The pandemic and restrictions have meant many families are struggling financially or feel insecure. Research suggests that younger generations have been turning to parents and grandparents for a helping hand. However, some older family members haven’t fully considered the long-term impact that providing support could have on their own plans.

£1.9 billion gifted during the pandemic

According to Legal & General, 55 million older family members expect to provide additional financial support as a direct result of Covid-19 on top of the support they may already offer.

Gifting money to help children and grandchildren get onto the property ladder has become commonplace. However, the survey indicates that many are also providing a helping hand to cover day-to-day costs. The figures suggest 15% of the older generation expect to provide an additional sum of £353, on average, in financial aid. In total, that adds up to £1.9 million being gifted due to the pandemic.

This is on top of support they may already be offering. More than a third (39%) of young adults regularly receive cash from family to help them get by. Collectively, older family members provide £372 million to loved ones each month. Some 29% of recipients use this money to pay for everyday essentials and 27% use it to pay their bills.

When loved ones are struggling with day-to-day costs, it’s natural to want to provide support. However, the research also suggests that some aren’t fully considering the short or long-term impact this could have. The survey found:

• 38% of those gifting money have made sacrifices in order to do so
• 31% have cut back on some day-to-day spending
• 21% admitted they have struggled to pay bills as a result

Understanding the impact a gift can have on your lifestyle before handing it over can mean you feel confident in your decisions. In many cases, family members offering support know they can maintain their current lifestyle, but taking some time to double-check can provide peace of mind.

Don’t forget the long-term impact of gifting

While the study focuses on the short-term implications of gifting, such as paying bills, you need to consider the long term as well.

If you’re taking money out of your pension, for instance, would providing gifts mean you could run out of money later in retirement? Or will cutting back now mean bigger expenses in the future? Again, many clients find they’re in a position to provide the level of financial support they want. But by understanding the long-term consequences, they can proceed with confidence, knowing that it isn’t harming other aspirations they may have.

Reviewing your financial situation now can also help you understand where to take the money from. You may, for example, have money saved in an ISA that you’ve been using, but the annual ISA allowance will limit how much you can replace at a later date. In some cases, this means it makes more sense to draw from other sources of wealth and assets. Reviewing your finances beforehand means you can choose an option that makes sense for you and your plans.

Make gifting part of your financial plan

When asked how they want to use their wealth, many clients will want to provide financial support to loved ones. In the past, this has often been achieved by leaving an inheritance. However, as young families face pressure now, gifting during their lifetime is becoming an increasingly popular option among clients and there are benefits:

• You can see the impact your money has had for loved ones
• It can help loved ones overcome challenges they are facing now, such as getting on the property ladder
• It can reduce a potential Inheritance Tax bill

However, whether you want to lend regular financial support or give a one-off lump sum, gifting should be part of your long-term financial plan. It’s a step that can ensure your plans are viable and have considered other factors, some of which may be outside of your control. For example, if you want to make regular payments to cover school fees for grandchildren, it can allow you to create a plan that ensures this will be provided until they finish their education, even if something unexpected happens.

Please contact us if you’d like to discuss how to pass on money and other assets to loved ones. We’ll help you incorporate it into a financial plan that considers your goals and financial situation to deliver a blueprint you can have confidence in.

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 or tax planning. 

From 2030, the government will stop using the retail price index (RPI) measure of inflation, instead, it will use the consumer prices index (CPI) measure. While this switch might not seem impactful, it could affect your pension income and other personal finance areas.

The switch has been on the cards for a while, but Chancellor Rishi Sunak confirmed it would go ahead in the November 2020 Spending Review.

What is the difference between RPI and CPI?

Both indexes aim to measure the cost of living and how it is increasing. However, how the figure is calculated varies between the two.

The RPI was first calculated in 1947 and was used for many years as the headline measure for inflation. It has slowly been used less due to “shortcomings in its composition”, according to the government. The CPI was introduced in 1996 to measure inflation consistently across all EU members. So, how do the calculations differ?

• The RPI calculates the rate of inflation by measuring the price of various everyday items, as well as housing costs, such as mortgage interest payments and council tax. However, it doesn’t account for some people switching to cheaper products when prices rise.
• The CPI calculates inflation by measuring the price of thousands of items that we regularly spend money on, but excludes housing costs. This includes things like cinema tickets or technology.  The prices are weighted to give more prominence to what we spend more money on.

Some people argue that CPI is a better measure as it represents a more realistic view of how inflation affects spending.

While RPI has not been used as an official statistic since 2013, it’s still the figure used for some calculations. This includes some pensions, index-linked gilts, and student loan interest. As the RPI is usually higher than the CPI, switching measures could mean that some people miss out.

