When it changes, the Bank of England base rate is something that’s featured heavily in the news. But why is it important and when does it matter to you?

The base rate is the interest rate that the Bank of England sets, in turn, it affects the interest rates that banks, building societies and other financial services offer. The base rate changes depending on economic conditions and influences the way consumers behave:

• Low interest rates mean that borrowing is more affordable, encouraging consumers to spend more. When interest rates are low we’re more likely to consider buying a car using finance or take out a larger mortgage
• In contrast, high interest rates mean you’ll earn more on savings and pay more when borrowing. As a result, it encourages people to save rather than spend

The Bank of England’s monetary policy committee sets the base rate, with members voting to leave base rates as they are or change them.

How has the base rate changed over time?

In recent times, we’ve become used to low-interest rates but this hasn’t always been the case.

The current Bank of England base rate is 0.75%. It’s been low for over a decade, following the 2008 financial crisis. In April 2008 the base rate was 5%. However, this was slashed several times over the course of a year in an effort to improve the economy and encourage consumers to spend and support businesses. In August 2016, it was cut even further, to 0.25%, taking it to a historic low. Over the last two years, it has increased but at a very slow pace.

Whilst we’ve experienced low interest rates for over a decade, this isn’t the historic norm.

During the late 80s, the base rate was far higher. In fact, the interest rate reached 15% in 1989. There are many factors that led to this decision but one of the key reasons was that it was seen as a way to reduce inflation.

The current interest rate and that of the late 80s are extremes. Looking at the historical average, interest rates have usually fallen between 4% and 6%.

But how will the Bank of England base rate change in the future? It’s impossible to say with certainty, but economic turbulence caused by ongoing Brexit uncertainty could mean that interest rates will fall even further; good news for borrowers but bad news for savers.

At the last monetary policy committee meeting in November, the base rate was held. However, it was the first time since June 2018 that this wasn’t a unanimous decision. It could signal that the base rate will be cut further if the UK leaves the EU in bid to support the economy.

The impact on your finances

The base rate set by the Bank of England affects the interest rate commercial banks will lend money. It’s used as a benchmark when lending to businesses and individuals.

Saving

You’ve no doubt noticed that savings have been benefitting from poorer interest rates over the last decade. If, since the financial crisis, you’ve been a saver rather than a borrower, you’re probably worse off.

For much of the last decade cash savings are likely to have grown by only small amounts. In fact, once you factor in inflation, your savings have probably declined in real terms. This means the spending power of your savings has been reduced.

In the past, cash savings may have offered you a way to grow your wealth safely over the long term. But lower interest rates may now mean it’s more appropriate to invest in order to outpace inflation.

Borrowing

In contrast, borrowers have benefitted from the low interest environment. It’s cheaper than ever before to borrow money. The interest rates for credit cards, loans and other forms of borrowing are competitive.

One of the areas you may have noticed this in is your mortgage. Our mortgage is often the largest loan we’ll ever take out and interest payments can be significant. If you had a tracker mortgage, which tracks the Bank of England base rate, at the time of the financial crisis, you’ll have noticed minimum payments fell.

Lower interest rates make borrowing more affordable. They also present the opportunity to overpay and reduce debt quicker, whilst paying less interest.

The Bank of England base rate may affect the best way to use your money. At some points, it’s wise to quickly pay off debt but in others, it can be more prudent to save or invest your capital. If you’d like to discuss how to get the most out of your wealth in the current low interest environment, please contact us.

We all know the challenges of trying to find a Christmas present for someone who already has everything. When it comes to children or grandchildren who are going to get piles of presents under the tree this year, you may not know what to get. Thinking long term and setting some money aside for after the festive period has passed could be the perfect Christmas gift.

The average amount that parents spend per child at Christmas is £137.50. With other relatives and loved ones adding to this sum, children in your family could get quite the stack of gifts to unwrap. Whilst the excitement of new toys is part of Christmas for children, deferring gifts could have a far greater impact and boost their financial future.

Becky O’Connor, Personal Finance Specialist at Royal London, said: “It might seem Scrooge-like to save for rather than spend on your children, but putting money into long-term savings is truly far more generous than things that come in gift wrap over time.

“Even if your children don’t realise it now, they’ll appreciate these ‘future presents’ when they reach adulthood; for driving lessons, help towards university maintenance costs, or homeownership dreams.”

