This has been a tough month for investments and recently the impact of rising base rate has caused a downturn. Dan has written an article on how this effects the timing of investing and Beth has covered off the importance of having financial advice alongside your portfolio. Kristina is looking at saving tax on your bonus and Peter has discussed how to provide company benefits and when to review them.
Should you wait to invest?
Right now there are a lot of factors causing uncertainty and driving market sentiment, in particular a high inflationary environment, rising interest rates, reducing growth expectations and the ongoing conflict in Ukraine. Many experts attempt to predict what will happen in the short term and inevitably just as many are wrong that are right. However, investing is not about speculating on the outcome of events in the short term, instead it is about trusting in the tried, tested and proven method of holding a portfolio that is diversified in asset class, geography, sector and investment style over the long term and using experienced investment managers to add value by picking assets in their area of expertise that represent both good value and potential for growth/income.
It is important to remember there will never be a time where there isn’t something causing uncertainty e.g. recently we have had Covid, lockdowns, Brexit, Trump to name just a few. Focusing on this can lead to perpetual sitting on the fence ‘waiting for the right time’. It is however important to remember the old cliché that investing is about time in the market rather than timing the market (timing the market inevitably never works unless incredibly lucky). It is also important to remember that predicting highs and lows in the market is difficult, if not impossible, and sentiment can change extremely quickly.
To provide some context I have shown performance data below for some sector averages to show how these have performed over 1, 5, 10 years and since the start of available data.
The sector averages used are:
- IA Mixed 0-35% – funds that hold 0-35% of their assets in equities (Cautious)
- IA Mixed 20-60% – funds that hold 20-60% of their assets in equities (Cautious to Moderate)
- IA Mixed 40-85% – funds that hold 40-85% of their assets in equities (Moderate to Adventurous)
1 Year
5 Years
10 Years
Since Early 90s
That last graph includes the dot com bubble burst in the early 2000s, September 11th, the Financial Crisis of 2007/08 and the pandemic.
N.B. These sector equity ranges are quite broad and as an average will include many of the best and worst performing funds. They have been used because they represent an easy way to show a generic range of risk profiles and how these have reacted to various events over time, they do not represent the funds you would be recommended, although they may serve as a benchmark to determine outperformance or underperformance.
Pandemic 2020
And the highest point before the pandemic (17th January 2020):
Inflation
Given that we should be viewing any invested funds over a minimum of 5 years the short term ‘noise’ is a distraction and investing in a diversified manner is very likely to outperform inflation and provide capital growth over the long term. Historic Performance including Inflation measures CPI and RPI and short-term cash returns shown below:
10 years
Since start of data:
In Summary
Ultimately there will always be something happening that might impact markets in the short term, however inflation will almost certainly erode the purchasing power of your cash holdings, particularly given where bank interest rates are and investing with some exposure to markets as shown above has historically offered far better protection against this.
This article is not advice. Contact your adviser if you would like to discuss whether investing now will help you meet your own personal objectives and fits your risk profile.
Author: Daniel Robertson, Chartered Financial Planner
drobertson@richmondhousewm.co.uk
Tel: 01438 345745
The value of financial planning advice
Engaging with a financial advisor can increase the value of your overall wealth which means your key financial objectives can be met and managed. The key areas identified by Vanguard (one of the largest global asset management groups) as visible enhancements from engaging with a financial planner were:
Asset allocation – the overwhelming factor in determining investment performance
A financial advisor will help you establish your objectives for the investment. They will create a well thought-out investment strategy, identifying the right blend of investments for you. This ensures that you take the right level of risk and are best placed to achieve the returns you need.
Rebalancing – keeping a portfolio’s risk and return profile on course
A financial advisor will review the portfolio and recommend rebalances as required to ensure that you maintain the right investments for your current objectives and don’t take too much or not enough risk.
Lowering costs – the one factor guaranteed to improve returns
Every penny counts, anything you pay in costs erodes your future returns. A financial advisor can reduce your charges by providing access to institutional investments with lower costs. This ensures you keep more of any investment return.
Behavioural coaching – avoid the costly mistakes of giving in to fear and greed
Individuals automatically want to avoid pain and seek pleasure, which can result in selling our investments when they fall, and buying them when they rise.
A financial advisor will provide sound, objective advice, helping you stick to the plan and remain invested, avoiding any expensive mistakes.
Tax allowances – tax-efficiency is key to getting the best results
A financial advisor will help you work out which investment vehicle and tax-wrappers are right for you based on your tax position. They will consider the tax rate you pay now for current planning and then ensure you withdraw your money in the most tax efficient way over the years.
Cashflow Modelling – crucial to maintaining the value of a portfolio in retirement
Creating a withdrawal strategy for your investments with your financial advisor will ensure that withdrawals are as tax-efficient as possible and that your investment strategy and risk appetite is still suitable the closer you get to retirement.
Author: Beth Mills, Will Writer and Trainee Financial Planner
bmills@richmondhousewm.co.uk
Tel: 01438 342430
Making the most of your Bonus
With the cost of living rising at such a rate that many families are having to give consideration to normal costs such as heating, food, clothing and other outgoings, a bonus arriving in your pay packet can be a very welcome sight.
