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What Place Should an Inheritance Take Within Your Financial Plan?

By | Financial Planning

Inheritance can be a thorny topic, which we often dread discussing with family. As a result, many people put the conversation off until their parents or grandparents actually die. By which point, deciding what to do with your inheritance can feel somewhat overwhelming, on top of the emotional turmoil and grief you are likely to experience.

In light of this, whilst it might be a difficult conversation, it can be a good idea to think about having it now (well ahead of time) if this is possible. It can save a lot of pressure for yourself later, as well as avoiding potential family fall outs.

Having a clear grasp of what is coming to you can be immensely helpful for your financial planning. However, it’s important to be realistic. Millennials in particular (i.e. those born between 1981 and 1996) tend to have very inaccurate expectations about how much wealth they will one day inherit from their parents, anticipating a sum of around £130,000. In all likelihood, however, the median inheritance currently stands at £11,000.

The place of an inheritance in financial planning

Of course, some fortunate people will inherit more, and £11,000 is certainly nothing to turn your nose up at. This sum could make a huge difference to your family. However, it’s important to keep your potential, future inheritance in perspective. There are many events out of your control which might affect how much you eventually receive.

For instance:

Unforeseen taxes/debts. Your parents or grandparents might have promised you tens of thousands of pounds one day. However, it is very difficult for you to know the full nature of their wealth or financial situation. They could be facing an inheritance tax bill or debt repayment which eats into the value of your inheritance, when it comes to dealing with the Estate. This can happen even if parents appear financially astute.

The cost of care. Your parents or grandparents might be very healthy now, but sadly none of us know what will happen in the future. Dementia, Alzheimers and Parkinsons affect thousands of people in the UK, often leading to them needing around-the-clock professional care. The fees for these services can be very high and can easily reduce the value of an Estate, which would have otherwise been passed on as an inheritance. Care Home fees, for instance, can cost over £30,000 per year which residents are expected to pay themselves, if they have over £23,250 in capital assets.

Remarriage. In reality, it is quite common for people to remarry later in life. This might occur following divorce, or perhaps bereavement of a husband or wife. Regardless of how it might happen, this could affect your inheritance since, by default, the Estate will be distributed according to the Rules of Intestacy, if there is no Will in place stating what should happen in the event of death. In this instance, if the Estate is valued at less than £250,000, then the surviving husband or wife will receive everything.

What are the implications of all this? Well it basically means that for most people, an inheritance should take on a “supplementary” role rather than “primary” pillar within your financial plan. In other words, if one day you do receive the inheritance you hope for, then it will be a welcome addition to your finances and wealth. If it does not arrive in the form, timing or manner in which you might expect, then your financial plan will not be affected or ruined as a result.

Ways to use inheritance money

So, what are some options for your inheritance money, should it come your way?

1. Settle debts. If you have any debts weighing heavily on your mind or monthly bank balance, then it may be a sensible idea to consider paying these off or reducing them. For instance, clearing £200 in monthly debt repayments could free up a lot of breathing space, allowing you to place more funds elsewhere in order to build up your assets (e.g. saving into a pension).

2. Emergency funds. If you do not already have 3-6 months’ worth of living expenses saved as an emergency fund, then it can be a good idea to commit some of your inheritance money towards building up this safety net. This will give your family peace of mind and financial stability in the unfortunate event of either you or your partner losing a job or needing to suddenly cover an expensive bill (e.g. a replacement boiler).

3. Pay off the mortgage. If one of your main financial goals is to live mortgage-free as soon as possible, then paying off your mortgage (either as a lump sum or regular mortgage overpayments) could be an attractive option. Be careful to check your mortgage lender’s terms, as there can often be charges for repaying your mortgage debt over certain thresholds.

4. Invest some of it. If you deposit a substantial inheritance into an ordinary savings account, then in today’s low interest rate environment, it is likely to start losing its value over time, due to inflation. However, investing it in a pension fund or a Stocks & Shares ISA could be a way to help the money grow over time.

5. Enjoy it. Perhaps you are in the fortunate position where you are already well on track to achieving your financial goals and could instead put the money towards something more luxurious – maybe you would prefer to treat your family to an lovely holiday or buy a new car. If so, then enjoy!

