Tag: concept financial planning

Categories

Will triple lock state pensions survive the current economic crisis?

The Covid-19 pandemic has dealt a crippling blow to the British economy. The latest predictions from the Office for Budget Responsibility say that the country is on track to see the largest economic decline for 300 years, with output falling by at least 10% over 2020. While the long term economic outlook is uncertain, the various economic support measures announced by the government will go some way to protecting it. For instance, the job retention scheme, where the government paid the wages of 6.3 million people, should prevent some of the fallout that would be caused by large scale mass unemployment.

However, all this needs to be paid for. For the first time in 50 years, government debt exceeds the size of the economy. Income from tax, National Insurance and VAT has plummeted while government spending has soared.

All this means that the state pensions triple lock could again come under the microscope. Under the triple lock system, state pension payments rise by the higher of inflation, wages or 2.5% each year. This policy has been a central part of the government’s commitment to pensioners over the last ten years.

Recently, experts have been increasingly vocal in their opinion that the triple lock will have to be abandoned in order to pay for the fallout of the lockdown. The Social Market Foundation think tank advised the government to scrap the triple lock system, calling for a double lock system where the state pension would rise in line with either average earnings or inflation. The think tank estimates that this would contribute to £20bn worth of savings over the next five years.

An added concern is that following this year’s fall in average earnings – predicted to be 7.3% – average  earnings could then soar next year in the event of a sharp recovery. One estimate places this figure at over 18%. This figure would form the basis of the earnings element of the triple lock system for 2021 and 2022, meaning that state pensions could rise by over 21% in just two years. 

This kind of increase would be unsustainable, especially given the severe hardship that millions of workers will face over the next few years.

However, the triple lock pension scheme was a key part of Johnson’s manifesto, a commitment he reaffirmed in parliament back in May.

What’s more, there are some models of the country’s economic recovery which show a more restrained recovery than the one mentioned above. 

Under the Office for Budget Responsibility’s latest prediction for a “moderate” recovery, the triple lock would only see earnings rise by 5% next year, meaning that state pensions would also rise by 5%. This is a far more prudent figure than 18%, meaning Johnson could still find traction to stick with his triple lock pledge. 

Sources

https://www.moneyobserver.com/news/state-pension-triple-lock-revised-forecasts-suggest-stay-execution

https://www.bbc.co.uk/news/business-53104734

https://citywire.co.uk/new-model-adviser/news/triple-lock-bill-could-hit-20bn-as-gov-t-grapples-with-finances/a1367917

What does the stamp duty holiday mean for me?

In his 8 July summer statement, Chancellor Rishi Sunak confirmed that the stamp duty threshold will be immediately raised to £500,000 in England and Northern Ireland, in what some have dubbed the ‘stamp duty holiday’. The rise in threshold lasts until 31 March 2021 and will apply to both first-time buyers and previous owners.

Sunak said that the change will affect around 90% of buyers, saving each one an average of £4,500.

Stamp duty is a tax you have to pay if you buy a property or a piece of land in England or Northern Ireland. Buyers in Scotland pay Land and Buildings Transaction Tax (LBTT) and in Wales Land Transaction Tax (LTT) instead of stamp duty. 

The property website Rightmove said traffic to its listings increased by 22% immediately after Sunak’s announcement, an indication that this could be the stimulus for many to come to a decision about moving home.

The move comes in response to the current economic crisis. Many are worried that the housing market will stagnate in the current economic climate. Lockdown measures put sales on hold and prevented work on construction sites. The number of transactions was down by 50% in May. 

Stamp duty will be collected at a rate of 5% on transactions over £500,000. For instance, if you bought a house for £575,000, you would pay 0% on the first £500,000 and 5% on the final £75,000. Overall, you would pay £3,750 in stamp duty.

What about buy-to-let and second homes?

The stamp duty cut will also apply to those buying second homes and buy-to-let properties, allowing investors to make savings. However, the 3% surcharge for buying additional properties will apply to the new stamp duty rates.

So, property investors spending less than £500,000 would only need to pay 3% on top of the purchase, as opposed to the previous 5%.  

The housing market has responded well to the rise in threshold. It frees up larger properties for families, which they previously may not have been able to afford, and it could help first-time buyers onto the property ladder.

It’s widely expected that the stamp duty holiday will have an immediate impact on the volume of sales agreed in the coming weeks. Please get in touch if you’d like to know more about how the ‘stamp duty holiday’ will affect you.

