Category: Investment

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How to find the right investment for you

In the wake of the Woodford debacle, there’s a lot of buzz around investments and the rationale for choosing them. So we thought it would be useful to outline what you should be thinking about when it comes to choosing an investment to enable you to get the best outcomes for your money.

Review your goals

It sounds obvious, but taking the time to think about what you want from your investments is key to selecting the correct fund for you. Writing down your needs, your goals and how much risk you may be prepared to take is a good starting point. 

Consider your investment’s lifespan

How soon will you need your money back? Timeframes will vary between goals and will affect the level of risk you are prepared to take. For example:

  • If you’re saving for a pension to be accessed in 30 years’ time, you can ignore short-term falls in the value of your investments and focus on the long term. Over longer periods, investments other than cash savings accounts tend to deliver a better chance of beating inflation.
  • If your goals are shorter term, i.e saving for a big trip in a couple of years, investments such as shares and funds might not be suitable as their value can fluctuate, so it may be best to stick to cash savings accounts. 

Make a plan

Once you’ve identified your needs, goals and risk levels, developing an investment plan can help you to find the sort of product that’s best for you. Low risk investments such as Cash ISAs are a good place to start. After that, it’s worth adding some medium-risk investments such as unit trusts if you’re comfortable with higher volatility. 

Adding higher risk investments is something you’ll only really want to approach once you’ve built up a few low to medium-risk products. However you should only do so if you’re willing to accept the risk of losing some or all of the money you put into them. 

Diversify, diversify, diversify

You’ve probably heard it before, but diversifying is a key part of investment planning. It’s a basic rule that to improve your chances of better returns, you have to accept more risk.  Diversification is an excellent method that improves the balance between risk and return by spreading your money across different investment types and sectors. 

Avoid high risks 

As mentioned above, it’s best to avoid high-risk investments unless you’re willing to accept the chance that you might not see any returns or even lose your investment. Adverts that proclaim to offer high levels of return will rarely come without risk and we’d urge caution before investing in anything that you’re not 100% certain about. If you do decide to pursue a high-risk product, it’s vital to make sure you fully understand the specific risks involved. 

With all investments comes a degree of risk, and returns can never be wholly guaranteed. Of course, we would always advise talking to an independent financial adviser. 

Sources
https://www.bbc.co.uk/news/business-48510235
https://www.moneyadviceservice.org.uk/en/articles/making-an-investment-plan
https://www.investorschronicle.co.uk/portfolio-clinic/2018/08/30/think-carefully-about-swapping-cash-for-bonds/
https://www.moneyadviceservice.org.uk/en/articles/top-tips-for-choosing-investments
https://www.investopedia.com/articles/investing/103015/cash-vs-bonds-what-pick-times-uncertainty.asp

Ethical investments:what shade of green are you?

Light green, dark green – there’s a whole range of shades when it comes to ethical investment opportunities. If you want to invest your money in line with your moral compass, then ethical investment funds or ‘green funds’ are suited to you. There are a few types to choose from; let’s check them out…

Dark green

Dark green funds refer to funds that hold international ethical values at the heart of their investment strategy. Funds such as Kames Ethical Equity excludes certain areas completely. Tobacco and alcohol, oil & gas, munitions manufacturers and companies that utilise animal testing will not be found in such a portfolio. Another fund by Kames is their Ethical Cautious Managed fund which excludes energy stocks, tobacco and banks with investment banking operations. It also excludes government gilts on the bond side. 

Focused green

This is how we refer to ethical funds that only focus on a couple of particular areas for investment. Investing Ethically’s WHEB Sustainability fund has three focuses: health and population, climate change and resource efficiency. Legal & General’s Gender in Leadership fund is about investing purposefully without compromising returns – they believe that responsibly run, diverse companies will benefit both society and the investor. 

Light green

Funds within the lighter shade of green have ethical focus; they may invest in companies that are responsible in their practices, but might still be part of an industry deemed to be less than ethical. Such a fund would invest in an oil company aiming to move over to greener sources of energy. One such fund is Vanguard’s SRI Global Stock Fund which only invests in companies that meet the UN’s Global Compact Standards on environmental protection, labour standards, human rights and controversial weapons (it also excludes tobacco companies). 

Ethical investing offers the possibility of growing your wealth whilst benefiting society and is becoming more popular with investors of all ages. The ethical value of a particular fund, however, lies solely with the individual’s own personal values, as what is seen as ethical to one person may be deemed not so by another. That’s why it’s best to make sure each fund’s investment portfolio is consistent with your personal views before you invest. 

