How much does bias affect your financial decisions? While you may try to make decisions based on facts, it can be much easier than you think to overlook when your decisions are being influenced by emotions or bias. 

Last month, you read about why bias occurs and how it can lead to “irrational” decisions through making shortcuts. Now, read on to discover six signs that bias could be affecting your financial decisions. 

1. You hold on to certain information

When you make financial decisions, there may be a lot of information to process. So, you may focus on one piece of data. This is known as “anchoring bias” because your view is anchored to the information.

For example, when thinking about how valuable an investment is, you may anchor your view to a previous share price, even if further data means this is no longer accurate. It could mean you choose to hold on to an investment longer than is appropriate because you view it as being more valuable than it is. 

This type of bias could mean you’re not looking at the full picture when you make financial decisions as you are blinded by a specific piece of information. 

2. You’re too cautious 

Often when you think about making investment mistakes, it’s taking too much risk that comes to mind. Yet, being too cautious when making financial decisions could be just as damaging.

Psychology theory suggests that you feel the pain of losses more than the joy of gains. So, it’s natural that you’d want to avoid a loss. That could mean you choose to take too little investment risk or not invest at all due to fear of potential losses.

However, being too cautious could erode value and affect your plans. It could mean you miss out on opportunities to grow your wealth even if they’re suitable for your risk profile and goals. 

3. You’re overconfident 

In contrast to being too cautious, overconfidence can be damaging too. It can mean you don’t manage risk properly and could lead to reckless financial decisions. 

Overconfidence can mean you overestimate your abilities. This can often be seen in investing, where some people may believe they can time the market to maximise returns, despite markets being unpredictable. 

Overconfident investors will often attribute “wins” to their skill and knowledge, but when they “lose” it’s blamed on things outside of their control. This mindset can lead to investors taking on even more risk that may not be right for them and a short-term outlook.

4. You follow the crowd

There’s something comforting about doing something that everyone else is. It can make you feel like you’ve made the “right” choice because everyone can’t be wrong, can they?

Herd mentality is another bias that can often be seen in investing. If all your colleagues are talking about an opportunity they believe will deliver returns, you can feel left out if you’re not part of it. You don’t have to know the people to be affected by herd mentality, reading the news or financial commentary can also encourage you to follow the crowd. 

It’s a bias that can mean you make decisions that aren’t right for you. 

5. You seek information that supports your views

It’s normal to seek out people that have like-minded views. It’s a bias that can affect how you seek and process information too.

Known as “confirmation bias”, some people will place a greater emphasis on information that reaffirms what they already believe. When making financial decisions, that could be that an investment is “bad” or “good”. It’s a process that can mean you discard valuable details without giving them the attention they deserve. 

6. You give all information the same level of importance

How you process information can lead to bias. In the case of “information bias”, you give all information the same level of importance even though they could come from very different sources.

When you’re bombarded with information, it can be challenging to decide what to focus on. However, understanding that not all information is equally useful is important. 

Knowing which information to discard and which to use to guide your decisions is difficult, but improving this process could help you make choices that are better for you.

Recognising bias can help you overcome it to make better financial decisions

Realising that bias could affect your financial decisions can mean you’re in a position to spot the signs and start to make better choices. Look out for our blog next month for tips on how to reduce the effects of bias.

If you have any questions about your financial plan or would like our support when making decisions, please contact us. 

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.

High levels of inflation and economic uncertainty continue to plague the investment markets. Investment portfolios are likely experiencing volatility – read on to find out what has been influencing markets.

Despite the doom and gloom statistics, financial services firm JP Morgan suggests that a global recession could be avoided as inflationary pressures ease.

As an investor, you may worry about what the current circumstances mean for your investments and financial goals. Remember, you should invest with a long-term time frame in mind and focus on performance over years, rather than weeks or months.

If you have any questions about your investment portfolio, please contact us.

UK

There were several pieces of big news in the UK during September.

Liz Truss was appointed prime minister on 6 September after winning the Conservative Party leadership race. Just two days later, Queen Elizabeth II passed away and many businesses chose to close or limit operations as a mark of respect during a period of mourning.

During the leadership race, Truss said she’d hold an emergency budget to tackle soaring energy bills and address other economic challenges.