Sources
https://www.theguardian.com/business/2020/jul/08/stamp-duty-holiday-revive-housing-market-summer-statement-property

https://www.financialreporter.co.uk/finance-news/government-raises-stamp-duty-threshold-to-500000.html

https://www.moneyadviceservice.org.uk/en/articles/everything-you-need-to-know-about-stamp-dutyhttps://www.mortgagestrategy.co.uk/news/stamp-duty-cut-extended-to-second-homes-and-btl/

How do you pivot your business?

Pivot’s one of those words that we’re hearing a lot at the moment; a word usually associated with a ballet dancer, being able to turn nimbly on their ‘pointe’ shoes. But a word that‘s proving equally relevant to businesses as they seek to trade in the new world since COVID-19.                 

No doubt you had clear goals set in place for your business at the start of the year. You’d have pored over figures, spreadsheets and graphs. You‘d have done detailed analyses, made forecasts and drawn up plans. 

Yet when the context for those spreadsheets and plans is pulled right from under you by a global pandemic, those goals have to change. So how do you shift direction? What questions do you need to ask as you try to pivot your business?  

Assessing the situation

First of all, it’s important to step back and take stock. Consider what the purpose of your business is in a post-lockdown world.

Many business owners have found that being forced to take a step back has given them time to reflect and go in directions they would never have thought possible before. It’s allowed them to think creatively and consider new opportunities. 

The next step is to scan the business horizon: 

  • What does the new environment look like?
  • Where are your usual customers in this new world? 
  • What are they looking for that’s different? 
  • How have their behaviours changed?

Think about how the pandemic has affected your long-term performance and strategy. 

  • Are your products and services still relevant for your customers? 
  • How could you adapt them? 
  • Where might new customers be found?
  • What are the new risks to the business – from a health and safety point of view, of course, but also to cash flow and supply chain? 
  • How can you use technology to help you deliver your offering to customers?

Looking to the future

One thing is for sure – there won’t be any business as usual. But the secret about pivoting is that you stay fixed to your centre. You stay true to your core values but turn towards the new opportunities. So think about your product or service, what your clients value about it and adapt it as necessary to the new circumstances.   

That may mean offering something entirely different. It may mean being more flexible in your opening times or means of delivery. It may mean increasing your online presence. Figures by Statista showed that the use of social media increased globally by 21% during lockdown so consider how you can capitalise on using these channels.     

Think about those businesses that have successfully pivoted to meet demand. Pubs and restaurants quickly diversified to offer takeaways and deliveries. Brewing companies and gin distilleries started making hand sanitiser. Other companies used their machines to make visors and PPE. Gyms adapted their classes to go online. Live events companies pivoted to offer successful online experiences.         

Brands that have survived during lockdown are the ones that have been innovative and quick to  respond. It will be those that continue to be future-focused that will survive. 

So while pivoting may involve a re-thinking of your business model, it is possible with careful analysis of the various scenarios and will hopefully be a direction your customers will embrace.    

Sources
https://www.accountingweb.co.uk/community/blogs/zoe-whitman/what-to-do-when-you-have-to-change-direction
https://www.accountancyage.com/2020/06/15/three-ways-to -help-your-business-thrive-in-the-new-normal/
https://www.appearhere.co.uk/inspire/blog/11-brands-who-pivoted-successfully-and-what-you-can-learn-from-them

To defer or not to defer your tax bill

As part of their response to the Covid-19 pandemic, HMRC are letting businesses defer VAT payments due between 20th March and 30th June this year. 

Businesses will only be able to defer payments made quarterly and monthly for the period ending in February, March and April. Deferral is automatic, so you need not apply if you think that your business would benefit. 

In addition, HMRC are letting taxpayers who owe a self-assessment payment on account from the 2019-2020 tax year defer until 31st January, 2021. The original payment date would have been 31st July this year. It’s worth noting that 31st January is the same due date as your January self-assessment tax liability, so you could end up making a rather large payment on this day. 

Businesses and self employed workers can also apply for a ‘Time to Pay’ arrangement. This entails a pre-agreed debt repayment plan over a period of 6-12 months.

The VAT deferral scheme is designed to keep some businesses alive in the short term. However, there could be financial implications for delaying a payment which could become more significant in an uncertain business environment, especially if there is a second outbreak of Covid-19.

 With the risk of a second outbreak of the pandemic remaining a possibility, it’s worth getting a grasp of the impacts of delaying your payment before you defer. It could be a wise idea to speak to an accountant if you’re unsure.