Market Turbulence: Should I Turn To Gold?

By | Investments

Gold was the currency of states and countries across the world throughout history i.e. Byzantium used a gold standard over 1,500 years ago to support its empire and for centuries leading up to the 20th Century, it was the globe’s reserve currency.

Given its longevity, many people consider investing in gold as a “safe haven”, particularly during periods of stock market volatility. In the days following the 24th June 2016 Brexit referendum result, the FTSE 100 declined by 8% but the price of gold continued to rise, as it has done since April 2016.

Yet investing in gold, whilst it may sound glamorous and “safe”, comes with its advantages and disadvantages, which are important to be aware of before committing to this type of investment.

In this short guide, we will be sharing some of these benefits and drawbacks with you. Please note that this content is for information purposes only and should not be taken as financial/investment advice.

Pros: Why people turn to gold

Gold is tangible and “feels real” to us – similar to property. This (in addition to the prestige and attraction of jewellery) makes gold an appealing investment, compared to more intangible assets such as stocks and bonds.

As mentioned, gold can be a compelling choice for worried investors since its value is often not linked to other assets. During a decline in the stock or property markets, for instance, the value of gold might hold steady or even rise in value (since people often turn to it during market turbulence). Other advantages of investing in gold include:

Liquidity. Property and gold are both “tangible” assets which you can see and touch. However, the advantage of the latter is that it can be bought and sold fairly quickly, which tends to be harder to achieve with property. Virtually anywhere across the globe, you can convert gold into cash with relative ease if you choose to do so.

Diversification. Your investment portfolio should contain a range of asset types and classes in order to spread the risk. This might include a range of stocks, bonds, cash and property investments. Adding another asset type such as gold can help diversify your portfolio even further.

Steady value. Over time, gold tends to retain its value due to the limited amount of gold available around the world. This can make it an attractive hedge within an investment portfolio, especially during times of rising inflation.

Cons: Reasons not to commit everything to gold

Gold offers lots of advantages to an investor but most Financial Planners would caution against leaning towards gold investments for the following reasons:

Bubbles. We mentioned earlier that many people turn to gold during times of market volatility. This can cause the price of gold to rise, but if too many people rush to gold as a haven then it could lead the commodity to become overpriced. It’s then only a matter of time before a price correction happens, which could be harmful to your portfolio.

Insurance & storage. You may choose to buy gold coins or bars yourself and you will obviously need a safe place to keep them. In all likelihood, you will also need to take out insurance. All this added expense erodes the value of your investment returns.

Lack of income. When you invest in companies, it is possible to generate a “passive” income in the form of dividends. Similarly, when you invest in property such as a Buy to Let, you can also create an income stream via rent from your tenants. Gold, on the other hand, does not generate income (unless you buy shares in a gold producing company).

Returns over time. If you are hoping to invest in an asset and hold it for 20 or 30 years in the hope that it will generate a long-term return, then gold is at a disadvantage compared to other assets. As mentioned earlier, gold tends to retain its core value over time whilst stocks/equities such as the FTSE 100, historically, have risen considerably in value. Whilst gold can be a useful hedge, it is not really a great wealth creator.

Ways to invest in gold

Direct purchase. This is the “old fashioned way” of investing in gold – buying physical gold coins or bullion. You then hold and store these yourself, potentially to sell later.

Gold company shares. You could buy shares in gold mining companies. The share prices will be strongly influenced by the price of gold as well as the success of the individual companies.

Gold options/futures. It is possible to invest in gold via financial derivatives, using call and put options. This is quite a risky strategy, however, as most people try to “time the market” by purchasing a “put” when they anticipate a drop in the price of gold, or by buying a “call” if they think it will go up. This is very hard to predict accurately.

Gold ETF. An exchange-traded fund (ETF) behaves a bit like individual stocks, trading on an exchange. A gold ETF will hold derivative contracts in gold, which are, themselves, backed by gold.

Final thoughts

Everyone’s financial situation and investment goals are different, so it’s unwise to make blanket recommendations regarding the position that gold should take within your investment portfolio. That said, it would be fair to say that, for most investors, gold is likely to occupy a small part of a wider investment strategy, if it is present at all.

Are you set to get the best State Pension deal?