Newly appointed chancellor Kwasi Kwarteng delivered the “mini-Budget” on 23 September. Among the announcements were:

• Confirmation that there will be a cap on household energy bills at £2,500 a year for a household with average use for two years. In addition, the new Energy Bill Relief Scheme will provide support to businesses, voluntary organisations, and public sector organisations.
• The cut to the basic-rate of Income Tax from 20% to 19% has been brought forward to April 2023.
• The plan to raise Corporation Tax in April 2023 from 19% to 25% has been scrapped.
• The National Insurance hike that was introduced in April has been reversed, as has the Health and Social Care Levy.
• The Dividend Tax rise will be reversed from April 2023.
• A Stamp Duty cut means that the tax will not apply to the first £250,000 of a property purchase. The threshold for first-time buyers also increased to £625,000.

Inflation also remained high – it was 10.1% in the 12 months to September 2022. In response to inflation, the Bank of England (BoE) increased its base interest rate again to a 14-year high of 2.25%.

The BoE also said that the British economy is now in a recession after contracting for two consecutive quarters.

Official wage data highlights the pressure many families are facing. While average pay (including bonuses) rose by 5.5% in August, it’s a fall in real terms once you factor in inflation.

The economic situation is also affecting aspiring home buyers. Not only do rising interest rates mean repayments will be higher, but some mortgage providers have withdrawn products from the market due to concerns about potential defaults.

Many businesses are struggling with rising costs too and data suggests there could be further challenges ahead.:

• The S&P Global purchasing managers index (PMI) suggests the manufacturing sector suffered its steepest downturn since the first Covid-19 lockdown as domestic and overseas demand fell.
• The PMI reading for the service sector fell to 49.6 in August, signalling that the sector is contracting.
• According to data from the Office for National Statistics, the value of sales by small businesses fell by 10% in July, when compared to the previous month. It’s the largest fall since April 2020, when lockdown restrictions were in place.

With these statistics in mind, it’s not surprising that research from the Confederation of British Industry shows a negative outlook. British manufacturers expect the biggest drop in production since the start of last year in the next three months.

Europe

European economies face many of the same challenges as the UK.

In the eurozone, inflation reached 9.1% in August. It led to the European Central Bank (ECB) lifting interest rates by a record amount to try and curb inflation – the base interest rate increased by 0.75 percentage points.

Forecasts for Germany’s economy highlight some of the obstacles to overcome. The Ifo Institute now expects the German economy to contract by 0.3% in 2023. Fears of energy shortages are also fuelling concerns, with a ZEW Institute economic sentiment tracker finding that investor morale is falling.

US

Again, inflation continues to be an issue in the US. Inflation fell slightly when compared to a month earlier in August to 8.3% but it was still higher than expected. Food inflation was also at its highest level since 1979 after a 13.5% year-on-year increase.

However, payroll data indicates that businesses are still confident as employment increased by 315,000 in August.

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

Reducing your energy consumption can be a great way to cut your carbon footprint, lessening your personal impact on the environment and potentially helping to limit the devastating effects of climate change.

As living costs and the price of energy are soaring, taking action to lessen your usage can also be an effective tool to save money on your bills.

Read on to discover 10 simple techniques you can adopt to help save both the planet and your pocket.

1 in 8 UK consumers think they’re already doing enough

Interestingly, when compared globally, the UK has the highest proportion of consumers – 17% – who think they already do enough to prevent climate change, according to a  MarketScreener report.

However, by better understanding your consumption habits, you might realise there’s actually more you can do.

According to the report, Jaap Ham, associate professor at the Eindhoven University of Technology, argues that our mindset is the biggest problem to tackle when trying to take action to curb energy consumption.

Echoing this, Schneider Electric’s vice-president of home and distribution, Nico van der Merwe, says that “it is encouraging to see the public recognise that real change starts at home”. He puts emphasis on the use of smart tools to help consumers understand their own usage, allowing you to take targeted action from there.

With 8 in 10 UK consumers believing that climate change will lead to higher energy bills, conditioning yourself to make the most of your energy consumption could kill two birds with one stone – saving money and the planet.

Here are 10 useful ways to reduce your carbon footprint while saving on your energy bills.

1. Understand your carbon footprint

A useful first step in reducing your carbon footprint is to understand it.

Visualising where you’re being excessive with your energy consumption can often be the wake-up call that people need to shock them into action. Online calculators are a great way to find this information and help you track your energy habits.

For instance, seeing how much energy you use through your dishwasher may inspire you to pack loads more tightly, making better use of your appliances.

Carbon footprint calculators are available from organisations such as WWF, the Carbon Trust, and the UN among others.

2. Switch to renewables

Next, you could consider switching to renewable sources of energy in your home.