With all investment opportunities, there can be no guarantee of returns regardless of the fund’s ethical objectives. There will always be a degree of risk involved. It’s clear that investing ethically is becoming an increasingly important consideration for investors. Reflecting this, the sector has developed to offer a much wider range of funds and opportunities to meet a broad range of investor needs. The growth of the sector can only be seen as a positive step for investors and the broader society. 

Sources
https://www.lovemoney.com/news/77612/8-ethical-investment-funds-kames-jupiter-stewart-wheb-vanguard
https://www.hl.co.uk/funds/research-and-news/fund-sectors/ethical
https://www.ft.com/content/e75917a0-86ef-11e9-a028-86cea8523dc2
https://www.theguardian.com/money/2008/feb/11/investmentfunds.moneyinvestments

Cash versus bonds, which is safer?

Protecting and growing wealth is often one of the main objectives clients have. There are many investment opportunities out there that are described as ‘safe,’ but many individuals feel that cash is the safest option for them. Keeping your money in your account is an appealing option, as you know exactly where it is and can access it at any time. However, it may be worth looking into the other investment options available to you. 

Here’s some more detail of the cash versus bonds debate.

The benefits of cash

The main benefit, of course, is that you maintain complete control over your money. You simply deposit it into your bank account and there it remains. You can then review your balance and transaction history easily, knowing that no one else has access to those funds. 

Cash is available for those rainy days or times when emergency funds are required – it gives you flexibility. 

The risks of cash

Inflation is one of the biggest risks to cash. According to the ONS, the 12 month inflation figure as at June 2019 was 1.9%. This is the rate your savings require just to maintain their buying power, anything less than this and you are, in effect, losing money. 

The second risk surrounds what are referred to as ‘opportunity costs’. These are the potential profits that could have been acquired if your money had been used differently. Since holding cash generates relatively little profit, the opportunity cost could be quite high. 

It is generally prudent financial planning to always hold some cash for quick access and ‘emergencies’. Understanding just how much will be dependent on personal circumstances. Like all investments, there can be a risk of holding either too much or too little cash.

The benefits of bonds 

Unlike cash, investing in bonds offers the benefit of consistent investment income. Investing in a bond is similar to making a loan in the amount of the bond to the issuing entity – a company or government. In exchange for the loan, the issuing entity pays the bondholder periodically. The income generated by bonds is generally stable and quite predictable, allowing for robust financial planning. Once a bond matures, the issuing entity pays the bondholder the par value of its original purchase price. 

The risks of bonds 

The main risk of bond investing comes when the investment loses value. If the issuing entity defaults, you may lose some or all of the investment. It’s important to note, however, that bonds are rated to measure the credit quality of any individual bond. The higher the rating, the lower the risk. Government bonds tend to receive the highest ratings.

A bond might also lose value if interest rates rise. However, this is only a concern if a bondholder is looking to trade it in before the bond reaches maturity.

Sources
https://www.investorschronicle.co.uk/portfolio-clinic/2018/08/30/think-carefully-about-swapping-cash-for-bonds/
https://www.fool.com/how-to-invest/a-quick-guide-to-asset-allocation-stocks-vs-bonds.aspx
https://www.investopedia.com/articles/investing/103015/cash-vs-bonds-what-pick-times-uncertainty.asp

20 years after the ISA was launched, what does the future hold?

A study by the Yorkshire Building Society found that savers deposited £4.3bn into ISAs in the final week of the 2017/18 tax year, and the tax year just gone (2018/19) was set to see a similar final week deposit of up to £4bn. This was despite the number of ISA holders falling from 11.1m in 2016/17 to 10.8m in 2017/18.

ISAs, therefore, are continuing to be attractive.

They were launched two decades ago as a tax-free alternative to traditional savings accounts which failed to offer an interest rate that competed with the rate of inflation. At its advent, the total tax-free allowance was £7,000, but at least £4,000 had to be invested in funds, meaning the maximum you could save in a cash ISA was £3,000. Since then, the ISA portfolio has grown to include Help to Buy ISAs, Innovative ISAs and Lifetime ISAs. In addition to this, the tax-free saving allowance has increased, and today, savers are allowed to deposit up to £20,000 into their ISAs each tax year, tax-free.

That means no interest tax, no income tax and no capital gains tax. Cash ISAs also offer access to funds as easily as regular savings accounts and are an excellent choice when it comes to choosing a default savings account.