By | Pensions

The State Pension is the money you get from the Government to provide you with an income in retirement. This might sound straightforward enough but the system is actually quite complex.

The system can be a bit of a minefield but it’s important to understand it as your State Pension entitlement could have a big impact on your future retirement lifestyle.

In this article, we will briefly cover how the State Pension works, how to calculate the level of State Pension you are likely to receive in retirement and ways in which you could get a better deal from the Government.

What is the State Pension?

State Pension rules changed in April 2016 which made them more difficult to understand. Before this happened, people received a “basic” State Pension when they reached retirement age and in some cases, certain individuals received an “additional” State Pension.

So, if you reached retirement age before April 2016 then in the 2019-20 financial year, the basic State Pension making its way to your account should be £129.20.

If, however, you are set to retire after April 2016, your State Pension will operate under the new rules and you should receive a “single-tier” State Pension when you reach retirement age (sometimes referred to as “new State Pension”).

In 2019-20, the amount you receive under the full, new State Pension is £168.60 (about £8,767.20 per year). We highlight the word “full” because you may not actually receive this amount as it is dependent on your personal circumstances.

If, for example, you have not built up 35 years of qualifying National Insurance contributions (NICs) then you are unlikely to receive the maximum £168.60 available. On the other hand, if you have accumulated an “Additional State Pension” then you may well receive more than this.

It is worth mentioning briefly that it has not been possible to build up any additional state pension (sometimes called the “Second State Pension” or “State Earnings-Related Pension Scheme”) after April 2016. However, you may have prior to this date, as you approach your retirement age after 2016.

You might be wondering what your “retirement age” is (i.e. the point where you can start claiming your State Pension). In 2019-20 it is between 65 and 66 for everybody which is set to increase in future years. So, for instance, in 2028 it will be 67 and by 2039 it will have risen further to 68.

How much will I get?

As mentioned above, how much money you get from the Government in retirement depends on a range of factors, including:

-Whether you reached retirement age before April 2016. Certain groups of people get more, or less, than others under the old system compared to the new one.
-How many years of NICs you have built up (remember, you need at last 35 to get the full, new State Pension).
-Your pension credit status. This an extra, means-tested source of income for retired people who are struggling financially. You must meet certain criteria to be able to claim this benefit, which we will come to below.
-Any Additional State Pension you may have accumulated.

The other important thing to remember is that to get any kind of State Pension, you must have at least 10 years of qualifying NICs.

How to get a better State Pension deal

Clearly, if you are still working and will be for a good few more years, then one important way to get the best pension deal is to make sure you build up at least 10 years of NICs throughout your employment.

Better still, try to meet the 35 qualifying years to ensure you become entitled to the full, new State Pension when you reach your state retirement age. In general, those in full time employment earning over £166 a week should be making NICs automatically via their employer, under the Pay-As-You-Earn system (PAYE).

Looking forward, it may well be that you will fall short of the 35 years’ worth of NICs through your future employment. Should this be the case, it is possible to “top up” some of your previous years where you did not make a qualifying year (e.g. because you lived abroad), by making voluntary NICs. Another option could be to consider deferring your whole State Pension, which can sometimes result in you receiving a higher income from the Government when you do eventually claim it.

You can check for gaps in your NI record on the government’s website.

For expectant parents, you may be wondering what could happen to your NICs if one or both of you intend to take time off work to look after your child.

This situation can become quite complicated but generally speaking, if you are over the age of 16 and your child is less than 12 years of age, you should receive “Class 3 National Insurance credits” if you are receiving Child Benefit. These credits allow you to fill gaps in your NI record, even if you are not working.

Another option couples may wish to consider is making voluntary NICs on behalf of a spouse or partner so they can build up their own full new State Pension record.

Final thoughts

We hope this has helped with the basic aspects of the State Pension which may affect you but there is a lot more to consider when factoring your State Pension into your overall retirement plan so please do get in touch if you wish to explore this further.

Is it ever too late to start investing?

By | Uncategorised

It is fair to say that conventional wisdom states you should start saving as early as possible for your retirement. The reality, of course, isn’t always the case.

For many of us, “life” gets in the way of investing in our twenties and thirties. Salaries tend to be low for most people as they embark on their careers, and the cost of rent (assuming you live away from home) can be a big drain on what little money you have coming in.