Switch predicted to cost savers and investors £96 billion

The plans to reform the inflation measure is predicted to cost savers and investors £96 billion according to the Association of British Insurers (ABI). It will particularly affect workers and retirees with a Defined Benefits pension, as it may reduce expected income. Retirees who have taken out an inflation-linked Annuity could also be affected.

Hugh Savill, Director of Conduct and Regulation at the ABI, said: “It is widely accepted that the RPI model is less than perfect, but the proposal’s impact will be felt by policyholders and pension savers for decades.

“Compensation by the government should also be seriously considered to avoid creating winners and losers.”

With the government not commenting on any compensation for those negatively affected by the plans, pension savers, retirees and investors should take steps now to understand if their retirement income will be affected.

Will the inflation change affect your retirement income?

The change could affect anyone receiving a retirement income that is linked to inflation. This is likely to be if you have either an inflation-linked Annuity or a Defined Benefit pension.

1. Inflation-linked Annuity: This is a product you purchase with a lump sum, usually built up in a Defined Contribution pension, when you retire. It provides you with a guaranteed income for life, increasing each year in line with inflation. Many products will already use CPI as their measure of inflation. If this is the case, you will not be affected by the switch. However, if your Annuity increases according to RPI now, you could lose out in the long run. Check your product documents to see how your Annuity annual rise is calculated and get in touch if you have any questions.
2. Defined Benefit pensions: Defined Benefit pension holders are likely to be among the most affected by the changes. With this type of pension, you receive a guaranteed retirement income for life, which is usually linked to inflation. Again, if your pension is currently linked to the RPI, you’ll lose out once this switches to CPI. You should check your pension scheme documents to see how annual increases are currently calculated.

At first glance, the difference between RPI and CPI can seem minimal. However, when you factor in the difference it will have on your income over your full retirement, it can be significant. Research conducted by the Pensions Policy Institute (PPI) suggests it could mean Defined Benefit pension members receive up to 9% less from their pension overall.

Daniela Silcock, Head of Policy Research at the PPI, said: “Women and younger pensioners will experience the greatest reduction as women live longer than men, on average, and younger pensioners will experience a compounding effect. Older pensioners on low incomes will also struggle with a reduction in benefits as they have less opportunity to make up income deficits than younger members.”

If you have a retirement income linked to inflation and want to understand what the changes mean for you, please get in touch. We’ll help you understand whether you’ll be affected, the extent of the impact over your lifetime, and what steps you can take to secure the retirement lifestyle you want.

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.

If your estate could be liable for Inheritance Tax (IHT), gifting is one solution for passing on wealth while reducing the bill that could be appropriate for you. Our latest guide explains the basics of IHT and what you need to consider if you want to make gifting part of your long-term financial plan.

The guide covers:

• What Inheritance Tax is and when it has to be paid
• What Potentially Exempt Transfers (PET) are and how they affect IHT
• Gifting allowances that allow you to pass on wealth or assets to loved ones free from IHT
• How a charitable legacy can reduce an IHT bill
• Reliefs that allow you to gift certain assets free from IHT

Click here to download your copy of our Inheritance Tax and gifting guide.

IHT can significantly reduce what you leave behind for loved ones, but there are often things you can do to reduce the bill. If you’re worried about IHT, please contact us. We’ll help you put a plan in place that considers your legacy, including gifting where appropriate.

Please note: The Financial Conduct Authority does not regulate estate or tax planning.

Global stock markets continued to be affected by Covid-19, but there was good news mixed among the negative.

While the International Monetary Fund (IMF) warned the global economic recovery was ‘losing momentum’, markets rallied during the month based on the news that a vaccine was on the way. Pfizer was the first to announce a vaccine, closely followed by AstraZeneca. While it could be some time until a vaccine allows us to return to normal, it’s a light at the end of the tunnel.

UK

Throughout much of November, the UK was in a second lockdown, fuelling fears of a double-dip recession.

In line with these concerns, the Covid-19 furlough scheme was extended until March 2021 to protect jobs and businesses.

The Chancellor also delivered his Spending Review, which sets out plans for the 2021/22 tax year. The statistics painted a gloomy picture. The government is now borrowing at its highest level in peacetime history and the economy is predicted to shrink by 11.3% this year. The new year isn’t expected to bring relief either. Unemployment levels are forecast to reach a peak of 7.5% in the second quarter of 2021 and the economic output isn’t expected to reach pre-crisis levels until the end of the year.

