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In a widely anticipated move, earlier this month the Bank of England (BoE) raised interest rates for the first time in over a decade. At its November meeting, the Monetary Policy Committee (MPC) voted by seven votes to two in favour of increasing base rate by 0.25 percentage points to 0.5%. This is good news for savers but does mean that the cost of mortgages will likely increase.
The last interest rate rise was back in July 2007. After that they fell steadily to reach 0.5% in March 2009 following the 2008 Financial Crisis. Rates then remained unchanged until August 2016, when they were cut to 0.25% – the lowest level in over three centuries.
The rate rise was not unexpected and is an attempt by the BoE to lower inflation. The UK economy grew more strongly than expected during the third quarter of 2017 and consumer price inflation reached its highest level in over five years during September, rising to 3%. BoE policymakers had made it clear that higher rates would be a natural consequence of intensifying inflationary pressures. Several members of the MPC had already called for tightening, and minutes from the MPC’s November meeting cited the need to return the rate of inflation “sustainably” to its 2% target.
Higher interest rates will be welcomed by savers, with several providers already committed to increase their rates by the full 0.25% and many more currently reviewing their rates. However it is not good news for borrowers. Although double-digit interest rates were relatively commonplace in the 1970s and 1980s, borrowers have recently become accustomed to very low rates. The BoE estimates that more than 20% of mortgage-holders have never experienced a rise in base rate since they took out their mortgage.
The average outstanding balance on a mortgage is around £125,000. A rate increase of 0.25 percentage points will push up a typical monthly mortgage payment by approximately £15 but meanwhile average earnings have continued to fall in real terms. Elsewhere, the BoE has identified “a pocket of risk” in the growth of consumer credit and, while this is not believed to pose a serious risk to economic growth, it could undermine banks’ ability to withstand a “severe” economic downturn.
Furthermore the latest BoE Inflation Report indicates that more interest rate rises will follow, however the BoE governor Mark Carney has said that any future increases would be “at a gradual pace and to a limited extent".
A recent article in the Financial Times highlighted the fact that more and more parents are helping their children to buy their first home. Latest figures show that in the year to September 2016, family members provided £2.8bn to homebuyers in England.
Rising house prices, the requirement for large deposits to secure a good mortgage deal, and new more stringent mortgage rules are all making it harder for young people to get on the housing market.
Understandably, many parents want to help their children out, but how does this fit in with their own plans? It may be an unexpected expense at a time when they were not anticipating needing to help their children anymore, but instead focusing on their own needs such as retiring or going part time. It can be a delicate balance between wanting to help their children, and protecting their own interests. Sufficient funds may not be readily available.
There are many options available for helping children to buy their first house, from being a Guarantor for them or taking out a joint mortgage with them, but often what is needed is cash towards a deposit. Even if buyers take advantage of the Government’s Help to Buy scheme, a sizeable deposit may still be required relative to their income.
For parents who don’t have the cash available to make a cash gift, increasingly they are turning to Equity Release. In a nutshell, Equity Release is a way for people aged 55 and over to unlock funds from their home by effectively taking out a loan secured on their home which does not need to be paid back until the property is sold.
The advantages of Equity Release are clear: money which is tied up in a property can be released, but homeowners can stay in their home and day to day finances and retirement plans need not be affected. However, there are many potential disadvantages to consider as well, such as the high ultimate cost of equity release compared to a conventional mortgage, the impact on any means tested benefits and also the fact that the value retained by the homeowner (and ultimately their beneficiaries) in the property will significantly reduce.
If you are considering supporting your child or children to buy a home, but have not already planned for this, the best approach is to contact an Independent Financial Adviser to undertake a full review of your finances. Your adviser can then prepare a financial plan for you which takes account of all your financial goals, not just your desire to help your children. Your adviser will be able to assess if Equity Release is something that is appropriate for your situation, and highlight both the benefits and potential risks to you to help you make an informed decision.
In this way you can hopefully help your children now, whilst retaining the peace of mind that your own plans and aspirations for your future and retirement are secure.
Friday, 19th May 2017
Individual Savings Accounts (ISAs) are tax-efficient savings vehicles that allow you to save and invest without having to pay income tax or Capital Gains Tax. They can be a good way for people to start saving or to add to their existing portfolio of savings and investments.
The ISA allowance for the 2017/18 tax year has risen from £15,240 to £20,000, its highest ever level. This increase offers a welcome additional incentive for savers – and not only for existing ISA investors, but also for those who might be new to tax-free saving.