During this stage in your life, what little you have to save, you understandably might want to put towards a house deposit rather than a pension. By the time you are on the housing ladder, perhaps you are in your thirties and you now have the cost of a family taking over.

As a result, it isn’t uncommon for people to reach their forties and suddenly think: “I should probably start thinking about retirement!” At this point, of course, many of us hear the message that we “should have started saving in our twenties” and wonder if it’s all too late.

Naturally, the ideal scenario would be to start putting money aside as early as possible but it is certainly never too late to start investing and saving for your future life after work.

In this article, we’re going to suggest some ways to “catch up” on your retirement savings if you have missed out on previous years. This content is for information purposes only and is not financial advice, so best to speak to us further for specific guidance on your own situation.

Look at the positives

Whilst you might feel disheartened that you didn’t start saving sooner, consider the strengths of your current position. In your forties, for instance, your salary is likely to be much higher than it was when you first started working in your twenties. This means you have more money to potentially commit towards a pension if you have spare funds available.

Also, it is quite likely that your outgoings are not as high as they could be. Admittedly, you will have a mortgage or rent to pay, and possibly children to look after. However, for many people, the children are older at this point, which allows more freedom for two parents to work and increase their household income.

Moreover, if you are now on the property ladder then you presumably no longer need to save for a deposit, which was previously hindering your ability to build up your pension in your twenties.

Take a look at the longer-term picture. The reality is, most of us are now living longer, which means we all are likely to need larger pension savings compared to previous generations. However, it also means that you could still have more decades in which to build up your pension pot.

For instance, if you recently turned forty years old, then your retirement age (under the current system) is likely to be sixty-eight, which gives you potentially twenty-eight years of work, during which time you can build up your retirement savings. This is a good length of time, assuming, of course, you are fortunate enough to remain in good health and in employment.

Draw up a plan

Let’s continue to assume that you are forty; that you have no retirement savings; that you have two children in full-time education and that you are slowly paying off your mortgage.

How much will you need in retirement, and how much will you need to start saving to get there?

Here, it is usually helpful to draw up a plan and perhaps discuss with a professional financial planner, who will be able to present you with some options. However, it’s also a good idea to start thinking about things yourself, to at least get you started.

Begin by looking at how much you are likely to need in retirement. A general benchmark is to assume that you will need at least £18,000 per year to cover the essentials, and at least £26,000 to live more comfortably in retirement.

So, how can you start to work towards this? Firstly, look at your State Pension. In 2019-20, the most this will give you is £168.60 (about £8,767.20 per year). To be eligible for this, you need at least thirty-five years of qualifying National Insurance Contributions (NICs).

Are both you and your spouse/partner on track to achieve the thirty-five qualifying years? Together, that would generate £17,534 per year in today’s money and achieves a large percentage of your target. (Bear in mind, however, that you cannot “inherit” your spouse’s/partner’s State Pension when they die, so this would dramatically reduce your retirement income from the Government).

For the rest, you will need to make up the difference with your own saving and investment plan. So next, look at your workplace pension.

Some employers offer very good pension schemes, which can enormously boost your retirement savings. Under Auto Enrolment rules, employers must contribute at least 3% of your eligible earnings towards your pension pot. You need to put in at least 5% of this yourself (of which 1% is made up of tax relief) making a total of 8% in pension contributions each year.

You will need to do some careful planning to see whether these current levels of contributions will get you to where you need to be in retirement.

For instance, 8% of a £40,000 annual salary, is £3,200. Broadly speaking, over say twenty-eight years, achieving an estimated 7% annual investment return, this would generate a £267,252.92 pension pot.

This sounds like a lot of money and it’s certainly a good start. However, it is quite likely that you will need significantly more to attain a comfortable retirement income, and also counter the eroding effects of inflation. If you would like help in devising a plan for the future, please do get in touch with us as we can help you cover all the necessary bases.

Inheritance Tax: How to Reduce the Bill

By | Financial Planning

Many families stand to lose more money to the Government through Inheritance Tax (IHT) than they really should. In 2016, £585 million was spent unnecessarily on IHT by British taxpayers. With IHT receipts expected to reach an all-time high in 2018, it seems unlikely that this trend will reverse in 2019.