Still in need of some persuasion that deferred gifts could be the right option? Here are four reasons to consider them:

1. They have everything they need

Whilst children might want the latest toy or gadget, the fact is that usually, they have everything they need already. If you’re struggling to think of gifts they’ll still love to play with, in a few months’ time, looking further ahead could be the answer. Even if you decide to forgo presents or offer a token gift instead, they’ll probably still have gifts to open from other loved ones, so they won’t miss out on the excitement of Santa. 

2. Give them a helping hand in the future

A look through the newspaper headlines and you’ll probably spot a story about how younger generations are struggling financially. Whether it’s low wage growth, student loans or housing deposits, taking steps to put money aside now can make things easier in the future. Remember, if you’re saving money in their name, they will usually be able to access it from the age of 18. As a result, it’s important to let them know what the money is intended for as they get older. Alternatively, you could save in your own name, ready for when it’s needed.

3. Make your gift go further

A £50 gift doesn’t typically go that far when you look at what it will buy and how long it will last. But keep adding those sums together, along with the benefit of interest or investment returns, and it can add up over the long term. When you look at the bigger picture, deferring gifts can mean your money has an even greater impact.

4. Teach them a valuable financial lesson

We’re often told to save for the future. Saving a little bit from this year’s Christmas budget for your child or grandchild’s future is a great opportunity to teach them an important financial lesson. Whether you tell them about the savings now or wait until they’re a little older, it can help reinforce the idea of saving for a rainy day.

Giving a deferred gift for Christmas

So, if you’re looking for an alternative to the usual colourful toys and treats that can be found under a tree, what are your options? Here are three to consider:

• Savings account: If you saved the equivalent spent on Christmas presents each year by parents (£137.50) a child could reach their 18^th birthday with a useful nest egg of £2,824, assuming an interest rate of 1.45%. It’s a sum that could provide the support needed to pass their driving test or lend a helping hand as they prepare to study at university. Alternatively, you could decide to spread out contributions. Deposit just £25 a month and they’ll have £5,400 when they reach adulthood.
• Premium bonds: Premium bonds can be a fun way to set money aside for children. The minimum amount available is £25 and anyone can purchase premium bonds on behalf of a child. Every month, two bondholders will win £1 million, with smaller prizes on offer. On average, premium bonds win the equivalent of 1.4%. However, many savers will receive less than this or nothing at all.
• Investing: Using a savings account can seem like a safe option, as contributions won’t be affected by market volatility. But it could mean that your money isn’t working as hard as it could be. If you’re saving for more than five years, investing is an option worth considering. £25 a month could grow into £12,002 over 18 years, assuming average returns of 8% per annum. Use a Junior ISA (JISA) and savings returns will be tax-free.
• Pension: Thinking even further ahead can help your child with retirement. You can open a pension in a child’s name from when they are born. Pay in £25 a month from birth to adulthood, and the child could have a pension worth £147,798 when they reach 60, assuming growth of 8%. It can make the transition into adulthood easier, knowing they have some savings ready for later life.

If you’d like to understand which option best suits your goals, please get in touch. We’re here to help you make the most of your finances, including passing them on to loved ones to support their future too.

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

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.

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.

Welcome to our latest update on the investment market. We take a quick look at some of the key factors that influenced the stock market in October and could continue to do so over the coming months.

The global economy continues to have a gloomy outlook. In October, the World Trade Organisation slashed its global forecast to the lowest in a decade. The organisation now predicts growth of 1.2% this year, compared to the 2.6% estimate it gave in April this year. As is still a common theme, the reduced expectations were linked to Brexit uncertainty and ongoing trade wars.

The new Managing Director of the International Monetary Fund Kristalina Georgieva also used her inaugural speech to warn the global economy is now in a synchronised slowdown urging politicians to act. It points to continued volatility for investors.

UK

Unsurprisingly, in the UK, Brexit continues to be the key topic on everyone’s lips.

For a short time, it looked as though the UK would be leaving the EU on the 31^st October deadline. Prime Minister Boris Johnson managed to get his deal through the first stage this month, beating predecessor Theresa May, but that’s as far as it got. We’re now set to have a general election on 12^th December, indicating the Brexit uncertainty is far from over.

Nissan has also waded into the Brexit debate. The Japanese car maker has said it would review its decision to build the Qashqai sport utility vehicle in Sunderland if the UK were to leave the EU.