As well as the increase in allowance, in recent years, ISA rules have become more flexible. Investors used to be able to save a maximum of half their allowance into a cash ISA, while those who decided to put less than this into a cash ISA could invest the balance into a stocks and shares ISA. However, under reforms introduced in 2014, you can allocate your entire ISA allowance of £20,000 across cash, stocks and shares, or any combination of the two. Moreover, you can transfer savings from your stocks and shares ISAs to your cash ISAs, and vice versa, and can also transfer your ISAs between providers as often as you wish, subject to your providers’ rules.
Even if you cannot afford to take advantage of the full annual ISA allowance, it is still worth putting away what you can via a regular savings plan, which can start from as little as £50 a month. Although you are not allowed to hold an ISA with or on behalf of someone else, you can open a Junior ISA for a child under the age of 18. The 2017/18 allowance for Junior ISAs is £4,128, a slight increase on the previous allowance of £4080.
The Government have also recently introduced Lifetime ISAs which are intended to help people save towards buying their first home or for retirement. They are available to be opened by people aged between 18 and 40.
Savers can put £4,000 a year (which comes out of the overall £20,000 ISA allowance) into a Lifetime ISA up until they are aged 50. Their contribution will be topped up with a 25% Government bonus, meaning that up to £5,000 can be saved every year. This can be put into cash or invested into stocks and shares.
There is a 25% charge to withdraw cash or assets from a Lifetime ISA unless you are over 60 or using the money to buy your first home.
According to HMRC, around 12.7 million individuals subscribed to ISAs in the 2015/16 tax year. Although this was lower than the 13 million who subscribed in the previous year, the amount subscribed – £80bn – was more than £1bn higher. This suggests subscribers are taking advantage of increasing ISA allowances and greater flexibility to invest more on an individual basis. Average ISA subscriptions in 2014/15 were more than 7% higher than in the previous tax year.
Above all, do not forget one of the golden rules of ISA investing – use it or lose it. It is worth trying to make the very most of your allowance each year if you can.
Thursday, 29th June 2017
Tuesday, 4th June 2019
Friday, 17th November 2017
In light of recent market voliatility, I would like to highlight the importance of staying invested and making regular contributions irrespective of adverse market conditions.
Ignore risk at your peril, as billionaire investor Warren Buffett famously put it: “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.”
I agree with Buffett, with a slight amendment—investment risk is losing money that can never be made back. For example, you may not take enough risk for your goals, resulting in low returns that see you fall short. Therefore, we need to accept some risk.
On the other side, we want to avoid taking too much risk, as we may never make any lost money back in time. This requires a principle-driven approach to investing, where we have a number of principles to consider.
1. Goals-based planning requires your portfolio to be aligned to your personal roadmap and positioned using a robust investment philosophy that considers downside risk. Our role is then to evade poor behaviours in decision making, such as trying to time the market at an inopportune moment.
2. The second principle is to acknowledge that risk and reward are connected, but that the impact of risk is lower over the long term. That is, to achieve returns in excess of cash, we must take some short-term risk in anticipation of long-term gain. For example, equity markets rarely experience a loss over a 20-year period, even though they can fall by large amounts approximately three times every 5 years.
3. Linked to the above, the third principle is that not all investments are equal, requiring an ongoing fundamental assessment and periodic progress reviews. Irrecoverable losses can come in many forms, but they are typically linked to or overpaying for an asset (buying at the peak). Your portfolio must be managed in a way that withstands these risks.
4. The fourth principle is to look for hidden risks, such as costs. This does not impose itself as a major risk of loss, but it does chip away at your returns over time and can be prohibitive in reaching your goal. Seeking to minimise costs is an easy win but is too often ignored.
5. The fifth principle is that risk requires a holistic approach. Investment markets are inherently unpredictable, which is why diversification is so important. Even if an asset has a high probability of strong gains, you can reduce risk meaningfully by holding complementary assets that will bring something different (and help preserve capital) if markets do not go our way.
Together, this creates our solid foundation for measuring and assessing risk-adjusted outcomes and deliver strong returns—but do so in a sensible and diligent manner.
Thursday, 21st March 2019
Given the recent events I wanted to take this opportunity to offer my thoughts on Brexit.
On the state of politics:
• We remain in a stalemate with significant uncertainty still ahead of us.
• Delaying Brexit buys time, but it does not solve the problem. Assuming the EU agrees to an extension (or PM May miraculously pulls off a deal), we still do not have clarity on the path ahead.
• All options are still on the table.
As far as the financial markets and your portfolio are concerned, UK stocks are up around 20.6% since the initial vote (in aggregate including dividends), UK corporate bonds are up 8.5% and cash has gone sideways. This can be seen in the chart below:
Source: Morningstar Investment Management calculation, Morningstar Direct data to 28 February 2019. Returns are month-end data points in GBP and normalised at 1 on 30 June 2016. Past performance is not a guide to future returns.