If you defer, you will have to pay by 31st March 2021. It’s worth noting that this could leave you with a larger bill than usual and there is a chance that it could see you facing cash flow challenges in the new year, during what could be a period of fragile recovery.

To avoid increased costs next year, you can choose to pay your tax bill as you normally would. HMRC are actively encouraging businesses and the self-employed to behave as ‘good citizens’ and pay any tax they owe on time, helping the government at a time where it is busy taking on emergency loans to fund its response to the crisis.

Some businesses are opting for monthly VAT repayments, due to fears of not being able to cover a single colossal tax bill in January. By repaying in instalments over the next few months, these businesses will avoid the catch-up payment hitting in one go.

Sources

https://www.thisismoney.co.uk/money/comment/article-8293773/How-Britain-pay-furlough-coronavirus-bill.html

What’s your money personality?

We all have a different relationship with money. Recognising your money personality can help you better understand yours. Although no member of each group has exactly the same attitude towards their finances, researchers have identified four common attitudes towards money: Money Worship, Money Avoidance, Money Vigilance and Money Status. 

Psychologists think that our internal beliefs around money were formed by our childhood experiences, the community we grew up in and the spending habits of our family. Here is a description of the four money personalities:

Money Worship

If you’re a money worshipper, you might think that money could solve all your problems and that you can never reach a point when you’ll have enough. People who fit into this category are most likely to overspend on themselves or others and rack up credit card debts.  According to research by Creighton University, this is the most common money personality among Americans.

People who fit into this personality type might have to put some measures in place to control their spending habits. They could make a monthly budget and remind themselves to regularly check their bank balance to keep a tab on their spending.

Money Avoidance 

Money avoiders believe that they don’t deserve the money they have and try to avoid thinking about their finances. If you’re a money avoider, you might try to shift your money onto others, rather than take responsibility for making financial decisions. 

Money avoiders can benefit from setting up automatic contributions to savings accounts or speaking to a financial adviser to remove some of the responsibility around their finances.

Money Vigilance

If you’re extremely frugal and firmly believe saving for the future is the best use of money, chances are you’re money vigilant. People who fit in this category tend to derive more satisfaction from reading the interest rate on their bank statement than from buying something new. What’s more, they’re likely to prefer a conservative investment strategy and avoid financial risk.

If you fit into this personality type, you should be careful not to allow secrecy to stand in the way of better money habits. 

Money Status

People who fit into this personality type equate money with status. As a result, they may be driven to earn more money than their peers purely for the sake of earning more money. Although people who hold their net-worth in such high regard are likely to be high earners, they can be liable to make risky decisions and buy expensive things that reflect their wealth. 

If you tend to focus on “money status”, it’s a good idea to stop and think before making an expensive purchase as you could be at risk of buying things on impulse.

Sources

What is the value of advice?

You’re not going to be surprised that, as advisers, our firm belief is that an advised client will get a better financial outcome than a non-advised client. How to prove, though, that we’re not just biased? What is the actual value of that advice? How can it be quantified?   

Most importantly, the value of advice is not simply tied to fund picking or performance.

A good example of this was when the FTSE 100 fell by over 26% in early March due to panic over the coronavirus outbreak and some advisers chose to move their clients’ investments out of equities into assets, traditionally viewed as ‘safe havens’. Although they may have moved them back into more equity-dominated funds in April, the FTSE 100 actually made its biggest recovery between 23 and 26 March so their clients’ money would have been out of the market at the optimum time. This is a clear sign that adding value by trying to ‘time the market’ does not work.

Advice, in our view, goes much further. It can cover: 

  • Behavioural coaching
  • Spending strategies
  • Portfolio rebalancing 
  • Tax-smart recommendations
  • Financial planning  

It’s all part of building a long-term relationship where the adviser really gets to know the client and understands their objectives for life.    

Behavioural coaching, in particular, can be useful in helping an investor to ignore market noise and to keep their emotions at bay so that they avoid expensive mistakes and stick to their long term goals. 

Research over a number of years by the International Longevity Centre (ILC) showed that using a financial adviser led to better financial outcomes in the following ways:

  • Taking advice added £2.5bn to people’s savings and investments,
  • The pensions of clients who received ongoing advice were worth 50% more than those who took one off advice. 
  • Those who took advice were likely to be richer in retirement.
  • The benefits of advice outweighed any costs associated with it 

In addition, the University of Montreal estimated that clients with an adviser would have a 2.73 times larger savings pot over a 15-year period than clients who hadn’t seen an adviser. If that time frame was reduced to five years, the savings pot would still be 1.58 times greater. 

