not just market movements that can affect whether your portfolio still suits you. As you should invest with a long-term timeframe, you may find your goals and aspirations change. As a result, you may need to update your risk profile, and reflect this in your portfolio.

Rebalancing may already be factored into your financial plan. A common time for investors to rebalance their portfolio is as they near retirement. While you’re earning an income, you may be in a position to take more risk with your investments than you will once you retire and will rely more on your portfolio to provide an income. Therefore, as you approach retirement, you may choose to gradually take less risk with investments.

This is why your lifestyle choices and aspirations should be central to your financial plan. Your goals will affect your investment strategy.

Why is rebalancing such an important part of an investment strategy?

In short, rebalancing helps ensure your portfolio remains in line with your investing goals in spite of market movements. It’s important for making sure your portfolio continues to support your goals over the long term.

If you’d like to discuss your portfolio and whether rebalancing is needed, please contact us. We’ll help you align your investment strategy with your wider lifestyle plans so it helps you reach your goals.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

It really is never too soon to start investing through a pension. You may not be thinking about the retirement lifestyle that your children or grandchildren will enjoy quite yet, but opening a pension before they even start school can be worthwhile.

If you’re looking for a way to help secure a child’s financial future, a pension can ensure their later life is far more comfortable and provide them with a valuable foundation for later life.

Here are three reasons why investing through a pension on behalf of a child can lead to powerful growth:

1. Tax relief will provide an instant boost

Pensions opened on behalf of a child work in the same way as those for an adult. That means contributions will benefit from tax relief, which provides an instant boost to the money you’re setting aside.

Pension holders that don’t earn an income, including children, can add up to £2,880 a year to a pension. With tax relief, this brings the annual sum up to £3,600. By making the maximum contribution from birth until they’re 18, they’d receive almost £13,000 through tax relief alone.

2. Compound growth is powerful over the long term

When opening a pension for a child, the money is invested for decades. This provides plenty of time to benefit from compound growth. This is where an asset’s earnings are reinvested to generate additional earnings over time. The compounding effect means returns grow exponentially.

To put this into perspective, Morningstar calculates that if you make a one-off contribution of £2,880 (£3,600 with tax relief) when a child is born the pension would be worth £90,000 after 66 years, assuming an average growth of 5% a year.

If you contributed the annual maximum amount for the first 18 years of a child’s life, the value would be more than £1.1 million by the time they reached 66. The power of compound growth means they could still have a comfortable retirement even if they didn’t make contributions during their working life.

3. It provides a foundation for your child or grandchild to build on

Instilling good money habits in children can set them on the path to a financially secure future. By contributing to a pension throughout their childhood, you can help get them into the habit of saving for the long term early. It also means they won’t be starting from scratch when they enter the workforce, which can motivate them to keep adding to a pension.

It’s not just financial benefits offered by a child’s pension

Saving enough to retire on is a huge undertaking and can seem like a daunting challenge. That’s why starting a pension for your child or grandchild can improve their wellbeing and outlook.

More than half (58%) of non-retired people aged between 45 and 60 worry they won’t have enough money to provide an adequate standard of living in retirement, according to an Aviva survey. Even younger generations, who still have several decades to save, have concerns. Two-thirds (66%) of workers aged between 35 and 44 have concerns about retirement finances. Paying into a pension fund early could help alleviate some of these worries.

Having a pension foundation could also mean children or grandchildren have more flexibility later in life. The State Pension Age is rising and will reach 67 by 2028. By the time the children of today reach State Pension Age, it’s likely they’ll be in their 70s. Having a personal pension to fall back on means they may be able to give up work earlier if they want to.

3 questions to ask before setting up a child’s pension

Before you open a pension for your child or grandchild, you should consider the alternatives. A pension isn’t the right option for every family. These three questions can help you understand if a child’s pension is something you should research further:

1. Do you have an emergency fund? Remember you cannot access funds you place into a pension until the pension holder reaches the minimum pension age, currently 55 (rising to 57 in 2028). Before investing additional funds into a pension, including on behalf of your child or grandchild, you should ensure you’re in a financially stable position.
2. Have you made use of a Junior ISA (JISA) or saving products for children? There are other saving and investing products aimed at children which can provide more flexibility. Some, for example, will allow you to make withdrawals at any time, which can be useful. Others will become available when the child is 18 and could pay for other milestones, like further education, driving lessons or buying a home. A JISA is a tax-efficient option for investing and saving a nest egg for when your child reaches adulthood.
3. Are you prepared for the money to be inaccessible until your child reaches retirement age? Keep in mind that any money contributed to a pension will be locked away. You should think carefully about this and ensure it aligns with your priorities and circumstances.