The UK narrowly avoided recession. Whilst the economy shrunk by 0.1% in August, it’s still up 0.3% over three months. The figures have gone a little way to easing fears that a recession is on the horizon. Overall, statistics paint a gloomy picture:

• Markit data suggests factories are cutting jobs at their fastest pace for six years
• The construction industry is now shrinking at a faster pace, the PMI fell from 45 in August to 43.3 in September, figures below 50 indicate contraction. Jobs in construction also fell at their fastest pace since December 2010
• Retailers in the UK suffered their worst September in at least 24 years, according to the British Retail Consortium. This is coupled with data from Barclaycard finding retail spending on credit cards was also subdued
• Worryingly, the UK’s dominant service sector is now declining along with manufacturing and construction
• The housing market has stalled, with prices falling 0.2% nationally in September, according to figures from Nationwide. London leads the fall with a 1.7% decrease
• One bright spot in the figures was TV and film, which helped boost GDP thanks to several box office productions

Moving on to some company news, an inquiry was launched into the collapse of Thomas Cook. Executives were questioned by MPs about remuneration policy and accounting practices, among other areas, after the travel firm collapsed at the height of the holiday season this summer, leaving thousands stranded.

Another much-loved British brand is facing challenges too. John Lewis Partnership is looking for discounts from landlords amid struggles that meant it made a loss in the first half of the year for the first time. A major shake-up is underway at the company though; one in three senior management HQ jobs will be cut as it merges running John Lewis and Waitrose.

Europe

Europe continues to be affected by both Brexit and the US-China trade war; the manufacturing PMI fell from 47 in August to 45.7 in September, the lowest reading since October 2012.

Germany, often seen as the stalwart of Europe, has also seen a flurry of negative news. Growth forecasts have been slashed to 0.5% for this year and 1.1% in 2020. This compares to previous estimates of 0.8% and 1.8% respectively. Factory orders slumped by 6.7% year-on-year in August and exports fell 3.9%.

Tellingly, a Sentix survey revealed that Eurozone investor morale has hit a six and a half year low. With difficult conditions continuing, it’s a sentiment that may not pick up for some time.

New US tariffs on some EU products also came into effect on the 18^th October. The tariffs of 25% affect a wide range of products from across the continent, including French Wine, Italian Parmesan, Spanish olives and Scottish whisky.

US

Statistics in the US also point towards a slowdown.

Factory output fell at its fastest rate in a decade, falling to 47.8. The news affected stocks on both sides of the Atlantic with prices falling in response.

President Donald Trump celebrated unemployment figures as they fell to 3.5%, the lowest since December 1969. However, this statistic shows just one side of the job market; wage growth fell below expectation indicating that the unemployment figures may be unsustainable.

The Federal Reserve also cut interest rates to the 1.5%-1.75% range as business investment and exports continue to be weak. Despite Trump urging action for months, he still blasted the move, stating the Fed had been too slow to act.

Now on to an area that’s having global consequences; the trade war between the US and China.

Even basketball became implicated in the issue after General Manager of the Houston Rockets expressed support for Hong Kong. China’s state broadcaster, CCTV, then halted plans to air the league’s pre-season games.

Whilst tensions have been rocky between the two countries this month, there could be a deal just around the corner. The US blacklisted 28 Chinese firms, citing human rights violations. The Beijing Foreign Ministry accused Washington of ‘smearing China’ over the crackdown. However, by the end of the month, Trump indicated that he could sign a preliminary trade deal very soon. Meetings will continue into November.

Asia

Of course, the trade war with the US continues to have an effect on China. The country missed its economic growth forecast. GDP grew 6% between July and September. Whilst this is still within its target range, it may be a reminder that the fast-paced growth of China can’t last forever.

Another key issue in Asia is the ongoing protests in Hong Kong. The special administrative region of China has now faced months of protests with tensions continuing to escalate. As a result, it’s not surprising that the country has now fallen into a recession.

Keep an eye on our blog for more investment updates.

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

Research has highlighted how being cautious with pension investment can be as damaging as taking too much risk. In some cases, a cautious approach is appropriate. But, in others, it’ll be the result of subconscious financial bias affecting the decisions we make.

Research from Cass Business School found women are more risk-averse than men. It’s a trend that could be affecting how much women have in their pensions and other investments. The research also found that young people and those that are single are more likely to be risk-averse too.

Professor David Black, co-author of the paper and Director of the Pensions Institute at Cass, said: “Women, because they are more risk-averse than men, would be more comfortable with lower-risk investments. Over a long investment horizon, such as that involved in building up a pension pot, this behaviour has been described as ‘reckless conservatism’ – women with the same salary history as men would, on average, have lower pensions as a result.