Different investment companies quote different figures but on balance agree that advisers can generate between 3% and 4.4% per annum net returns for their clients.      

Set against this backdrop, it would seem financial advice does have a real value to offer.   

Sources

https://www.professionaladviser.com/opinion/4016222/tim-sargisson-insider-guide-value-advice?utm_medium=email&utm_content=&utm_campaign=IFA.Update_RL.EU.A.U&utm_source=PA.DCM.Editors_Updates&utm_term=QU

Retirement planning in the time of coronavirus

The COVID-19 outbreak has signalled the dawn of a worrying time for everyone. As well as anxiety about our own health and the wellbeing of our loved ones, many of us are understandably worried about the financial future. Recent stock market turbulence is concerning for all investors, but particularly for those who are in defined contribution pension schemes and looking to retire in the near future.

The important thing is not to panic. Although we are in very uncertain times, reckless actions could severely endanger our financial wellbeing in the future. Here are some things you should consider if you’re planning to retire in the next few years:

Don’t cash out suddenly

Cashing out in a panic could severely damage your financial security in retirement. Although no one knows when the markets will recover, selling now could mean that you are taking your pension at the bottom of the market. It’s likely that financial markets will regain their strength over a period of time, even if we don’t know how long this could take.

What’s more, cashing out will mean that you’re likely to end up paying lots of unnecessary tax. In most cases, only the first 25% of a defined contribution is tax free; the rest is taxed as income. Chances are you’ll end up with a gigantic tax bill.

Remember that pensions aren’t the only form of retirement income

Retirees frequently use other assets such as cash ISAs, cash savings and rental income to provide for their life in retirement. If you have any other assets, you could use these to fund the first few years of your retirement in order to give your pension time to recover. The benefit of this would be that you wouldn’t be drawing from your pension pot when the markets are low.

If you don’t have any other assets to fund your retirement, you could consider delaying your retirement or working part time for a period. Hopefully, this would allow the markets time to recover, giving you more confidence when you finally do leave the workforce. 

Watch out for scams

Unfortunately, some unscrupulous people see times where people feel financially vulnerable as an opportunity to exploit them. There has been a lot of fraud since the start of lockdown and it has been reported that people are being scammed through being sold non-existent pension plans. 

Whatever you’re planning to do with your pension savings, it’s vital to check that the company you’re planning to use is registered with the FCA. Keep on your toes and if you see anything that looks too good to be true, it probably is.

Sources

https://www.moneyobserver.com/retirement-tips-time-coronavirus

https://broradio.fm/sky-news/fraud-victims-have-lost-more-than-4-6m-to-coronavirus-related-scams-during-the-lockdown/

Rethinking what’s important

The time in lockdown has given people the opportunity to reflect on what’s really important to them. It’s been a time to re-evaluate priorities and think about resetting goals for the future.

What about you? 

What have you missed?     

  • Has it made you want to spend more time with family and friends? 
  • Are there places you’ve decided you really want to visit when you can? 
  • Have you realised how much you appreciate being able to get out in the fresh air?  
  • Have you missed eating out? Or have you quite enjoyed doing more cooking at home? 
  • Have you rekindled a passion for an old hobby or taken up a new one?
  • Have you enjoyed the slower pace of life?  

In some respects, the lockdown may have given you a taste of what retirement might be like. Admittedly, the “stay at home” policy has been a mandate whereas retirement is a choice but nonetheless there will have been distinct similarities:

  • You’ll suddenly have had more free time on your hands (even if you’ve still been working from home, you’ll have gained back your commuting time) 
  • You’ll have been spending more time at home than ever before
  • You’ll have had to think creatively how to fill that time
  • You’ll have had to work out how to replace the social buzz of being at work  

The way you have decided to fill the time in lockdown may have revealed something about yourself and your priorities. It may be that the break from routine and going into work each day has been quite liberating. Or you may have realised that staying at home every day is definitely not for you.

Whichever camp you’re in, it may have got you thinking about your options regarding work in the future – working from home more, part-time hours, consultancy? If you’d always thought you might be bored in retirement but have actually managed to entertain yourself quite easily in isolation, the thought of early retirement might be starting to seem quite attractive. 

Many people fear retiring early because they think they won’t have enough money to live off without a salary. The lockdown experience, however, may have shown you just how much less you spend when you stay at home for a few weeks. You may have realised you don’t actually need as much financially as you thought you did. You may have got used to budgeting carefully and limiting your activities. You may have realised that you could live quite comfortably off a fixed income, just as if you were living off a pension, and your savings. 