Certainly, everyone should pay their fair share to society, but why should your loved ones lose out needlessly? At FAS we can help you to put sensible measures in place ahead of time to ensure that you, one day, leave a meaningful legacy to your family.

Here are some practical ways we can help you to reduce your IHT liability:

The Nil Rate Band & Additional Threshold

A new rule was introduced on 6 April 2017 which has had an important impact on IHT planning. It is something to consider if you have direct descendants.

To quickly recap, in 2019-20 Inheritance Tax (IHT) is levied at 40% on the value of your Estate over £325,000. This threshold is called the Nil Rate Band (NRB).

Your “Estate” includes assets such as your property, cars and personal possessions.

So, if your Estate is valued at £475,000 when you die, then £325,000 would be free of IHT. The rest of it – i.e. £150,000 – would likely be taxed at 40%, which means an IHT bill of £60,000.

Since 6 April 2017, however, an Additional Threshold (AT) has been in place which can reduce your tax bill. This new threshold allows you to pass on an extra £150,000 in 2019-20 to direct descendants (e.g. children or grandchildren) in the form of your residential property.

Let’s see how this would affect the example above. Suppose this person’s £475,000 Estate consists entirely of their home. Assuming they pass this property onto a direct descendant, the whole Estate would likely be free from Inheritance Tax. This is because it would fall under the combined thresholds (i.e. £325,000 NRB + £150,000 AT = £475,000 allowance).

Spouse / Civil Partner Benefits

Each person has their own Nil Rate Band and Additional Threshold. That means you have your own NRB and AT, and if you are married then your spouse does too (the same applies in civil partnerships).

When you combine these allowances together it means that you can effectively double the amount you can pass on to beneficiaries, Tax-free, via an Inheritance:

Person A: £325,000 NRB + £150,000 = £475,000
Person B: £325,000 NRB + £150,000 = £475,000

Total Tax-free allowance (2019-20) = £950,000

So, if you and your spouse / civil partner own a £900,000 home and pass it to your children when you die, then you should be able to do so, Tax-free, assuming everything is in order, and the remainder of your Estate is less than £50,000.

Remember, your unused allowances pass on to your spouse if you die before them. You do not need to both die at the same time to combine your NRB and AT allowances!

Bear in mind that you cannot combine your IHT allowances in this way if you and your partner are unmarried, or not in a civil partnership. This is the case even if you have lived together for a long time and have children.

Pension Planning

Pensions are primarily intended to provide you with an income when you retire. However, they can also be an important part of your IHT strategy.

Remember we mentioned that your “Estate” comprises assets such as your property, cars and personal possessions? Pensions are notably absent from that list.

That’s because your pension does not form part of your Estate for IHT purposes. So, if you have a £750,000 house and a £300,000 pension pot when you die, the former might be liable to Inheritance Tax. The latter will likely not be.

You can pass on your pension pot to your beneficiaries, Tax-free, if you die before the age of 75. If you die after that age then the pot still does not face IHT. However, your beneficiaries will have to add any money they receive from your pension to their income. That means that they could face a higher Income Tax bill.

With some careful financial planning, you can therefore potentially pass on more of your wealth to your loved ones via your pension pot(s). Please note that you cannot do this with Final Salary pensions or Defined Benefit pensions.

Making Gifts

The IHT rules in 2019-20 allow you to give away up to £3,000 per year, Tax-free. Think about that. Over five years that amounts to £15,000. Over fifteen years it totals £45,000.

You could ignore this allowance but consider that £45,000 taxed at 40% IHT amounts to £18,000 that could have otherwise gone to your family. So gift-making is not a strategy to dismiss lightly.

We can help you understand the current allowances and how they impact on you and your family. One annual exemption that is often missed is for wedding gifts. Here, you can give up to £5,000 (Tax-free) to your child for their wedding day (£2,500 for a grandchild or great-grandchild).

Other Options

The above examples are just a handful of tactics to consider when thinking about Estate planning for your beneficiaries. Other options which might be appropriate for you include using Trusts and taking out a Life Insurance policy.

The rules surrounding Inheritance Tax are quite complicated and are subject to change. You could easily miss an important consideration if you try doing everything yourself, especially if you have a large complex estate.

