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.

Millions of people in the UK are now self-employed. Whether you work for yourself or are part of an industry where contracting is commonplace, it can place pressure on your finances. You need to manage your financial situation and potentially plan for periods where you’re not earning an income. Working with a financial planner can give you confidence in your career and future security.

There’s been rapid growth in self-employment in the UK in recent years. According to official statistics:

• 3.3 million people (12% of the labour force) were self-employed in 2001
• By 2017, this had increased to 4.8 million people (15.1% of the workforce)

There are many benefits to being self-employed, but it often means you need to take greater control of finances in order to ensure you meet goals. So, how can a financial planner help you?

1. Paying into and managing a pension

The majority of UK employers will now benefit from a Workplace Pension. However, if you’re self-employed, you’ll need to set up and manage your own pension. Whilst you won’t benefit from employer contributions, you’re still entitled to tax relief. For many self-employed individuals, a pension will be the most efficient way to save for retirement.

There are a variety of ways of setting up your own pension and you may have many questions.

• Should you invest through a fund or select your own investments?
• How much should you aim to put away each month?
• What kind of income will your contributions afford you?

A financial planner can help create a long-term financial plan that considers your lifestyle now and the one you want to achieve in retirement.

2. Creating a financial safety net

When you’re self-employed, there is a chance that your income will stop or reduce. As a result, it’s important to create a financial safety net that you can fall back on should something happen. This could be a period of illness, meaning your income stops in the short term or a contract coming to an end.

Financial planning should give you confidence that you’re financially secure even if these ‘what if’ scenarios did happen. The right solution will depend on you and your priorities. It may involve building up an emergency fund and taking out an appropriate insurance policy, for example.

3. Building suitable savings and investments

We all know we should be putting some of our income aside. But it can be challenging to know what to do with it. Should you hold in cash or invest? There’s no right or wrong answer to this. It’ll depend on your personal situation and attitude to risk.

With so many different providers and products on the market for both cash savings and investments, it can be just as daunting to decide where to put it. Again, this will depend on you and what you’re saving for. If you’re saving for a goal that’s a year away, you’ll need a very different product if you plan to save for 15 years. Our goal is to help clients pick out the right products for them.

4. Getting to grips with tax liability

As you’ll be responsible for organising your own Income Tax, it’s worth spending some time understanding it. There are often steps you can take to reduce your liability depending on your circumstances. However, there are other areas of tax to be aware of too; could your income from investments be liable for tax, for example?

Knowing your tax responsibilities enables you to avoid potentially hefty penalties and set realistic expectations. Tax regulations can often be complex and difficult to apply to your situation. This is where working with a financial planner comes in useful. We’re here to help you get to grips with tax and make the most out of your money.

5. Understanding your long-term goals

Financial planning isn’t just about looking at figures though. It helps you to see how your money habits can help you achieve short, medium and long-term aspirations. People often know what they want in the short term, but planning further ahead can be difficult.

If you’re self-employed, it’s worth thinking about whether you ever want to return to traditional employment, when you’d like to retire, and what the future holds. Talking with a financial planner about your wider goals can help put in place a plan that sets you on the right path.

If you have any questions about the above issues or any other financial matter, please get in touch. We aim to work with all clients, including those that are self-employed, to have confidence in 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.

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.

The Financial Conduct Authority does not regulate Tax and Estate Planning.

November marks Talk Money week, an initiative that aims to encourage more people to talk about their finances. In the UK, personal finances can be something of a taboo subject. It’s not something we widely discuss. But whether it’s chatting with your partner or your financial planner, there are a lot of reasons why we should all make an effort to talk about money.

1. Look at your finances from another perspective

As the saying goes, two pairs of eyes are better than one. Keeping money worries or concerns to yourself means you only see solutions from your perspective. Sharing, whether with a loved one or professional, can give you a fresh viewpoint. If you’re not sure which way to go or feel as though you’re stuck in a rut, chatting about your options can be just what you need to spark some inspiration.

2. Alleviate stress

Money can be one of the biggest causes of stress. Whether you’re worried about what would happen if your income were to stop, or whether you’ll outlive your pension, it can be a cause for concern. Financial stress can affect other parts of life too, including your overall wellbeing. Sharing worries can feel like a weight has been lifted off your shoulders and may lead to a solution that you hadn’t thought of. However, it’s important to keep in mind that what has worked for one person, won’t necessarily be right for you. Our goal is to provide each client with peace of mind when they think about their finances. 

3. Pass on your knowledge

Over the years, you’ve probably picked up a few tips of your own. Why not share what you’ve learnt with others? It could help them achieve their goals and improve their financial situation. Whether it’s just a gentle reminder to set money aside for a rainy day or insights you’ve picked up when building up your own investment portfolio, it could be useful. It’s also an opportunity to debate different options and maybe pick up something new from others too.