Switching to a supplier that generates energy from sustainable sources can be a good way to reduce bills as well as reassuring yourself that the energy you’re using is “clean”.

As well as this, you could generate your own renewable energy by installing solar panels on your home. While this upfront cost can be expensive, this can offset your energy bill by using less of your supplier’s energy and generating your own from the power of the sun.  

3. Use less hot water

Limiting how much hot water you use at home is another useful way to control your bills while lending the environment a helping hand.

Keeping tabs on how long you take in the shower, monitoring the number of baths you have, or being conservative with the hot tap are all examples of ways you can reduce your energy use.

Heating water is an expensive process as well as an energy-intensive one, so limiting how much you’re using could help to offset your bills.

4. Turn off idle appliances and chargers at the plug

TVs, chargers, and any other appliance plugged into the mains could be soaking up your precious energy. When switched on, chargers will use electricity even if nothing is connected.

So, getting into the habit of checking plugs throughout the day, or before you leave the house, can help you to waste less money on unused electricity while reducing your carbon footprint.

As well as this, TVs, radios, and consoles all use energy when on standby, so make sure you fully turn them off!

5. Consider an electric vehicle

Swapping your petrol or diesel car for a battery-powered, electric vehicle can reduce your costs and can also have environmental benefits.

Emissions you personally produce while driving can be drastically reduced by going electric instead of using fuel. As well as this, powering your vehicle with electricity is often cheaper over time compared to regularly filling a petrol or diesel tank.

Increasingly, you can even come across free charging points that are available for public use – according to Zap-Map, supermarkets such as Aldi, Lidl, Sainsbury’s, and Tesco are great places to find them.

6. Buy energy-efficient appliances 

Kitting out your home with low-consumption appliances is a simple way to lower your energy consumption and, as a result, your bills.

Good examples of these include bulbs, showerheads, kettles, plugs, and hoovers to name a few.

The compromise in performance is generally negligible and well worth the switch. For example, a low-energy bulb may take a few extra minutes to reach full brightness, but save a worthwhile amount of energy over time.

7. Use “smart” home appliances

Making use of smart devices that can remotely alter your home’s use of energy offers an easy way to reduce the size of your bills along with your carbon footprint.

According to research reported by MarketScreener, smart lighting and thermostat devices are now among the top three most purchased smart devices, proving how people are waking up to their utility.

Installing these in your home allows you to easily monitor your consumption and readily adjust how your home is using energy. Even better, you can change your home’s settings remotely so you can stick to your low-energy habits even if you leave the lights on after you go out.

8. Replace or service kitchen appliances

If you have any older models of kitchen appliances, it could be worth replacing them with newer, energy-efficient versions.

Culprits of high energy use could include your dishwasher, fridge, freezer, tumble dryer, or washing machine. Thankfully, technological advances mean newer appliances can complete tasks to the same standards while using less energy.

Through constant use over many years, these marginal savings can add up to be well worth the investment.

9. Improve your home’s insulation

If you’re already paying to heat your home, you should want to make the most of what you get – especially with energy prices being so high.

One of the best ways to do this is to make sure your home is appropriately insulated. You can draught-proof your home by:

• Plugging holes and cracks
• Insulating vulnerable areas like windows, doors, and floorboards
• Utilising draught excluders or fitting a suitable carpet to prevent heat loss.

According to Energy Saving Trust, draught-proofing your home could save you up to £45 a year, or £65 if your home has a chimney.

10. Turn down the thermostat

With winter approaching, limiting your use of central heating can offer a great way to keep your energy bill down.

When you can, opt instead for an extra layer and wrap yourself up inside a warm blanket. Some nights are colder than others, but keeping windows closed and updating your home’s insulation can reduce the need to crank up the heating.

Installing thick curtains can stop some of your precious heat from escaping through the cold windows and keeps you warmer for less.

In turn, this additional energy efficiency will see you require less energy, helping to reduce your carbon footprint.

Spiralling household expenses have led to some DIY investors selling assets to bridge the gap. Depleting your investment portfolio could help you meet income needs now, but you also need to consider how sustainable it is and whether it’ll affect long-term plans.

According to research from EQ, 44% of DIY investors have cashed in investments as the cost of living rises.

Inflation is much higher than it has been in recent years – in the 12 months to September 2022, it was 10.1%. So, it makes sense that families are now looking for ways to boost their income. 

Unsurprisingly, this approach is also more common among younger generations, who are more likely to face financial insecurity.

While selling some of your investments could provide a welcomed cash injection, it may not be the right solution.