Unsurprisingly, shares in UK travel companies, pub chains, retailers and hotel operators all fell sharply with the news of a second lockdown. Among those affected were:

• Wetherspoons (-7%)
• Whitbread, owner of Premier Inn (-3.7%)
• JD Sports (-5.8%)
• IAG, parent company of British Airways (-6.3%)

A survey conducted by the Office for National Statistics also highlighted the challenges businesses are facing. One in seven companies (14%) fear they will not last until next spring. This sentiment was particularly high among hospitality firms.

Not all firms have been negatively impacted by lockdown through. Some, such as supermarkets, takeaway delivery firms and DIY retailers, saw stocks rise.

The Bank of England has also commented on another risk to businesses – Brexit. The central bank warned that disruption caused by firms being unready for the transition period with the EU coming to an end will shave 1% off growth in the first quarter of 2021.

Europe

Looking to the EU, it is again a mixed bag of good and bad news.

Eurozone GDP increased by 12.6% in the third quarter. However, investment bank Goldman Sachs predicts economic growth will be negatively affected by the new restrictions across Europe. As a result, the bank expects the European economy to shrink again in the final quarter of 2020 and warned this is a trend that could continue into 2021.

Technology companies have largely been resilient during the Covid-19 volatility but that doesn’t mean they’re ‘safe’. In November, the EU hit Amazon with anti-trust charges over merchant data. Following an investigation by the European Commission, Amazon has been charged with distorting competition in the online retail sector. A second investigation is also pending. The firm faces a potential fine as high as 10% of its global turnover, about £15 billion.

US

The big news from the US in November was, of course, the presidential election. Uncertainty over who had won and whether legal action would be taken led to volatility in the markets in the days  following the vote. However, the markets did enjoy a Biden bounce as it became clear that Joe Biden will be the 46^th President of the United States.

While the US still battles to control Covid-19, headline figures suggest the economy is recovering at a stronger pace than expected. According to the Institute of Supply Management, US manufacturing grew at its fastest pace in almost two years in October. Output was 59.3, compared to the 55.8 forecast on a scale where a reading above 50 signals growth.

This was also reflected in the unemployment rate dropping to 6.9%, down from 7.9% in September.

Asia

In Asia, there were also positive signs of recovery, but fears remain. Japan was the latest country to exit a recession after posting 5% growth in the third quarter. However, concerns that the country now faces a third wave of Covid-19 dampened the news.

Moving away from Covid news, the largest technology firms in China saw the value of their shares fall sharply this month. Beijing’s market regulator took its first major step in tackling the monopolistic power of tech giants. E-commerce firm Alibaba was one of those affected, with shares falling 9%. 

Keep up to date with market and financial news by keeping an eye on our blog. Please get in touch if you have any questions about your investments or financial plan.

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.

2020 has been an eventful year for investment markets. Impacted by the Covid-19 pandemic and government responses to this, there have been many valuable investment lessons that will apply in 2021 and beyond.

As the extent of the pandemic became known in March, stock markets around the world suffered sharp falls. In fact, fears of a recession meant the FTSE suffered its biggest fall since the 2008 financial crisis and trading was temporarily suspended on Wall Street as circuit breakers were triggered, according to the Guardian.

Since then, markets have bounced back but continued to experience volatility. The uncertainty of the situation, with governments changing restrictions and support as they try to control the virus, affected markets throughout the summer and autumn.

So, 2020 has been useful in highlighting the investment lessons we should keep in mind.

1. The unexpected does happen

A year ago, who would have predicted that a global pandemic would have occurred? It’s probably not something you’ve ever considered when weighing up investment risks. Yet, it’s had a huge impact on investment volatility and opportunity in 2020.

This year has taught us that the unexpected does happen. We can’t consider every eventuality but preparing for the unexpected can improve your financial resilience. In terms of investing, this may mean having liquid assets or a rainy-day fund you can use if investment values fall. This is particularly important if you’re drawing an income from investments. Having options for when the unexpected does occur should be part of your financial plan. 

2. Volatility is part of investing

No one wants to see the value of their investments fall. But volatility is part of investing. When you invest, you need to be aware of the risk that values can fall.

This is why a long-term time frame and goal is so important when investing. Short-term volatility is often smoothed out once you look at investment performance over a longer time frame. It can be frustrating to see that investment values fell in 2020, but when you look at performance over the last five years, for example, you’ll probably still see an upward trend.

3. Diversifying is important

We all know we should diversify our portfolio. Investing in a range of assets, industries and geographical locations can help spread the risk. When one investment falls, another may perform better helping to create balance.

Covid-19 has had a far-reaching impact, with countries around the world affected by the virus. However, some industries have been affected far more than others. Travel and hospitality businesses, for instance, have been forced to close for weeks at a time in many places. In contrast, the pandemic has created opportunities for some firms too. While a balanced portfolio will still have suffered volatility, it can lessen the impact.