“On the other hand, men’s investment overconfidence can lead to ‘reckless adventurism’. This is not necessarily desirable at older ages close to retirement, since there is less time to recover from a severe fall in stock markets.”

What is financial bias?

Financial bias is simply a human tendency that affects our behaviour and perspective. These may be based on beliefs and experiences. In financial terms, bias may affect your ability to make decisions objectively. For instance, you may make a choice based on emotional bias rather than evidence.

Taking the above example; why are women more likely to take less risk with investments? It’s likely that bias is having an impact. Whilst the research didn’t show their personal circumstances, pre-conceived ideas will be affecting some women when they decide how much risk to take.

There are many forms of financial bias that may affect your decisions, including these three:

1. Loss aversion

This is the financial bias that the above research looked at. It’s an emotional tendency to prefer avoiding losses over making gains. Past research has indicated that the pain of losses is greater. As a result, investors may choose lower-risk options than appropriate to avoid this.

Another example of loss aversion is selling stocks to prevent further losses before you planned. Whilst doing so may protect you from further falls, it can be damaging. Selling stocks and shares effectively lock in your losses. Remember, over the long term, investments typically deliver returns. 

2. Confirmation bias

Let’s say you’re looking at pension opportunities and decide one option is too high risk. But you decide to do some research anyway. Confirmation bias leads you to seek out information that supports your view. So, you’d discard the figures that suggest it could actually suit you. As a result, research simply backs up what you already believe.

Confirmation bias can lead to a one-sided financial view. It can make it difficult to objectively balance the pros and cons. Being aware of this can go some way to improving your research process, as can working with a financial planner.

3. Herd behaviour

If you’ve ever found your action mimicking those of a larger group, herd behaviour could be to blame. In some instances, it’s right to follow what others are doing. But it should align with your own reasoning, plans and wider goals. With so much noise in investment markets, it can be difficult to focus on what’s right for you.

For example, if markets start to decline, you may pull out investments if others are doing so. This is because you believe that the majority must be right. Yet, their circumstances and aspirations may be very different from yours. It’s important to build a financial plan you have the confidence to stick to.

How can financial planning help?

Working with a financial planner can help you remove some of the bias from decisions. It allows you to view your options through another’s eyes. You may have a clear idea about the best way to invest for retirement, for example. But after talking with a financial planner, you discover that taking more or less risk is appropriate.

Financial bias can also mean making snap decisions. For instance, when the value of stocks begins to fall you may consider selling. Having a long-term financial plan in place can give you the confidence to hold steady. This, in turn, can help keep you on track for your goals.

If you’d like to discuss your financial future, please get in touch. Our goal is to create a financial plan that reflects you and that you have confidence in.

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.

In recent years, we’ve heard a lot about the gender pay gap, from salary to pension savings. But HMRC data reveals that the pension gap starts at a much younger age. Boys are more likely to have had a pension opened in their name before they turn 16 compared to girls. Thanks to the benefits of compound interest and tax relief, this could mean a significant pensions gap before children even apply for their first job.

There are restrictions on how much you can pay into children’s pensions. But even small contributions can make a big difference. As the contributions are typically invested, gaps can widen.

Figures obtained by Hargreaves Lansdown found 20,000 boys under 16 had money paid into a pension on their behalf in 2016/17. This compares to 13,000 girls. Whilst both figures are relatively low, it does highlight the gap.

Nathan Long, Senior Analyst at Hargreaves Lansdown, said: “Parent and grandparents are far more likely to save for boys than girls, so the gender pension gap can start from birth. While women’s paltry pension savings are rightly blamed on the gender pay gap and their greater role in looking after the family, there is another villain in the piece.

“It’s counter-intuitive that there are more pensions for boys as women earn less, take more career breaks, and yet have longer retirements, so need more in their pensions. It’s unclear why this discrepancy exists, although it could be because gifting has come in part from a generation of baby boomers where men are typically more likely to have the lion’s share of pension in retirement.”

So, should you consider paying into a pension for your child or grandchild?

How do children’s pensions work?

People that do not have any earnings can pay up to £2,880 per year into a pension, including children. Contributions will receive a 20% tax relief, boosting the pension further.

The restriction may seem like the savings will add up to little when you consider how much is needed for retirement. But, look at it over the long term, and the impact can be significant. Past research has indicated contributing the maximum annual amount each year could result in a £1 million pension.