Ideally, you should start investing with a long-term time frame in mind and have an emergency fund to fall back on before you invest.

If you’re thinking about accessing investments sooner than anticipated, here are three things you need to consider first.

1. Are your withdrawals from your portfolio sustainable?

If you need the extra income now, selling some assets can make sense. However, keep in mind that the Bank of England expects high levels of inflation to remain in the coming months and prices may not fall once the period of high inflation is over.

Depleting your investments without thinking about your long-term income could leave you with a bigger gap to bridge in the future.

You should consider how long you may need to use your investments to boost your income and what is sustainable.

2. Will depleting your investment affect your long-term plans?

When you started investing, what was your goal? Could selling some of your investments now mean you can no longer reach that goal?

In some cases, compromising may make sense, but it may not be something you want to do, or it could affect long-term security. For example, if you’d been investing for retirement, could taking an income now mean you need to work longer? Or that you could run out of money later in life?

Looking at the decisions you make now in a wider context can help you balance short- and long-term needs.  

3. Could investment withdrawals mean you face a larger tax bill than you expect?

In some cases, you need to pay Capital Gains Tax (CGT) when selling assets for a profit, including shares. It’s important to understand how your tax liability could be affected so you don’t face an unexpected bill.

For the 2022/23 tax year, the CGT allowance is £12,300 for individuals. If the profit you make from selling investments is below this, you will not need to pay CGT.

Spreading out disposing of assets across several years can make sense to maximise the CGT allowance. You may also choose to plan with your partner to make use of both of your CGT allowances.

The rate of CGT you’d pay will depend on your Income Tax band and other circumstances. However, it can be as high as 20% for investments and significantly reduce your income.

If you hold shares in a Stocks and Shares ISA, you don’t need to pay CGT on the gains you make.

Investors are making changes to their portfolios too

The EQ research found that investors aren’t just selling shares to boost their income. Some are making changes to their portfolio.

In a bid to get the most out of their money, a third of investors said they had divested from ethical stocks in search of greater returns.

There are reasons to make changes to your investments, but it’s important that you consider your goals and risk profile when doing so, rather than making knee-jerk decisions in response to economic circumstances.

Usually, investments that could potentially deliver higher returns also come with a higher level of risk. Chasing returns without thinking about risk could mean you take more than is appropriate for you. This could harm your financial security and mean your investments are more likely to experience volatility.

You should keep in mind that investment values can fall.

Contact us to talk about your investments and the effect of the cost of living crisis

If you’re worried about what the cost of living crisis means for you or have questions about whether you should change your investment strategy, please contact us. We can help you balance financial challenges now with your long-term goals and provide you with confidence about the decisions you make.

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.

A trust can be a valuable financial tool when you want to pass on wealth to loved ones. Rather than simply handing over assets, you can set out your wishes and maintain control over how they’re used. So, understanding what your wishes are and how to ensure they’re followed is important.

A trust is a legal arrangement. It allows you to set aside assets, such as cash, investments, or property, for another person or persons, known as the “beneficiary”. Rather than the beneficiary having access to these assets to use as they wish, a trustee will manage them on their behalf according to your wishes.

A trustee could be someone you know well, such as a family member or friend, or a professional.

As a result, a trust can be a useful way to pass on assets to children or vulnerable people. They can also be valuable if you want to retain some control over how the assets are used and create a long-term legacy.

To ensure your wishes are carried out, it’s crucial that a trust is set up properly and that you take some time to consider what you want the trust to achieve. These four questions can help you start to think about what’s important to you when creating a trust.

1. Who do you want to benefit from the assets?

You should start with your reasons for setting up a trust and who you’d like to benefit from the assets you will place in it.

Setting out the beneficiaries and why you want to offer financial support can help you understand which type of trust and assets you need to reach your goals.

As well as naming individuals, you may also want to include other beneficiaries. For example, you might want to provide for future grandchildren.

2. When and how do you want an income to be provided to the beneficiary?

If you’d like the trust to provide an income, you will need to set out when you’d like this to happen. You will also need to consider what income will be provided. Will it be a set amount each time or a proportion of returns?

You can either set out clear wishes or give the trustee the ability to decide. A trustee will have to follow any instructions you provide in the trust deed and act in the best interests of the beneficiary.

You may choose not to provide a regular income to a beneficiary. If you set up a trust to pass on assets to a child, you may simply want them to be able to access the assets when they reach adulthood, for example.

3. Do you want the beneficiary to be able to access the assets?

Is there a point when you’d like the beneficiary to access or take control of the assets you’ve placed in the trust?