4. Financial bias can affect us all

Investment markets have featured in the news more heavily than usual this year, thanks to the volatility experienced. If headlines or talk about the markets meant you considered changing your strategy, financial bias is likely to have played a role.

Financial bias simply means other factors besides facts have influenced your investment decisions. When markets fell sharply at the beginning of the pandemic, an emotional reaction that means you considered taking money out of the markets is normal. However, recognising where bias occurs and limiting the impact is important. Working with a financial adviser can help you with this as you have a professional you trust and one that understands your situation to talk to.

5. You can’t time the market

Finally, the events of 2020 have supported the saying: It’s time in the market, not timing the market.

If you’d tried to guess when to put your money into the stock market and exit this year, you’d probably have ended up making mistakes. Trying to time the market to maximise returns is incredibly difficult, as so many factors play a role. Even investment professionals with a huge number of resources make mistakes.

Rather than trying to time the market, creating a long-term plan and sticking to it is usually the most appropriate strategy for investors.

What to expect in 2021

So, what lies ahead for the next 12 months? With lockdowns and restrictions continuing around the world, we expect further investment volatility as we head into 2021. But if 2020 has taught us anything, it’s that we can’t predict what’s around the corner. Think about your aspirations and build a long-term financial plan around these, including investing where appropriate.

Please get in touch if you’d like to review your investment portfolio for the year ahead.

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.

Stock markets in 2020 have been characterised by volatility and uncertainty. If you’ve made financial decisions based on your feeling towards this, it could have cost you money.

Whenever we make a decision, we have to weigh up the different options. While reasons and facts should be the basis for any decision you make, emotions play a role too. Where this happens when making financial decisions, this is called financial bias. It can mean you end up making decisions that aren’t appropriate for you.

In recent months, as markets have experienced volatility and economic uncertainty has featured in the news, this may have affected the decisions you’ve made too.

Moving to cash due to Covid-19 cost investors 3%

According to behavioural finance experts Oxford Risk, investors that responded to Covid-19 uncertainty by moving more of their wealth into cash could have missed out. By switching to cash for ‘emotional comfort’ it’s calculated that investors have missed out on returns of 3% or more a year.

Separate research also suggests that investors moved more of their wealth into cash in response to Covid-19. In the first half of 2020, UK households put away £77 billion in cash, taking the total amount saved in cash accounts to £1.5 trillion. While a cash account to cover emergencies is advisable, it’s estimated that nearly £1.2 trillion of this cash isn’t needed for contingencies.

With cash accounts currently offering low-interest rates, it’s estimated that UK households have missed out on £38 billion in potential investment returns.

While investing does come with risk, it can help your money grow at a faster pace than when using a savings account. However, you need to invest with a long-term time frame, a minimum of five years. This provides an opportunity for short-term volatility to smooth out. Investing for a short period means there’s a higher chance that you could lose money due to short-term downturns.

There are many reasons investors held more of their money in cash during the first half of this year. But for some, financial bias will have played a role.

For example, information bias occurs when investors evaluate information, even if it doesn’t relate to their situation. It makes it difficult to assess what information is relevant. The sheer amount of information can be overwhelming. During the pandemic, investors have been bombarded with news, forecasts and opinions about what will happen. With much of this coverage negative, it’s natural that some investors will have had an emotional reaction and decided that cash was safer.

Trying to time the market provides an opportunity for financial bias

It’s not just a trend that is having an impact due to Covid-19 either. When the markets are performing well, it can be tempting to increase how much of your wealth is invested. In contrast, it’s common to want to move your money to ‘safety’ at times when markets are performing poorly or experiencing volatility.

However, this can mean you end up buying assets while prices are high and selling at low points. Oxford Risk estimates this type of financial bias can cost investors an average of 1.5% to 2% a year over time. Over a long-term investment strategy, financial bias can end up costing you significant sums.

While it can be tempting to move money in and out of investments to maximise returns, trying to time the market is difficult. As the above averages show, you’re more likely to miss out on returns than to increase your portfolio’s value. For most investors, a long-term investment strategy is appropriate.

Minimising financial bias: Stick to your long-term plan

Creating a long-term plan based on your goals and sticking to it can help you minimise the impact of financial bias. That can be easier said than done, though, especially at times of uncertainty. Working with us can help you here. A financial planner will be able to help you understand your long-term financial positions and act as a second pair of eyes when you want to make changes. It can mean financial biases can be highlighted and discussed.

That doesn’t mean you should never make changes to your financial plan. After all, circumstances and goals do change, and your financial plan may need to change to reflect this. However, this should be driven by long-term aspirations and be based on evidence.

Please contact us, if you’d like to go through your financial plan and investment strategy.

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

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