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How to make the most of a Junior ISA nest egg

As of 6 April, the amount you can put into a Junior ISA (JISA) per annum has increased to £9,000 – quite a jump from the previous allowance of £4,368.

The tax saving this provides makes it an effective way of building up a nest egg for your children if you want to help with a gap year, university fees, or to enable them to get a foot on the property ladder.  

Which type of JISA?

You can choose to put the money into either a cash JISA or a stocks and shares one. Even in these low-interest rate days, the cash ones can attract quite generous rates with some as high as 3.6%. Another advantage is that they don’t have the volatility associated with the stock market, a particular issue at the current time.          

Yet while the majority of JISAs tend to be in cash, experts state that this can be a wasted opportunity. Despite the recent turmoil, the stock market will usually outperform cash savings over the long term. Wealth manager, Jason Hollands, calculates that if you achieved a 6 per cent annual return – which he describes as ‘quite modest’ – a JISA that had £9,000 invested in it each year would be worth more than £290,000 after 18 years. As you can see, once compound interest kicks in, it can have a considerable effect. He estimates that even JISAs that had smaller sums of £50 or £100 a month invested into them would accumulate pots of £19,367 or £38,735 respectively.

So if you’re wanting to use the JISA as a vehicle for a long-term investment to get your child through a degree course or to help them to buy a property, cash is not the most effective way to do so. 

It’s also advisable to invest a regular amount on a monthly basis amount rather than just put in lump sums at specific times. This avoids the worry of knowing whether it’s the right time to invest and also has the benefit of smoothing out the peaks and troughs in share prices.  

Inheritance Tax Implications

Parents or guardians are the only ones who can actually open a JISA but grandparents can pay money into the account. This can be a productive way of using up their annual gift allowance. They do just need to bear in mind the Inheritance Tax rules, though, especially now the JISA allowance has increased. The annual gift allowance on an Inheritance Tax free basis is £3,000 per donor (with one year’s allowance carried forward). Inheritance Tax would be charged on anything over this limit in the seven years before their death. Gifts of up to £250 per person can be given during the tax year as long as another exemption has not been used on the same person.

Once your child turns 18, the JISA becomes theirs. They can either access it directly or transfer it into an adult ISA. This encourages them to develop a lifelong interest in money and helps build up a great investment discipline. In fact, the Government’s decision to increase the JISA allowance was all part of its aim to create a generation of savers.    

The new JISA allowance could mean that your child comes of age on a much sounder financial footing.  

Sources
https://www.thisismoney.co.uk/money/isainvesting/article-8116351/How-build-290-000-nest-egg-child-Junior-Isa.html

https://www.express.co.uk/finance/personalfinance/1256356/junior-isa-allowance-changes-inheritance-tax-latest-news

https://www.gov.uk/inheritance-tax/gifts

The link between human behaviour and investing

Financial planning… Isn’t that based on cold, hard facts and scientific reasoning? Surely feelings  and emotions don’t have much to do with investing?        

We think they do. And here’s why.

A little thing called human behaviour gets involved, you see. Only it’s not so little. 

Human beings are highly complex systems, motivated by many different factors and emotions. This makes us volatile, unpredictable and irrational. We also hold values and beliefs that drive our behaviour; some logical and valid, others not quite so much. 

But despite being so important, human behaviour is often one of the most frequently overlooked aspects of financial decision making.   

Factors that influence us

Our financial behaviours are influenced in many ways, from sensational media headlines about the next downturn or star fund to family members telling us they know best. You know the type of thing: ”It worked for me, so you should do the same.” 

Your situation, your objectives and the current market could be very different, so it’s important to draw your own conclusions.          

Beware of the biases

You may think your decisions are based on sound, rational judgement, and sometimes they may be, but equally, the framework in which you are making the decision could be distorted. And that’s not helpful.

This is where you need to be aware of bias. It’s all part of what makes us who we are, but it’s not always useful when making decisions.   

We suffer from two common biases that can cloud our judgment and impede us from achieving our financial goals:

  • Cognitive bias
  • Emotional bias

Cognitive bias generally involves decision making based on established concepts that may or may not be accurate. Emotional bias typically occurs spontaneously and is based on the personal feelings of an individual at the time a decision is made.

These types of bias can be particularly significant in relation to risk. For example, being either overconfident or excessively cautious could each have a damaging effect on your financial well-being.

If you’re an optimist, you may tend to take too much risk, managing your money in a way that may have severe consequences in the future. On the other hand, if you’re risk averse, you may be holding yourself back from achieving true financial independence.

If you’re what’s known as ‘loss averse’, you may fear losing money to such an extent that you avoid making a loss more than trying to make a profit. So your financial decisions may be driven by the desire not to lose £2,000 rather than to make £3,000. Such a bias can be reinforced so that the more losses you experience, the more loss averse you become.        