Please do get in touch if you wish to discuss any aspect of the above in more detail.

What Difference can a Diversified Portfolio make?

By | Investments

Investing can be an incredibly risky business if you do not know what you are doing.

The story of a Chinese farmer who invested his life savings in a local mining company illustrates the point perfectly. He lost $164,000 when the company failed. Not only that, but he went into debt to buy $1 million more stocks to recoup his losses.

Most of us can see the problem here and think we would never do something so foolish as to put all of our eggs in one basket. Yet many people do make investment mistakes, sometimes against their better judgement and sometimes without realising it.

This is where a diversified portfolio can help protect your wealth. By spreading your money across multiple asset classes and investment types, you can mitigate your losses whilst maintaining a steady level of growth over the long term.

Diversification: An Example

The 2008 financial crisis might seem long ago to some people. For many investors, however, the pain is still fresh. Some people lost as much as 30% of their portfolio value in one year.

Yet this period of recent history provides a valuable lesson about the importance of diversifying your investments. Those investors with bonds in their portfolios, for instance, fared the storm much better than those with fewer bond investments and higher levels of (UK) equities.

Some portfolios with over 60% (UK) equities lost over 20% of the value of their portfolio between the end of 2007 and the beginning of 2009. Those with over 60% bonds might have only made a minimal loss – or even none at all.

The point here is not to try and argue that it is better to invest in bonds rather than stocks. Remember, past performance is no guarantee of future returns. Also, each investment type brings its own potential risks and rewards. Stocks tend to be higher risk with higher potential return, whilst bonds tend to carry lower risk and lower potential return.

Rather, the point is to show the importance of diversifying your investment portfolio. Had an investor put all of their money into (UK) equities during the 2008 financial crisis, their portfolio would have almost certainly taken an unbearable hit. However, by having investments spread out across different kinds of stocks, bonds and other assets, you lower your risk levels and minimise potential damage.

A Diversified Portfolio: Common Components

Domestic equities

Equities are sometimes also called “shares” or “stocks”. Here, you buy a degree of ownership in a company or set of companies in order to gain an investment return (e.g. on their profits). For the British investor, domestic equities refer to your investments in UK companies and typically form an important part of your portfolio.

At the time of writing, large numbers of UK stocks have been sold off in light of Brexit. This might sound like a bad thing for investors, but it could actually present them with some new opportunities to make a return.

However, the uncertainty surrounding Brexit should serve as a warning to not put all of your investments into one country’s equities, where they will be subject to the health, nature and effects of that single economy.

International equities

One way to diversify the equities in your portfolio is to buy shares in companies outside the UK. For instance, you might invest in funds which buy shares in the USA, Western Europe or even across the world. Certain funds might focus on a particular region such as technology companies in East Asia.

International equities can be a great way to spread your investment risk and leverage opportunities outside of the domestic market. However, they can be subject to currency fluctuations which can impact the value of your invest – even if you make a return. So, once again, it is a good idea to spread your investments out rather than just invest in these equities.

Bonds

Bonds are essentially a kind of “IOU” and are generally seen as less-risky than equities. For instance, you can buy a UK government bond and you be fairly confident that they will eventually pay the principal back with interest.

Due to their lower level of investment risk, bonds generally provide a lower investment return compared to equities. Therefore, they offer less growth potential for investors looking to expand their wealth, but are an attractive “insurance policy” against market dips and are a useful tool for investors to protect wealth as they approach retirement.

Property

Quite often a portfolio will also include investments in property in the UK, and possibly abroad. One common approach is for investors to put some of their money into REITs (Real-Estate Investment Trusts), which allows them to buy commercial property using pooled funds with other investors.

REITs and other real estate investments can offer some strong returns, but they also carry their own risks. Looking at Brexit once again, the uncertainty here has raised a lot of questions about the future of the UK property market and house prices. So, the rule of diversification applies.

Constructing a Diversified Portfolio

When building a diversified investment portfolio, you should consider the tax efficiency of your investments, as well as some of the popular investment platforms. However, building a solid investment portfolio which meets your needs and appropriately diversifies is not easy.

At FAS, we ensure you make informed choices about how to invest your money whilst taking into account charges and taxation, as well reducing investment risk without necessarily hampering growth potential!