Whatever your long-term decisions, treat this time of lockdown as a mini trial run for retirement. Use it to contemplate how your priorities might have shifted.Think about which goals you might want to re-set.

Sources

https://www.forbes.com/sites/chriscarosa/2020/04/19/will-coronavirus-quarantine-convince-you-to-retire-early/#7a6f863b8724

Why even financial planners need financial planning

You may find it surprising to learn that even financial planners use financial planners. Surely, they know it all already, don’t they? Don’t they just follow their own advice?

Let’s look at why advisers sometimes find it helpful to sit on the opposite side of the desk.    

To clarify goals 

Setting clear goals is hard, no matter who the person is! If you’re doing it on your own, it’s all too easy to set vague objectives that don’t really challenge you. After all, who will know, or care, if you reach them? You can also easily let the timeframe drift – one year, five years, never. 

Another independent professional, however, will bring your goals into sharp focus and make sure you really consider the level of risk and the possibility of failure. But they’re also likely to push you a bit and encourage you to commit to challenges that you might never have even considered if left to your own devices.     

Goals are also likely to involve other people; spouses and families. So financial planners can often welcome using someone experienced in facilitating these discussions, just as they moderate them for their clients.        

To be held accountable

Just being aware that someone is going to review your progress on a regular basis means you’re more likely to take it seriously. It’s human nature. Think back to school when you had to present something in class, or if a parents’ evening was looming. Or at work when a project is going to be analysed in a meeting.            

It’s invaluable to know that a third party is going to review your goals. Knowing you’re accountable to someone keeps you on track and helps performance. It’s also useful to know there’s someone reminding you of what you deemed important at the outset. 

To stop emotions getting in the way   

No matter how qualified an adviser may be, when it’s their own situation it can be difficult not to get too close but to stay detached. Doing the financial stuff may be relatively easy for them; it’s what they’ve trained for and become qualified in. The harder part can be making sure they don’t get emotionally involved in their own investment decisions, which is where having an independent third party can be invaluable.

Sources

https://medium.com/@behaviorgap/between-me-and-stupid-2947498ddad4

What will the new normal look like?

The Covid-19 outbreak has provoked a crisis of such enormous proportions that things will not just go back to the way they once were. When some semblance of normality emerges, things will be different. We are set for huge social, cultural and economic changes. It’s unlikely that we will suddenly wake up in a world where anxieties around the crisis have vanished into thin air. Rather, a new normality will gradually emerge from its ashes during a transitional period that could last for an extended amount of time. 

As lockdown restrictions are eased, it’s probable that we will enter a phase where life will hang between normality and lockdown. The government may again assert its need to tighten the rules depending on infection rates or the capacity of the health system. The operation of some businesses may be severely restricted and some social distancing rules may remain for some time. In short, we are not going to be able to draw a line in the sand behind coronavirus when the lockdown ends, as much as we may like to.

How the world will look after the outbreak is difficult to call. It depends on many factors, for instance whether or not countries are able to reduce infection rates around the world, and how long it takes scientists to formulate an effective vaccine.

However, there are a few changes that we can infer from what we have already seen during the crisis.

Working culture seems set to change for good. For many, social distancing has seen a complete shift to working from home. Technologies like Zoom and Slack have enabled many to move seamlessly into this way of working. If employees can maintain the same kind of productivity while working from home, there will probably be a large shift towards remote working in the long run. 

The impact of large scale remote working would be huge. London and Manchester would no longer see their daily deluge of commuters from the surrounding area. Experts have hinted that this could change the entire makeup of the country. Rural villages and suburbia could again become a centre of working life. Big city offices may only host a businesses’ core staff and be used occasionally for whole-company events. Flexible office spaces or co-working spaces could become a regular feature in suburbs, towns and villages.

The Covid-19 outbreak also looks set to accelerate the country’s shift to becoming a cashless society. People are being discouraged from using cash as it’s thought that cash can carry the virus, raising the risk of transmission. The crisis may mean that we are increasingly accustomed to using contactless to make transactions and this could continue even after a vaccine is found. 

Sources
https://www.thersa.org/discover/publications-and-articles/matthew-taylor-blog/2020/04/transition-covid-lockdown

https://www.stylist.co.uk/long-reads/life-after-coronavirus-predictions-uk-work-health-relationships-politics-climate-change/372608