Another common issue is inertia. This may cause you to put off making a decision altogether. Maybe the whole process just feels too difficult. Maybe you don’t have the time. Maybe you fear making the wrong decision. Whatever the reason, inertia is the enemy of financial well-being, because it gets in the way of action. 

An objective eye 

Whether your financial decision-making is being impeded by an incorrect bias, be that cognitive or emotional, or an unwillingness to move forward at all, working with an independent financial planner can help. Our role is to help you make clear, objective decisions, free from clouded judgment. Those decisions could help you secure better financial outcomes, whether that be retiring on your own terms or passing money to the next generation. 

So the next time you think of financial planning as ‘boring’ or ‘disappointing’, think of the ‘human behaviour’ element. We think you’ll find it a great deal more enjoyable and emotionally rewarding if approached in this way. 

     

Sources
https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/list-top-10-types-cognitive-bias/

Understanding Active vs Passive investment strategies

The debate about whether a passive or an active investment strategy produces a better return for investors is one that has rumbled amongst financial planners for as long as passive strategies have been in existence. For you as a client, the method favoured by your adviser can have a major impact on your investment experience, so understanding the two different approaches is important.

An active strategy is one in which the investor – possibly a fund manager or other investment professional – will make investment choices on a regular basis, buying or selling holdings when they think it is necessary, often when they believe they can make a peak profit. An active strategy is highly involved and requires constant management.

A passive strategy meanwhile is one which requires hardly any trading whatsoever. Instead, money is invested into funds linked to indexes, such as the FTSE 100, by way of just one of many possible examples. Relying on the market to make your gain, passive investing is typically seen as a longer term strategy and, although it may sound easier than active from a management point of view, there is still a lot to do in terms of selecting the right funds and creating a well-balanced portfolio of asset classes that meet client’s needs.

On the active side, proponents claim that such a strategy is the only way to generate better-than-average returns; the only way to ‘beat the market’. After all, passive strategies, though divested across indexes and asset classes, are by their very design market-linked. If the index your passive strategy invests in goes up, so will your investments, with the negative being true if the index falls. Your investment may never outperform the market but it will also never lose more than the market as a whole.

Passive proponents, meanwhile, point out that active investment strategies typically cost more in fees, with these fees potentially impacting on the ability of the strategy to produce a better return. Those who favour passive investments also point out the increased volatility of active strategies, stemming from the higher frequency of investment movements and the timing of those movements, which also produce the potential for market-beating gains.

the impact of climate change fears on ethical investing

As pressure mounts on governments and financial institutions to do more to combat climate change, the demand for ethical investment opportunities is on the rise. 

Triodos Bank’s annual impact investing survey has found that nearly half (45%) of investors say that they would be keen to move their money to an ethical fund as a result of news surrounding the environment. When asked, investors state that they would put an average of £3,744 into an impact investment fund, marking an increase of £1,000 when compared with 2018. 

53% of respondents believe that responsible investment is one of the best ways to fight climate change and 75% agreed that financial institutions should be more transparent about where their money is invested. 

Gareth Griffiths, head of retail banking at Triodos Bank UK, said: “Many investors are no longer waiting for governments to take the lead in our transition to a fairer, greener society – they are using their own money to back the change they want to see.” 

Ethical investing isn’t a new practice by any stretch. In fact, some ethical funds have been available for the past 30 years, though they still only make up 1.6% of the UK industry total, according to research carried out by Shroders. 

That then poses the question, why haven’t they earned popularity in the past?

The old consensus was that investing ethically meant you were sacrificing performance for morality. A thought which seems to be changing, however, as research conducted by BofA Merrill Lynch found that a strategy of buying stocks that ranked well on ethical, social and governance metrics would have outperformed the S&P 500’s yearly result for the past five years. 

Further to this, a survey conducted by Rathbone Greenbank Investments found that over 80% of the UK’s high net worth individuals are interested in investing ethically. Many want to back the fight against climate change and plastic waste reduction but say that due to a lack of choice they still end up investing in fossil fuels or mining companies.   

The investment industry has recognised the change in attitude, leading to more and more fund management companies including ethical, social and governance factors in their core investment strategies. However, with the movement only just beginning to gain true momentum, it seems that time will tell when it comes to the mass adoption of ethical investment practices. 

If you have any questions about ethical investment please feel free to get in contact. 

Sources
https://uk.finance.yahoo.com/news/climate-fears-could-prompt-more-014547488.htm

https://www.independent.co.uk/money/spend-save/good-money-week-ethical-investing-blue-planet-environment-fossil-fuels-plastic-a9142446.html

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