Better to stay in the Market than try to time it

By | Investments

Markets can be intimidating beasts. They go up and they go down. Some people profit through their investments whilst others lose money.

How is an investor supposed to approach this picture? Should you put your money into markets given the risks involved? If so, how much should you commit and what should you invest it in?

Moreover, when should you put it in and when should you take it out? Should you withdraw your money as markets are falling or during periods of volatility to try and curb your losses?

This latter question is the one we want to focus on here. This is known as “timing the market” and, generally speaking, it is a bad idea.

It might seem counter-intuitive, but it is ultimately better to stay in the market for a long period of time rather than trying to time it. Here’s why:

The Difficulty of Prediction

If you are already investing, remember why you invested in the first place.

It might be because you wanted to build up enough money for a comfortable retirement one day. Markets can be a great way to achieve that. Consider, for instance, that equities in the UK have grown by 5% on average each year since 1900.

However, you likely knew that it wouldn’t be plain sailing when you first started investing. The very nature of markets is that they stop and start. They bring short-term risks but also the potential of longer-term growth.

Consistently predicting the short-term dips and troughs is incredibly difficult, if not impossible. Think about the number of variables involved leading up to a market crash or substantial rise. There are human decisions made within governments and companies, which themselves are very hard to anticipate. Then there are local and world events which come down to bear.

Trying to see the near-future in this ever-shifting puzzle (where new pieces are constantly thrown into the mix) is clearly beyond normal human capacity, although this does not stop lots of stock brokers from trying!

It is very hard to see a market fall coming and pull your money out to protect it in time. In fact, trying to time the market in this way can really cost you both in the short and long term…

The Cost of Getting it Wrong

Consider for a moment what might happen if you missed some of the best days on the stock market because you pulled your money out at the wrong time.

One study actually tried to demonstrate this for the FTSE 250. It showed that if you invested £1,000 in 1987 and left it there for three decades it would be worth £24,686.

However, if during that time you put your money in and pulled it out, missing the FTSE 250’s best 30 days, then the money would be worth £6,878. That’s a difference of £17,808.

When you spread out the annual return over the thirty-year period, you would have seen an 11.3% return if you had kept your money in the FTSE 250.

Had you missed the best ten days it would be 9.3%. Had you missed twenty of them, it would be 7.9% and if you missed all thirty days it would be 6.6%.

These percentages might seem small, but over thirty years the difference amounts to a lot of money due to the nature of compound interest. There might be just 4.7% between 11.3% and 6.6%, for example, but remember that represents £17,808 in the above scenario.

In other words, rather than trying to time the markets it is almost always better to stay put and aim for longer term growth.

Should I invest now?

The answer to that question depends on your own financial circumstances. At the time of writing, it might be tempting to think that you should not invest right now given uncertainties surrounding the U.S.-China trade war and Brexit.

However, this is not necessarily a reason not to invest. Historically, some of the best investment returns have happened during times of great economic challenge.

One sensible way to protect yourself from short-term market dips and shocks is through “pound cost averaging”. Very simply, this means that you put your money into the markets gradually rather than in one bulk.

So rather than putting £20,000 straight away into stocks (which might then suddenly go down) you could put £2,000 into stocks over a 10-month period, reducing your risk exposure. It might mean that you actually end up making a better return in the long run, because you could end up buying more stocks at a cheaper price during a market dip. If these then rise in value down the line then you actually will have gained a higher investment return because of the dip. Conversely, of course, you could lose out on gains if the markets continue to rise during your phasing period.

Investment Tips

Unfortunately, you cannot completely shield yourself from short-term investment risks and market falls. However, there are some tactics you can use to increase your chances of gaining a higher investment return over the long-term:

    Diversify your investments across a range of stocks, funds and asset classes. That way, if one company or market falls your other investments will help balance the risk.
    Invest sooner rather than later. Remember the power of compounding. £10,000 invested over ten years produces about £16,288 at a 5% annual return. Over twenty years it gives you about £26,532. Over thirty is gives you about £43,219. Over forty years, you are potentially looking at £70,399.
    Take advantage of ISAs and other tax allowances to make sure you keep as much of your investment returns for yourself as possible.
    Stay in the market. Remember the potential costs of missing the best investment days because you incorrectly timed the market.