4. Share your experiences with loved ones

The challenges facing younger generations are often featured in the news, including struggles getting on the property ladder, saving for a longer retirement and stagnant wages. Talking about money with children or grandchildren can help you understand the challenges they’re facing and how you may be able to help. Sharing your experiences can offer some insight and encourage them to come to you when they’re in need of advice.

5. Take the opportunity to consider the long term

When you think of money, it’s often short-term factors that we focus on. Perhaps you focus on where your savings are going each paycheque or what you’re putting away for grandchildren. Talking about money is an opportunity to start thinking further ahead; what would you like to achieve in ten or 20 years’ time? It could be becoming mortgage-free as quickly as possible or enjoying the retirement lifestyle you’ve been looking forward to. By setting out aspirations, you’re able to create a plan that enables you to take steps towards them.

Children born today have a one in four chance of celebrating their 100^th birthday. It’s progress that should certainly be celebrated but one that also leads to financial questions. How do you prepare for a life that could span ten decades?

Many parents choose to put some money aside for children to give them a helping hand when they reach adulthood. Whether you’ll be making regular payments or adding money on Christmas and birthdays, you’ll want to ensure you get the most out of your deposits. But choosing how to build up a nest egg for a child can feel more complex than making decisions about your own financial future.

One question to answer first is: Should you place the money in a cash account or invest?

Why consider investing your child’s savings?

It’s natural to want to protect the money you’re putting aside for your child’s future by choosing a cash account with little debate. However, there are reasons why investing may prove to be more efficient.

Even on a competitive child current account, interest rates are low. This means once you factor in inflation, savings lose value in real terms over the long term. If you begin saving whilst your child is very young, this can have a significant impact on the spending power of the money.

Investing provides an alternative, with returns potentially higher than interest rates. However, it’s not as simple as that. Investing does come with some risks, as there’s no guarantee how investments rise and fall. But investing is something you should consider when you’re planning for your child’s future.

If you’re unsure whether a cash account or investing is right for your goals and circumstances, please get in touch.

Should you decide to invest money earmarked for your child’s future, there are some questions that can help you pick out the right vehicle and investment opportunities.

1. How long will it be invested for?

When you start saving, it’s important to have a deadline in mind. If this deadline is below five years, it’s usually advisable that you choose a cash account. This is because investments typically experience volatility in the short term and, as a result, values can fall. This may be an issue if you’re investing for a short period of time.

However, should you have a time frame that is longer than five years, investments may provide you with a way to potentially achieve returns that outpace inflation. This is one of the factors that link to investment risk. As a general rule of thumb, the longer you’re investing for, the higher the level of risk you can take. Of course, other factors influence appropriate risk levels too.

2. What is the money intended for?

You probably have an idea of what the money will be used for. Perhaps you hope it will be used to purchase their first car or support them through further education. You may be looking even further ahead to your child purchasing their first home. What the money is intended for will have an impact on the time frame. But it will also influence how comfortable you are with taking investment risk.

It’s important to remember that if you’re saving the money in the name of the child, they may be able to take control of the account when they reach 16. Whilst you might have an idea of what you’re saving for, they could have very different goals. As a result, speaking with them about the savings and how it might be used can help align your views.

3. How comfortable are you with investment risk?

It’s also important to think about how comfortable you are with investment risks when it comes to your child’s savings. This may be very different to your views on taking investment risks for your own nest egg.

Whilst you need to feel comfortable with risk and the level of volatility you can expect investments to experience, you also need to ensure it’s a measured decision. Our bias can mean we take too much or too little risk when financial circumstances are factored in. Speaking to a financial planner can help you understand what your risk tolerance is. Getting to grips with what level of risk is appropriate can boost your confidence.

4. Do you have other savings for your child?

Do you have multiple saving accounts for your child? Or are other loved ones also building up a nest egg for their future?

Assessing what other nest eggs they will receive when they reach adulthood may mean you’re more comfortable taking investment risk. If, for example, you know grandparents are adding to a cash savings account, this may balance out the risk associated with investments. Answering this question can work in the same way as assessing your other assets when you consider your own investment portfolio.

5. How hands-on do you want to be?

Finally, do you want to select which companies the money will be invested in? Or would you prefer to take a hands-off approach? There’s no right or wrong answer here, but thinking about it can help ensure you pick the right investment vehicle for you.

If you want to take steps to improve the financial future of your child, please get in touch. Whether investing is the right option or not, we’ll work with you to create a plan that you can 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.