Please contact us if you’re thinking about opening a pension on behalf of your child or grandchild. It can be a useful tool and we’re here to help you see how it fits into your financial plan, as well as offering advice on products, contributions and more.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.

In March, chancellor Rishi Sunak delivered his second Budget. After a lot of speculation that taxes would rise to pay for the cost of Covid-19, you may have been relieved to discover your tax bill won’t be going up. However, you could still be worse off.

Rather than increasing taxes, the chancellor said he would be freezing allowances. On the face of it, this seems like it won’t have an impact on your personal finances. However, it does once you consider the rising cost of living.

The effect on your income

The Personal Allowance (the amount you can earn before paying Income Tax) and the threshold for higher-rate taxpayers will both increase from 6 April 2021 as planned.

• The Personal Allowance will rise from £12,500 to £12,570.
• The higher-rate taxpayer threshold will rise from £50,000 to £50,270.

While relatively small increases, the amounts reflect inflation over the last year and will help workers to maintain their spending power.

Crucially, after the rise for the 2021/22 tax year, these thresholds will then be frozen until 2026. This means more people will pay Income Tax and 1.6 million people will be pushed into the higher tax bracket by 2024, raising around £6 billion for the Treasury. 

The impact of inflation can seem small from a yearly perspective, but it can add up over time. Over the five years the freeze will be in place, you could end up paying more in tax as a result.

The Bank of England’s inflation calculator highlights this compounding effect. Over the last five years, inflation has averaged 2.5%. If you had a sum of £20,000 in 2015, you’d need £22,674.51 to retain the same spending power in 2020. If inflation carries on at the same rate, then in five years you could see more of your income above the Personal Allowance or higher-rate threshold.

So, while you won’t see an immediate reduction in your pay, in real terms you could be worse off.

Other freezes could affect your income and wealth too

The chancellor also revealed he would freeze three other allowances until April 2026 that could have a significant impact on your wealth and financial plan:

Capital Gains Tax allowance

Capital Gains Tax (CGT) is paid when you make a profit disposing of assets. This may include a second home, investments held outside of a tax-efficient wrapper, or some physical items. However, a CGT allowance of £12,300 means most people won’t need to pay CGT, especially if you consider the tax year when disposing of assets.

The CGT allowance will not increase in line with inflation in April and is set to remain at £12,300 until 2026. As the value of assets rises, some investors could find their tax bill starts to creep up. In the five years to March 2021, house prices have increased by more than £43,000. If that growth is replicated over the next five years, without the allowance rising alongside inflation, second homeowners could face significant costs if they want to sell.

The pension Lifetime Allowance

This is the total amount you can tax-efficiently save into a pension. While the current allowance of £1,073,100 may seem large, once you factor in employer contributions, tax relief and investment returns, you could reach it sooner than you might think. This allowance is now frozen until 2026.

Crucially, the Lifetime Allowance applies to the value of your pension, not your contributions. So, if you’re near the threshold now, investment returns over the next five years could mean exceeding the threshold, even if you were to halt contributions.

The Inheritance Tax nil-rate bands

Inheritance Tax (IHT) is paid on your estate on death if the total value of all your assets exceeds certain thresholds. IHT can reduce how much you leave behind for loved ones. There are two thresholds to consider when reviewing if you’ll need to consider IHT, both of which are now frozen for five years.

The first is the nil-rate band of £325,000. If your estate is below this value, you won’t need to pay any IHT. The second is the residence nil-rate band of £175,000, if you leave your main home to children or grandchildren. You can also pass any unused allowance on to a spouse or civil partner. As a result, couples can leave £1 million to loved ones without paying IHT. As above though, inflation may mean some families that would not have needed to consider IHT will now need to do so.

Please give us a call if you have any questions about how the Budget will affect your finances. By making full use of allowances and planning your finances, you can often reduce your tax liability.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate estate and tax planning.

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.