Scams & Unregulated Investments: Update & Warning

By | Pensions

You have spent years building your wealth to support your family and lifestyle. It would be a great shame to lose it to scammers, unscrupulous businesses and high-risk investments.

Yet every year that is exactly what happens. Since 2014 at least £42 million has disappeared from people’s pension pots due to fraud. Worryingly, the Financial Conduct Authority (FCA) says this is likely to be a fraction of the scale of the problem.

Safeguarding your hard-earned family wealth is one of our top priorities at FAS. In this guide, we are going to shed light on some of the latest scams so that you are armed with more knowledge to protect yourself.

The two main areas we will cover are pension scams and unregulated investments.

Pension Scams: What to Watch For

The UK government finally made cold calling about pensions illegal in January 2019 – after years of consultation. This is a welcome move.

This new law was brought in due to pensioners receiving fraudulent calls. People who were tricked by these calls lost, on average, about £91,000 in 2018 and some were even left penniless in retirement.

Despite the ban, however, there are still companies making unsolicited calls to people in the UK about their pension. Sometimes these businesses are based off-shore, far away from the reach of prosecution under British law. So you still need to be careful.

Please note that pension scams do not merely come in the form of unsolicited phone calls about your pension. They can also involve unexpected texts, emails or social media messages.

Be especially wary if you are in your 40s, 50s or 60s as these are prime targets for scammers.

As a general guide:

    Be immediately suspicious of any company that contacts you out of the blue about your pension(s). End the call if you do not recognise them.
    If a caller claims that they can help you access your pension before the age of 55, then it is almost certainly a scam. End the call and do not give out any personal information.
    Should a caller try to pressure you into acting quickly (due to a time-sensitive “offer”) then do not proceed any further with the conversation. Authorised Financial Planners are not allowed to pressure you into important financial decisions, so a stranger on the phone is certainly not allowed to either!
    If you are promised a deal which sounds too good to be true, then it almost certainly is. The main scam to watch out for here are promises of high investment returns with little-to-no investment risk. Almost always, investments with the potential for higher returns also carry a higher level of risk.
    Be wary of anyone offering a free pension review. This might be an attempt by a fraudulent person to access your financial information.

If the company you are speaking to is not FCA-authorised, then you should certainly not entertain a conversation with the caller. Either check the FCA register for the company name if you are at all uncertain about who you are dealing with or contact us.

Remember, a company is only allowed to contact you about your pension if they are FCA regulated and they have an existing relationship with you.

Unregulated Investments: Be on the Lookout

The tactics and issues surrounding pension scams are very similar to the dangers posed by people who try to sell you unregulated investments.

If someone contacts you unexpectedly about a “great investment” opportunity, and you have never spoken to them about it before, then you need to be very careful.

Generally speaking, we would urge you to end the conversation as soon as possible. Make sure you do not give away any personal information over the phone and try to record the name of the business that the caller claims to represent.

Remember, a company must be regulated by the FCA to provide the vast majority of financial services in the UK. If the business is not regulated, then you know not to deal with them further.

However, there is a chance that a caller might indeed represent an FCA-registered firm, but they are trying to sell you an “unregulated product”.

These financial products are high-risk and are not covered by the FCA’s rules or the Financial Services Compensation Scheme. That means you are unlikely to get any money back if you invest in the product and things go awry.

Once again, resist any claims which sound too good to be true (i.e. high returns and low / no investment risk) as well as any pressure to make quick decisions.

Be especially wary if the investment “opportunity” concerns bamboo, hotels, cryptocurrency or storage as these are unregulated products. For a full list of unregulated products, please see the FCA website here.

The Value of a Financial Planner

If there’s one valuable service that a good Financial Planner can provide, it is to give you a reliable “sounding board” and “firewall” against potential scams like the above.

Should someone contact you out of the blue about your pension or an investment opportunity, then you can ask us about it. We will be able to quickly detect whether or not it was a scam and advise you accordingly.

The value of a long-term, trusting relationship with a Financial Planner cannot be understated. It is certainly more reliable than someone you do not know, contacting you unexpectedly, offering grandiose promises and pressuring you to act against your best instincts!

If you are concerned about a recent call, email or message you received then please get in touch.