Take-up appears to be declining amongst younger generations, though, as the total number of adults saving into an ISA fell from 11.1m in 2016/17 to 10.8m last year. With so many opportunities available to young people these days, perhaps it shouldn’t be so surprising that saving into an ISA is losing its appeal?

How can ISAs evolve to maintain appeal?

Clues may lie within the rise of Open Banking, as digital money apps have empowered many people to manage their money more actively.

These apps play a huge role, although it could be suggested that financial education should begin at a very young age. Encouraging young people to invest for the long term requires knowledge of the difference between investment and saving.

Einstein famously said that: “The definition of genius is taking the complex and making it simple,” and it would be unwise to underestimate the importance of simplifying language. The financial sector is awash with acronyms and savings jargon, creating potentially confusing barriers to entry for savers.

Some financial advisers have called for a more holistic approach and to examine how other industries are driving long-term behaviour change. Think of how the music industry changed the way we purchase and listen to music with digital distribution and online streaming platforms such as Spotify.

Ross Duncton, head of Direct at BMO Global Asset Management, says that a ‘revolution is due for the savings and investment industry – with ISAs centre stage.’ After all, if savings options were to remain the same for the next twenty years, the steady decline of ISA uptake will only continue.

Sources
What Investment – Issue 434 May 2019
https://moneyfacts.co.uk/news/savings/billions-of-isa-savings-expected/

Why easy access savings accounts are a bad idea

We’ve all been there, the boiler breaks, the car decides that today is not its day or a bill appears out of nowhere. For these sudden expenses, you need to have access to your money.  The UK has favoured instant access savings accounts for a good while now, with a staggering 77% of cash savings now being held in these easy access savings accounts.

Convenience is a wonderful thing, however there are a number of drawbacks to keeping your cash at your fingertips. The very best of these easy access accounts currently pay up to 1.5% interest AER (Annual Equivalent Rate). If you’re one of the millions of people who are trying to save with bigger high street banks, you’ll be receiving a whole lot less. In some cases, saving rates with big banks can be as low as 0.15% (29/05/19), which we can all agree is monumentally low.  

What should you do?

Easy access savings accounts might seem like the most uncomplicated way to keep your cash. The truth is, though, few of us really need to keep our cash instantly accessible.

A healthy blend of instant access and fixed-term savings could significantly boost your returns, whilst keeping that rainy day fund safe, in case of emergencies. That’s why it’s worth splitting your savings in two:

Emergency cash – money to be put to one side in case of loss of employment, home repairs or other unforeseen expenses. For most of you, this will be within the region of three to six months worth of income held in an instant access or current account.

Long term savings – you may have your eyes on a big expense in the future. You might be getting married, buying a new house or planning a trip around the world. Whatever it may be, putting your cash into a fixed term savings account is one of the best ways to grow your savings. You can keep your cash in a fixed term account from between 3 months and five years.

The general rule is that the longer you keep your cash in a fixed term account, the higher your rate. You may even be able to reach the dizzying heights of 2.5%!

With the national inflation rate currently set at 1.9%, saving has become more important than ever if you want to secure your future finances. For more information on what style of saving would suit you, don’t hesitate to get in touch.

What to know about ISAs in 2019/2020

The rules around ISAs (or individual savings accounts) change relatively often and different types of ISA rise and fall in popularity depending on where savers consider the most competitive place to put their hard earned money.

ISAs are a great way to save because of their tax efficiency. You don’t pay income tax or capital gains tax on the returns and you can withdraw the amount any time as a tax free lump sum. Because of their tax efficiency, there are set limits on how much you can save using ISA accounts.

The 2019-20 tax year is an interesting year for ISAs because the main annual allowance isn’t increasing. The yearly total you can invest in an ISA remains at £20,000. This means that the ISA limit remains unchanged since April 2017.

Remember that all ISAs don’t have the same allowance. For Help to Buy ISAs, you can only save a maximum of £200 a month, on top of an initial deposit of £1,200. Lifetime ISAs (LISAs) have a maximum yearly allowance of £4,000, on top of which you benefit from a government top-up of 25% of your contributions.

One ISA allowance that is rising (slightly!) is the Junior ISA, increasing from £4,260 to £4,368. This means that relatives can contribute slightly more to a child’s future, in a savings account that can only be accessed when they reach 18. Junior ISA accounts are rapidly gaining in popularity, with around 907,000 such accounts subscribed to in the tax year 2017/2018. Great news for the youngest generation!