So, looking backwards, it would have been a mistake to have taken your money out of the UK market when the UK voted to leave the EU. Looking forward, I think it is likely to be a mistake also. Nothing can be guaranteed, of course, but we have several things working in our favour when putting forward such a view.
For starters, your portfolio is diversified across many different assets and geographical regions—some defensive and some for growth—with each component impacted in its own way. This is what some call a “free lunch” in finance, as the bundled outcome is superior to the sum of the parts. If Brexit causes higher volatility, it only strengthens this argument.
Even for the UK exposure you do hold, we can offer three thoughts to dampen any concerns.
• First, remember that the UK equity market has beaten cash in every 20-year period in its history. That's not to say it always will, but it can give us some confidence that the rewards outweigh the risks for those that are patient.
• Second, remember that the UK economy is not the UK stock market. In fact, almost 70% of UK-listed corporate revenues are earned offshore, offering a buffer as the currency helps offset any local pain.
• And third, remember that a lot of bad news is already reflected in prices; UK stocks are good value right now, especially relative to other markets.
Although we can’t rule out a nasty surprise from here you should take comfort from the risk-aware approach we’ve employed and our ability to capture opportunities if/when they arise. I.e. we expect bumps along the road (a portfolio never moves in a straight line), yet we remain steadfast in doing the right things to help you achieve your financial goals.
Nothing I’ve said above can change the direction of travel, but put together, reaffirms to us that you’re still on the right track. While we have our fingers crossed for some clarity in the near term, I hope this puts the recent Brexit events in a better light.
Photo source: <a href="https://www.freepik.com/free-photos-vectors/background">Background vector created by starline - www.freepik.com</a>
Thursday, 19th September 2019
For this blog entry, I want to explain some of the behind-the-scenes issues we have been tracking. We tend to view these as opportunities rather than threats, seeking to take advantage of them for your benefit.
The first is the hot topic of the moment—trade wars. This struggle between the U.S. and China has affected markets off and on for almost a year. But much like other concerns in recent years (Brexit is the prominent one), it would be foolish to act on speculative matters. At the end of the day, your portfolio is built to handle external shocks and should continue to grow over time, so resisting the noise remains the most sensible path. This is typically the case anytime markets become volatile.
The second topic is the rise of sustainable investing, or strategies that incorporate environmental, social and governance (ESG) into their investment decisions. ESG portfolios allow investors the chance to help fight global warming, make companies more transparent and responsible, and improve working conditions for people around the world. These issues affect the lives of real people, often those who are least advantaged. The number of funds available in this space continues to grow and the quality is now at a standard we can trust, so let us know if you would like to explore such options.
The third is the regulation of financial advice, which is getting tighter and tighter. We are grateful to be ahead of the game here, and we are seeing a number of advisers drop out as the red tape increases. On balance, it is a welcome development and something we can expect to see more of.
Another point continually raised is the overvaluations in markets. We seem to be in an environment where certain markets go up whether there is good or bad news. Low interest rates are thought to have played a role and it does pose a challenge. Many investment managers warn of lower returns going forward, simply because the growth over the past 10 years has been unsustainable. We concur on some of these points, although do feel you are positioned well—all things considered—and it still makes sense to take advantage of growth assets to deliver on long-term goals.
We hope this helps you understand a few things that may be on your mind and please do not hesitate to get in touch regarding any of the above.
Photo source: whyframestudio
Friday, 16th August 2019
Question 1: Will the performance gap between the U.S. and the rest of the world ever close?
The truth is we can’t predict when the gap will close, but we don’t think we need to know this to take advantage of the market imbalance. It is no surprise that U.S. stocks have delivered phenomenal returns over the last decade or so— outperforming non-U.S. stocks in 10 of the past 12 years—with low interest rates, a pro-business environment, and tax cuts often cited as performance drivers. Yet, with sentimental strength comes consequences. As price growth has exceeded the underlying fundamental growth of these companies, it is natural that investors will eventually need to taper back their expectations on the U.S. market. We believe this could lead to capital being allocated away from the U.S. into previously unloved markets.
Source: Morningstar Investment Management calculation, Morningstar Direct data to 31 August 2019. Past performance is not a guide to future returns. Figures in percentages.
To be clear, we have no insight on when a reversal might happen but prefer to limit exposure to such risks. One way of expressing this is by holding less in expensive asset classes (including the U.S.) and allocate to cheaper asset classes such as the U.K., Japan, and emerging markets. We believe by doing so, we’re holding assets that generally have more room to grow and less room to fall. Over a full market cycle, research suggests this approach should deliver stronger returns while giving investors a smoother ride. Again, we believe this smoother ride should help individuals stay invested, which in turn should lead to better outcomes and ultimately help people reach their goals.