According to AJ Bell, depositing the maximum £2,880 for the first 18 years of a child’s life would result in a £105,197 pot. This assumes a 20% tax relief is applied and a growth rate of 5% after fees. That’s a nice sum to hand over to your child. However, as it won’t be accessible, it has decades to grow. Leave it for another 46 years, until the child is 64, without making further contributions and it could have reached £1 million.

It’s a step that can help secure the financial future of your child and ease concerns.

There are three key reasons to consider paying into a child’s pension over alternatives:

• Tax relief: Pension contributions will receive tax relief at 20% if the person is receiving no other income, as is likely the case for children. It gives your contributions an instant boost.
• Compound growth: Pensions are a long-term investment product and, as a result, benefit from compound growth. This can help your contributions to grow significantly.
• Restrict access: Some alternative products will allow your children to take control at 16. However, with a pension you know they won’t be able to access it until retirement age.

Children’s pensions: The pitfalls

Whilst paying into a child’s pension can be an efficient way to save for the long term, it often isn’t the right solution. Pensions aren’t readily accessible and may mean they’re not suitable. Other products, for example, can help children or grandchildren through university or stepping onto the property ladder.

It’s important to fully explore the alternatives before choosing to pay into a pension. Other options may be better for your goals, including:

• Easy access savings account
• Cash Junior ISA
• Stocks and Shares Junior ISA

If you’re saving for a child’s future and want guidance, please get in touch. We’ll help you understand the different options and where contributions can be best used to secure their future.

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.

Are you planning on taking a career break?

There are many reasons why you might decide to take a career break and it’s often an emotional decision. However, finances are likely to be a key part of whether it’s possible and the impact on your future. Uncertainty around the circumstances of some career breaks can make it incredibly difficult and stressful to manage finances.

Even if you don’t plan to take a career break soon, it could be on the horizon.

According to research from Aviva:

• 19% of employees aged 45 and over in the UK expect to leave work in order to care for adult family members
• 10% of mid-life employees expect they will have to leave work to care for children or grandchildren

Whilst career breaks for care reasons are common, many employers fail to consider the issue. It can mean there’s a significant disconnect and that working isn’t possible, even if a career break isn’t your preferred option. Just 6% of employers view caring pressures as a significant issue faced by their employees.

Lindsey Rix, Managing Director at Aviva, said: “The practical, financial and emotional costs of caring for relatives both young and old are forcing many people in mid-life to make increasingly difficult decisions about balancing commitments. Mid-life is the fastest-growing age demographic in the UK workforce, so we can expect these pressures to grow.”

Whatever your reason for taking a career break, it’s important to consider the financial implications.

The impact on your immediate income

The first thing to do is to make sure your plans are affordable in the short term. How would a loss of income affect your lifestyle?

Take a look at your outgoings and how these might change. You may find that your overall expenditure decreases. For example, travel costs may fall if you’re no longer commuting. There may also be areas where you’re happy to cut back in order to take a career break. Understanding your regular outgoings is the foundation for creating a financially secure career break.

Then, you need to look at your income sources. How will you meet financial commitments and live the life you want? You may have a partner who will be bringing in an income, for example. Alternatively, savings or an investment portfolio may provide you with the capital needed. You should also look at whether you’d be eligible for means-tested support.

Understanding the impact on your day-to-day life means you can make an informed decision about whether a career break is right for you and whether it’s financially possible.

Looking further ahead

When planning a career break, it’s often the short term that’s focussed on. However, it’s just as important that the medium and long term are considered too.

In the medium term, it’s likely that your savings will be affected. This may be due to using savings to supplement an income or because you’re putting less away. How will the impact on savings affect medium and long-term goals you may have? Will you need to adjust your plans to reflect the impact of a career break?

Another area to pay attention to is your pension. You may decide to take a break from paying into a pension, freeing up more income for now. However, even a short break can have a significant effect on the amount you retire with. Even if you decide to continue paying into a pension, you’ll lose the benefit of employer contributions. Again, this can have a big effect over the long term.

Planning ahead can be a daunting prospect but it’s a step that can help secure your financial future.

Modelling the impact of a career break

Calculating the financial impact can be difficult. After all, you may not have a concrete plan for when you’ll go back to work. Even if you do, you may have a lot of ‘what if’ questions. This is where financial planning can help.

We’ll help you understand how taking a period out of work will affect your finances in the short, medium or long term. With this information, you’re able to put precautions in places where necessary and proceed with confidence. Our goal is to give you the financial peace of mind needed to take a career break when necessary.

Whether you’ll be providing care or simply want a break, taking control of your financial future is crucial. Contact us to discuss how your plans could have an impact.

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.