Stocks and Shares ISAs are also gaining more popularity, with an increase of nearly 250,000 in the last tax year. On the whole, though, the number of Adult ISA accounts subscribed to in the last year fell from 11.1 million in 2016/17 to 10.8 million in 2017/18.

For investors with Stocks and Shares ISAs, Brexit uncertainty has understandably created cause for concern. In this scenario, your best course of action is to make sure that your investments are properly diversified around the globe. Speak to us if you are unsure about what you can do to reduce risk during any post-Brexit turbulence. We’ll be more than happy to help.

Sources
https://blog.moneyfarm.com/en/isas/annual-2019-isa-allowance

The perks of saving into a junior ISA

There are so many factors for a parent to consider in doing their best to make sure their children are prepared for the world when they reach adulthood. A lot of those things will be out of your control, but one thing you can consider that could make a real difference is investing into a Junior ISA. If you start early you could accumulate a pot of over £40,000; that’s a birthday present that no 18 year old would be disappointed with.

Entering adulthood with that level of finances comes with life changing opportunities and great freedom of choice. Depending on their priorities, your child could put down a deposit on a property, start a business, pay for training or tuition fees, or even travel the world to their heart’s content.

On April 6th 2019, the amount that can be saved annually into a Junior ISA or Child Trust Fund account will increase from £4,260 to £4,368. Just like an adult ISA, your contributions are free from both income and capital gains tax and often come with relatively high interest rates. For example, Coventry Building Society offer an adult ISA with an interest rate of 2.3% per annum, whereas their equivalent Junior Cash ISA comes with a 3.6% per annum interest rate. Junior ISAs are easy to set up and easy to manage: as long as the child lives in the UK and is under the age of 18, their parent or legal guardian can open the ISA on their behalf. On their 18th birthday, the account will become an adult ISA and the child will gain access to the funds.

Both Junior Cash ISAs and Junior Stocks and Shares ISAs are available, and you can even opt for both, but your annual limit will remain the same across both ISAs. When making that decision there are a few considerations to make; cash investments over a long period of time are unlikely to overtake the cost of inflation but come at a lower risk than their stocks and shares equivalent. With a Junior ISA, however, you can benefit from a long term investment horizon. Although the stock market comes with a level of volatility, you can ride out some of the dips and peaks over a long period. Combined with good diversification, it’s possible to mitigate a fair amount of risk.

Taking a look at potential gains, had you invested £100 a month into the stock market for the last 18 years, figures from investment platform Charles Stanley suggests that a basic UK tracker fund would have built you a pot worth £39,313. In comparison, had you saved the same amount into cash accounts, you’d be closer to £24,000, a considerable difference of nearly £16,000.

With this latest hike in the saving allowance, it’s time to make the most of Junior ISAs and prepare to swap bedtime reading from Peter Rabbit and Hungry Caterpillar to stories of how a stocks and shares portfolio can secure your child’s future.

Sources
http://www.cityam.com/273196/saving-into-junior-isa-great-way-new-parents-invest-their

Mary Poppins returns: Can a tuppence really save the day?

Since the release of the film Mary Poppins Returns in December, it’s taken over $250m, making it a financial success. The story of the film itself however seems to recommend a few ways of making your own personal finances successful too. With the original set in 1910, the sequel takes us to 1935 where Michael, just a boy in the first film, is now a man with children of his own. Unfortunately, due to him being unable to repay a loan, he finds himself face to face with the frightening possibility of having his home repossessed.

Thankfully for Michael, in the original film his father gives him shrewd advice to invest his pocket money of a tuppence, rather than giving it to the women selling bird food. Quick reality check; even over the course of 25 years, the compound interest on a mere tuppence is extremely unlikely to have been enough to help Michael out of his rut in the real world. Realistically, with an average interest rate of 6%, saving two pennies wouldn’t even bring you in a single pound. Perhaps his father invested it particularly wisely, finding the unicorn company of his day, perhaps putting it into oil stocks, but even then it would require a huge return. It’s a film, after all, and the overriding message of being responsible with your finances is a noble one, so we can allow them a bit of creative licence.

Beyond taking the advice of investing two pence too literally, there are some positive messages and useful takeaways from Mary Poppins Returns. Ultimately, the tone is optimistic; the suggestion being that even if you’re in a particularly difficult financial position, there’s always a solution. It also suggests that these solutions are easier to come by with a bit of forward planning.