Inflation has now reached 9.1% and predicted to rise to 11% later this year. The government is attempting to manage this by increasing the Bank of England base rate which now stands at 1.25% the highest it has been since 2009.
This is unlikely to be the end of the rises with speculation that we could be looking at a base rate of 3% before too long. The idea is that increased rates of interest will mean we borrow and spend less and tend to save more. This combined behaviour should bring inflation down. Although rate rises will eventually please savers, it will put extra pressure on those with a mortgage who are looking at increased mortgage payments on top of increased monthly expenditure.
So, less of the doom and gloom and back to the bonus payment. Receiving a bonus is often thanks for a job well done and it makes sense to make the best use of this and if possible not gift part of it away to the government.
The thought of this being used for a holiday or other luxuries is very tempting and who could blame us. We have had a pretty rubbish time of things over the last few years with lockdowns preventing us doing many things we previously enjoyed and possibly took for granted.
The issue is that if the bonus is paid as part of your salary then depending on your total income you will pay tax on this extra amount at your highest rate if income tax. This could mean losing 20%, 40% or 45% of it. Not something that any of us would like to do.
One way to avoid paying tax on this would be to have the amount paid to your pension instead. If this is done via salary sacrifice then it will never be taxed and the full amount can be contributed directly to your scheme, allowing you to keep more and add to your tax efficient savings for the future.
If giving up all your bonus is just too sensible, then it may be that your employer will allow you to split the amount, so you could have the best of both worlds keeping some for something nice or necessary and put the rest away for your future.
Some employers will also top up the pension contribution with the amount that they will save in your national insurance contribution, so a bonus for your bonus.
It is not always clear what your options are with a bonus payment and not all employers have advisers to help with these type of decisions. If you are at all unsure then seeking professional advice would be recommended.
It may be that you are in the position that your pension is already at risk of breaching the pension Lifetime Allowance of £1,073,100 and suffering a potential future tax charge and if so, you may be looking for other tax efficient ways of investing your bonus.
If the idea of helping young companies and having a tax efficient investment at the same time appeals, then Venture Capital Trusts (VCT) could be for you. You may be able to claim back up to 30% income tax relief on the amount you invest, provided you are happy to hold the investment for 5 years. So, if your bonus does suffer from income tax you can still get some of this back. These are not for everyone but a conversation with your financial adviser will assess the suitability of this type of investment and other potential options.
So before you book that holiday and join the queues at the airport, please give some consideration to your other options.
Author: Kristina Bailey, Financial Planner
kbailey@richmondhousewm.co.uk
Employee Benefits and the Cost of Living crisis
Nobody’s pretending it’s easy out there. Fuel heading towards £2 a litre. Supply chain problems due to Russia’s unconscionable invasion of Ukraine. Inflation running rampant across the board. It almost makes you nostalgic for the days of Covid!
Employers are as susceptible to these factors as individuals and, like a lot of the public, any way to cut costs will be eagerly welcomed. But what are your genuine options?
This article will look at the main types of employee benefits and what can be done to ensure costs are kept as low as possible.
Pensions
There are rules laid down in law for minimum contributions, so there is no option to stop or suspend contributions.
Many companies pay more than the minimum so could, at least in theory, reduce contributions for a period but, before doing this, they need to ask themselves what the effect on their employees would be. Would staff see this as a sign of an employer in trouble and start to look elsewhere, possibly reducing the talent pool and restricting future opportunities once something approaching normality returns?
Playing with the pension scheme is a highly contentious issue and one that should only be considered once all other options have been exhausted.
Group Life and Income Protection
These are pure insurance contracts so cost is really the only factor provided the other benefits are the same.
Therefore, employers should ensure they are regularly reviewing the market, usually via their advisers, to get the best cost. This is normally done every 2 to 3 years but can be done more frequently and is certainly worth the effort if there has been any significant change in staff numbers, up or down.
Private Medical Insurance
If you offer this benefit, you’ll already be aware that medical inflation exceeds even the headline rate and has done for a number of years. Add in a claim or two and costs soon spiral upwards at a dizzying rate.
Typical ways to reduce costs on this type of scheme are to add an excess, or increase it if there is already one in place. Outpatient costs can be restricted and optional benefits such as complimentary therapies can be removed. However, in light of the current concerns over mental health, any restriction in this area should be treated with the utmost caution.
And, ultimately, one way to reduce costs in many cases is to move insurer. New schemes almost always are more keenly priced than renewal of scheme already in place.
Against all this, employers need to remember the value employees place on Private Medical schemes and that any change in benefits can have a very significant and uncorrelated effect in employee sentiment. In other words, small changes can have very large negative sentiments as the outcome.
Overall, employers, irrespective of the current inflationary environment, should be regularly reviewing their employee benefits to ensure best value for money is being obtained. Advisers will do this on behalf of clients in most cases but it is always worth having the mantra in the back of your mind of “Review regularly and don’t take the first price”.
Author: Peter Murphy, Benefits Adviser
pmurphy@richmondhousecs.co.uk
Tel: 01438 345777