Question 2: Why are you investing in the U.K.? Are you changing your conviction as the political and economic weakness evolves?
We believe the case for investing in the U.K. remains strong, especially in a relative sense.
Practically, we know investors shy away from uncertainty, which has impacted sentiment and will continue to do so—for a while. The fact you’re concerned about the U.K. shows that demand is impacted in the short term. However, we’d suggest you broaden your perspective when thinking about supply and demand. Ultimately, long-term demand is a function of the cashflows the underlying companies can produce, which in the case of the U.K., looks on a solid footing.
Fundamentally the U.K. economy is not the same as the U.K. equity market. In fact, over 70% of FTSE 100 companies (the 100 largest listed companies in the U.K.) derive their revenue offshore. Moreover, approximately 28% of these revenues are derived from emerging markets. Therefore, it is a mistake to think that buying U.K. stocks will give you exposure to the U.K. economy.
Empirically, we’d simply cite that the link between economic growth and investment returns is weak at best. So, yes—the U.K. economy could worsen, but that isn’t a basis for us to not to invest.
Wednesday, 16th October 2019
Almost half of all pension pots accessed over the past year were taken by savers who had not sought any advice or guidance, according to the Financial Conduct Authority’s latest Retirement Income Market Study. It found that more than 645,000 pension plans were accessed in the year to March 31, 2019 and in 48% of cases no advice was taken. It’s a worrying trend that could see savers make poor decisions at a crucial time in their life, which could have a huge impact on their financial situation in retirement.
The FCA said 350,000 of the pension pots accessed in the year were fully withdrawn – around 90% of these were worth less than £30,000. Just 37% of savers accessing their pension pot over the period took regulated advice, while 15% took guidance from the government’s Pension Wise service.
The proportion of pots used to buy an annuity is steadily falling, down from 13% of plans accessed in 2016/17 to just 11% in 2018/19. Instead the number of savers opting to go into drawdown – where you can keep your money invested and withdraw ad hoc or regular amounts – is growing steadily. While 167,193 plans were put into drawdown in 2016/17, this climbed to 190,971 in the most recent tax year.
Drawdown has increased rapidly in popularity since the introduction of pension freedoms in 2015, whereby savers were given more choice over what they could do with their retirement funds. Tom Selby, senior analyst at AJ Bell, says: “These figures demonstrate the enduring popularity of the pension freedoms, with almost three people taking a regular income through drawdown for everyone person buying an annuity. It’s a monumental shift in retirement behaviour.”
One concern at the advent of the pension freedoms is that those who opted for drawdown would withdraw their money too quickly, leaving them without enough to fund their entire retirement. The idea behind drawdown is that by leaving your money invested, you can replenish each year the amount you take as income if you withdraw it at a sustainable rate. The FCA figures show that, on average, those in drawdown are withdrawing around 8% of their funds. This falls to around 4% for those with pots of more than £250,000.
Dan Kemp, chief investment officer at Morningstar Investment Management, says there is a lot of "worrying data" in the FCA's report. "The main danger in retirement is 'longevity risk' or the possibility that you will outlive your money. It seems that many people are withdrawing their money too quickly, significantly increasing this risk and consequently imperilling the financial health of retirees."
Size Matters - While four in 10 of the pots accessed over the period were worth less than £10,000 the average pot size was £147,500. In total, some £28 billion of pension savings was accessed in the year. More than seven in 10 of these pots were accessed by savers aged between 55 and 64. Those aged 65 and over were more likely to use their pension pot to buy an annuity, while those accessing their savings at a younger age are more likely to use drawdown. Those savers entering drawdown were the most likely to take regulated financial advice, with 66% of these investors seeking help from a professional. That compares with just 26% among savers who decided to buy an annuity.
The FCA said that taking advice becomes more common as the size of a pension pot increases. Just two in 10 of those with a pot worth less than £10,000 took regulated advice, compared with seven in 10 of those with more than £100,000 saved. However, Selby says more needs to be done to encourage savers to seek help: “Far too few people are seeking advice or guidance about crucial retirement decisions and boosting these numbers needs to be a priority for the regulator. The nature of the pension freedoms means that while some will use their newfound flexibility responsibly, other risk sleepwalking into disaster."
Kemp adds: "Retirement is one of the most important, impactful financial decisions in our lives and we would encourage everyone who is contemplating this step to seek good, independent advice before making decisions that are difficult or impossible to reverse.”