Financial Planning

A key role we have as advisers is to decipher how much risk our clients are willing to take. As a general rule of thumb the higher the risk the higher the potential return but the greater the fall when markets drop. In recent months we have seen the FTSE 100 fall from just above 7,400 on 14th Feb 2020 and although since then it has been lower it opened today (15/06/2020) at just over 6,100. So what effect does that have on your investments?

Investments tracking the FTSE 100 have dropped by over 13% in the last 6 months* and its annual performance also shows currently a drop of over 13%**. We would consider that someone wanting to invest in this type of fund should be willing to take quite a high risk, not just because of the type of investment but also because it only represents one sector of the markets. Other sectors have reacted differently, with some even having a slight positive return over the same time period. This is why we feel it is important to hold diversified portfolios, with funds representing a combination of sectors.

So how have our clients’ portfolios fared? Well, we run 5 main portfolios with a risk rating of Cautious to Adventurous. I have been pleased with the way they have fared. Whilst a few have a slight drop over a 6 month*** period all of them are showing a positive annual return**** (before charges), even though these are minimal. This is because they are diversified into a number of different types of fund, so the drop and impact has been cushioned.

However the most important aspect in our clients’ financial plans has always been to have a contingency plan: to include a reserve held in savings, or emergency fund, to tide them through situations like this, until we know whether values will recover. Understanding the level of investment risk is important and we would always recommend you seek independent financial advice to make sure you are fully aware of that risk before investing any funds.

Contact us if you would like to review your investments and risk profile

*L&G UK 100 Index Trust C acc 6 month period ending 15th June 2020
**L&G UK 100 Index Trust C acc 12 month period ending 15th June 2020
***6 month period ending 15th June 2020
****12 month period ending 15th June 2020

Past performance is not a guide to future performance, nor a reliable indicator of future results or performance. The value of investments, and the income or capital entitlement which may derive from them, if any, may go down as well as up and is not guaranteed; therefore investors may not get back the amount originally invested.

Time and time again people tell me how little they understand about money, a matter that consumes such a major part of our lives and helps us to achieve our goals. It has been reported that money worries have topped a poll of the biggest triggers of stress in the UK1*. Many people claim they wish they were taught about finances at school but it has only been part of the National Curriculum since 2014.

For example, statistics reported*2 last year are alarming: In 2017 around 6.5 million adults in the UK had no cash savings. Also, with those aged 18-24 having the lowest average amount saved.

A charity carried out a survey to see what people’s understanding of finances was and the results were as follows:

17% of under 35’s thought that the bank of England base rate was over 10% (it was 0.75%)

14% of under 35’s think it is better to start saving for a pension in your 50’s rather than 20’s (this will make it much harder to save enough).

43% of under 35’s don’t understand that inflation of 5% would erode the purchasing power of money in a savings account which pays 3% interest.*3

So does a lack of financial understanding lead to stress?

Well, perhaps a good question for people to start with would be, “If your income was to stop tomorrow, for example due to sickness or redundancy, how would you survive?” A good education in finances could help people to plan to make sure they are prepared for these kind of dilemmas.

So what would our advice be, if you want to achieve a better understanding of this subject?
The first step would be to seek help. At Monetary Solutions we offer a free without obligation consultation, which an individual can utilise to help educate themselves on what’s available.

*1Independent 28th May 2018
*2Statista 5th Nov 2019
*3Money Charity 15th January 2020

Last week, I used the word “annuity”. When I saw the look on my client’s face, I realised that it had become a dirty word!

As you may know, the Government announced new pension freedoms in the 2014 Budget, that started in the 2015/16 tax year. This means anyone aged 55 and over can now take the whole of their pension as a lump sum. There is no tax to pay on the first 25% and the rest will be taxed at their income tax rate, as if it were a salary payment.

The announcement was a surprise to many. As a child, my mum told me she could remember exactly where she was when she heard about the assassination of J F Kennedy. The impact on me and my financial adviser colleagues was similar when we first heard about pension freedom!

One of the reasons the Government introduced pension freedom was due to the drop in annuity rates. To put it simply, in 2000 the income from a £100,000 joint life annuity at age 65 was about £7,000, But by 2016, the same annuity would pay only about £4,200.*

Because of the new pension freedoms, many of my clients seem to think annuities are now a thing of the past – but they could still be a valuable part of their pension planning.

An article in March 2017 in FT Adviser quotes figures from the Association of British Insurers (ABI) that show annuity sales have declined by around 80% since the announcement of pension freedom in 2014, and have remained around that level since then.

However, annuities are not something that should just be ruled out.

Today, a joint life annuity of £100,000 paying 50% to the spouse on first death and guaranteed for 10 years would give an income of around £5,000 where the applicant and spouse are 65. On the other hand, a drawdown pension would need to grow at 5% to maintain its capital value and give this level of income after charges.

I still think it is important to consider annuities – it doesn’t need to be all or nothing, and it doesn’t have to die with you.

Annuities come in many forms today. Most of us think that an annuity is for life, but you can get fixed-term annuities. There are also enhanced annuities, which is when annuity companies offer an enhancement due to an individual’s medical history. It could just be because someone is overweight, so it’s important to look into this.

Obviously there are advantages and disadvantages of both annuities and pension drawdowns, and retirement planning has become even more complex. It’s therefore more important than ever to seek advice and look at all your options.

At Monetary Solutions Ltd, you can book a free initial consultation about any financial matters, so please call us on 020 8655 8488.

* Money Marketing 29 Nov 2016
Pension income can also be affected by 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.

Photo by Andre Guerra on Unsplash