This can make sense if you want a child to inherit the assets. You will need to decide if there’s a specific time or set of circumstances when you’d like this to happen. Again, you can choose for the trustee to have the power to make this decision.

In some cases, you may not want the initial beneficiary to have access to the assets at all. This may be because you want to create a long-term legacy so your descendants can benefit from the income for years to come.

This could also be the case if you want your partner to benefit from the income delivered from the assets during their lifetime, but for the assets to remain intact to pass on to your children once your partner passes away.

4. How would you like the trustee to manage the assets?

One of the benefits of using a trust is that you can set out how the trustee will manage the assets. You may have clear ideas about how you’d like them to be used or prefer to give your trustee the power to make their own decisions.

You can use the trust deed to set out your preference. For example, would you want the trustee to invest cash placed in the trust?

In addition, you can also write a letter of wishes. This is an informal letter that is not legally binding. However, it can be a useful way to give the trustee guidance and explain your wishes without legal jargon.

Contact us to talk about trusts

One of the benefits of using trusts is that it allows you to maintain some control, but this can be overwhelming too.

We’re here to help you navigate trusts, from whether they could help you reach your goals to maintaining a trust for the long term to ensure it continues to meet your wishes. Contact us to talk about your legacy.

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.

As the cost of living rises, you may be considering increasing how much you withdraw from your pension. While it could solve short-term challenges, it’s important that you think about how it could affect your future too.

Several factors, including the war in Ukraine and the long-term effects of the pandemic, mean that inflation is much higher than it has been in recent decades. In the 12 months to September 2022, the rate of inflation was 10.1%. 

Your regular outgoings are likely to have increased, as well as the cost of discretionary spending, like holidays or days out. As a result, the budget you set out when you initially retired may not be adequate now.

If you’re struggling financially or are having to make lifestyle compromises, increasing your pension income may seem like a simple solution.

Data published in FTAdviser suggests that pension savers would need an extra £90,000 to maintain their standard of living because of rising costs. While costs will vary depending on your lifestyle, the research estimated that an income for a “comfortable” lifestyle would need to increase by £2,000 a year, and by £3,000 a year for a “luxurious” lifestyle.

If you’re taking a flexible income from your defined contribution (DC) pension, it’s easy to increase your withdrawals if you need to. However, you also need to weigh up the long-term consequences of doing so.

For example, could taking more from your pension now mean you potentially run out of money in the future? Or could taking a flexible income now place you under financial stress if something unexpected happens later on?

This is why it is important to consider the long-term effects before you take more from your pension to cope with the rising cost of living.

3 things you need to do before you increase your pension withdrawals

1. Calculate how much your expenses have increased

Before you increase your pension withdrawals, it’s essential you understand how much income you need.

While the rate of inflation can provide you with a good baseline of how much costs have increased, your personal inflation rate may be very different. Take some time to set out what your budget covers and review how these costs have changed in the last year.

It’s a good idea to split costs into essential and discretionary spending. This means you can understand what level of income you need and the extra that would allow you to live the lifestyle you want.

It’s expected that inflation will remain high in the coming months. So, ensuring you have some room in your budget for potential increases in the future can also make sense.

2. Understand how increased withdrawals could affect your long-term security

One of the challenges of accessing your pension is understanding how withdrawals will affect your long-term financial security.

To take an income with confidence you should consider how long your pension will need to provide an income and how your needs might change. Ignoring this issue could lead to financial challenges in the future, including running out of money in retirement.

Taking a higher income or a lump sum from your pension now can have a larger effect on your long-term wealth than you may think. As your pension is usually invested, you will need to consider how potential returns could be lower than you expect.

3. Include other assets in your decision

If you need to boost your income, you may have other valuable assets – don’t just consider your pension.

Depleting savings or investments could make more sense for you, so it’s important you review your entire financial plan and assets before you make a decision. There are many things to consider when deciding how to create an income, from long-term security to tax liability.

It can be difficult to understand what your options are, and which solution is right for you. If you need support when weighing up your options, you can contact us.

Do you want to review your retirement income needs?

If you’re worried about the rising cost of living and the effect it could have on your retirement plans, please contact us.

We’ll help you review your retirement plan with the current circumstances in mind. Whether you want to increase your withdrawals now or have confidence you could in the future if you need to, we’re here to answer your questions.

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 not normally accessible until 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up, 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. Levels, bases of and reliefs from taxation may change in subsequent Finance Acts.