Sound investments are as beneficial now as they were in 1910, so seeking and listening to advice about how and where to put your money can be as helpful for you as it was for young Michael. Keeping on top of your financial situation and making conscious efforts to plan for the future will put you on steady ground and allow you to plan for a future that, in the words of Mary Poppins herself, is “practically perfect, in every way!”

Sources
https://www.bbc.co.uk/news/business-46741343

one in seven widows are missing out on valuable tax breaks

New data reveals that thousands of widows are missing out on valuable tax breaks on money inherited from their late husbands or wives.

In 2015, the government introduced a new rule that allows spouses to claim an extra ISA allowance. This allowance, known as an Additional Permitted Subscription allowance (APS allowance), is available to the surviving spouse or civil partner of a deceased ISA investor, where the investor died on or after 3 December 2014.

According to the Tax Incentivised Savings Association (an ISA trade body), around 150,000 married ISA savers die each year. However, just 21,000 eligible spouses used their APS allowance in the 2017-18 tax year, meaning they may be paying more tax than they need to pay.

Many bereaved spouses are unaware of the extra protections they can claim on, while others find the process difficult and confusing.

It is thought that many of those who lose out are widows whose husbands pass away without informing them of the exact nature of their financial affairs. In some cases, widows only discover large sums of money long after their husband’s death.

Situations like this have led to many to call for greater transparency between spouses around their financial affairs. A culture of privacy around financial matters is rife among the ‘baby boomer’ generation, where the higher earner often manages the money and investments. This can leave the bereaved in a precarious position, especially if they don’t know what bank accounts, investments and companies their spouse may have managed.

If your partner has left funds held in an ISA to someone else, you’re still entitled to APS. For instance, if your partner left an ISA of £45,000 to their friends and family, you can use your APS allowance to put an extra £45,000 into an ISA of your own.

Think you might be able to claim? You can apply through your late partner’s ISA provider. You will need to fill in a form, similar to when you open an ISA.

Sources
https://www.telegraph.co.uk/personal-banking/savings/one-seven-widows-missing-valuable-tax-breaks/

Kids off to Uni? Congratulations – but have you been saving enough?

The Institute of Fiscal Studies suggests that the average total debt incurred by today’s university students over the duration of their studies will amount to £51,000. This figure comes as those in higher education saw the interest rate on student loans rise to 6.3% in September. Total student debt in the UK has now risen to £105 billion as of March 2018, a figure £30 billion higher than the nation’s total credit card debt.

The rising cost of higher education perhaps makes it unsurprising that 40% of parents are now beginning to save towards future university costs before their children have even been born, with one in five hoping to have saved £2,000 by the time the baby arrives. Frustratingly, however, around two thirds of those who are saving are doing so by simply placing the funds in an ordinary savings account, meaning their money is earning them very little in interest.

An alternative option to consider is a Junior ISA (JISA) in the child’s name, which they can then access when they turn 18. The account currently allows £4,128 to be saved every year, and the best rate market rate for a cash JISA offers 3.25%. Saving the maximum amount at that rate for ten years would result in a nest egg of £49,427 tax free to cover university fees with plenty left over for other expenses.

Whilst a cash JISA offers dependability, a stocks and shares JISA is also worth considering as the potential reward on your investment can be higher. Both types of JISA can be opened at the same time with the allowance shared between them, so spreading your savings between the two can pay off in the long run.

Using your pension to save towards your child’s university education is also an option, thanks to the pension freedoms of recent years. With the ability to take a lump sum to put towards fees and other costs when you turn 55, pensions offer a tax-efficient way of putting away for both your child’s future and your own. This is an option which needs careful planning, however, as you’ll need to make sure you have enough for your retirement before paying for your child’s education.

For those able to do so, it may also be worth speaking to your own parents about helping towards their grandchildren’s university costs. Rather than leaving money to a grandchild in their will, a grandparent might consider gifting towards fees and other expenses or placing the money in a trust, reducing their inheritance tax liability and allowing their grandchild to benefit from their legacy when they really need it.

http://www.independent.co.uk/money/spend-save/parents-university-fees-saving-children-born-student-loans-college-fund-tuition-51000-a7895951.htmlhttps://www.moneysavingexpert.com/news/2018/04/student-loan-interest-rates-expected-to-rise-in-september—but-dont-panic/researchbriefings.files.parliament.uk/documents/SN01079/SN01079.pdfhttps://www.moneyexpert.com/debt/uk-personal-debt-levels-continue-rise/