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Minimum age for pensions freedoms rises to 57

The government has confirmed that the minimum age for drawing a personal pension is to rise to 57 in 2028.

Savers who pay into a personal pension either directly or through their workplace can currently access their money at 55. However, the government plans to raise the age as a result of increased life expectancy.

The change hasn’t yet been brought into law, but Treasury Minister John Glen has confirmed there are plans for legislation. 

In parliament, he said: “In 2014 the government announced it would increase the minimum pension age to 57 from 2028, reflecting trends in longevity and encouraging individuals to remain in work, while also helping to ensure pension savings provide for later life.”

The change will affect workers currently aged 47 and under, and was first announced by then chancellor George Osborne.

As chancellor, George Osborne significantly changed the way we can access our pensions.

He brought in rules that allowed retirees more access to their personal pensions, removing both the limit on cash withdrawals and the requirement to buy an annuity to ensure a secure retirement income.

Opponents to the rise in pensions age claim that the changes restrict workers’ freedom to retire. The changes will make it more difficult for some to retire sooner.

One investment analyst has described the change as a “kick in the teeth at a time when many people are reassessing their work/life balance after a terrible year socially, emotionally and economically.”

However, others believe that the changes are a positive step because they give people two years more to pay into their pension funds. They argue that this will increase the chances that retirees will have enough saved in their pension pots to provide an adequate level of income for the remainder of their lives.

Those who were planning to access their pensions at 55 but can no longer do so could look at other options. These could include saving into an Isa to fund the two year period before turning 57. 

Most savers will agree that the government is right to give so much advance warning, unlike with the increase in state pension age for women from 60 to 65, which caused some animosity. These changes do not affect when you can claim your state pension.

Sources
https://www.theguardian.com/money/2020/sep/04/minimum-age-uk-personal-pension-rise-covid

https://www.dailymail.co.uk/news/article-8696309/Private-pension-age-rise-57-Hopes-early-retirement-dashed-ministers-plan-raise-minimum-age.html

How long term home working will affect your finances

There’s a chance that many workplaces may never return to the office. Several prominent tech firms have already said that their staff can continue to work from home even after the pandemic and the evidence suggests that a large number of other employers are thinking the same thing.

Essentially, the pandemic accelerated an already established shift in the way we work, so that a few years worth of changes happened overnight.

The Chartered Institute of Personnel and Development recently conducted a survey and found that the proportion of people working regularly from home has risen to 37%, more than double the number from before the pandemic.

What’s more, employers think that the proportion of staff who work permanently from home full time will rise to 22% post-pandemic. In those pre-pandemic, halcyon days, this figure was 9%.

This shift will have financial implications for those home-working. And, as usual, the good comes with the bad. Here are some things you should consider:

It might affect your insurance costs

Back in March, the sudden change to home working will have been unexpected and you might have overlooked the impact it could have on your insurance. However, now the dust is settling, you should mention it to your home insurer. 

Chances are your home will have an extra printer, laptop and tablet, valuables that should be covered by your home insurance policy. Remember that if this kit belongs to your employer, their insurance should protect it. It’s worth double checking before you add anything to your policy.

Lastly, if you’re working from home permanently and no longer using your car to commute, tell your insurer. You may be able to pay less on your premiums.

You can claim tax relief on expenses

On 6 April, Rishi Sunak raised the claim allowance to £6 a week to cover extra household bills caused by working at home. 

When there is a home working arrangement in place, an employer can pay a weekly amount to its employees tax free. If you think that your costs exceed this amount, you should check with your employer to see if they will make higher contributions.

This benefit will only be available if your employer specifically asked you to work from home. If you’re working from home voluntarily, you cannot claim this tax relief on your bills.

It might be harder to secure a pay rise

By now, it’s widely established that working from home needn’t have an adverse effect on the quality of your work. However, there’s still quite a lot of uncertainty around the effects of homeworking on employees’ ability to secure promotions and pay increases.

When working remotely, it can be hard to keep relationships with people in your firm. There’s also a chance that employees who work from home permanently in a company where some staff still work from the office could get sidelined when promotions come up.

Showing the value of your efforts can be more difficult. It seems like good communication is important to avoid being overlooked. Try to communicate any new skills you have learnt and consistently show how your personal development is supporting you to do your job effectively at home.

Sources
https://www.independent.co.uk/money/homeworking-working-home-permanent-tax-income-insurance-bills-commuting-house-prices-a9652661.html

Britain’s stunning National parks you might not have visited

Considering how small and densely populated the UK is, we are blessed with some amazing natural beauty.

There are 15 national parks in total: 10 in England, three in Wales and two in Scotland. Each national park has its own distinct beauty and character, drawing visitors from around the globe. 

From the Cairngorms’ rugged mountains to the quaint South Downs, Britain’s parks differ enormously in terms of scenery, climate and culture. 

The country’s most visited national park is the Lake District, which sees 16.5 million visitors a year. However, others see far fewer. Here are some of the least visited:

Exmoor

Despite being located in the more populous South of England, Exmoor is actually Britain’s least visited national park. It receives just 1.4 million visitors a year.

Nestled on the border between Somerset and Devon, visitors can take in a spectacular mixture of dramatic coastal landscapes, rolling hills and lush woodland.

Sparsely populated, Exmoor is home to some of the darkest skies in the country and is a designated International Dark Sky Reserve. On a clear night, the Exmoor skies are simply stunning. Many astronomical wonders can be seen with the naked eye alone. 

Northumberland National Park

This diverse national park is the most northerly in England and the least populated in the UK. Covering an area of 1,048 kilometres, this park encompasses Kielder Forest and the Cheviot Hills and receives just 1.5 million visitors a year.

The park is an excellent place to see Hadrian’s Wall, a colossal triumph of Roman engineering and a designated World Heritage Site. You can also still find red squirrels hiding in the park’s woodlands, a rare sight in England these days because of invasive grey squirrels which have nearly wiped out their red cousins due to a fatal virus they transmit.

Pembrokeshire Coast

The Pembrokeshire Coast is Britain’s only coastal national park, and its beauty hasn’t gone unnoticed. The American National Geographic Traveler magazine recently rated the Pembrokeshire Coast one of the top two coastal destinations in the world.

This section of the welsh coast is notable for its rugged cliffs, dazzling beaches and hidden coves. A mecca for adventure sports, walkers, surfers, kayakers and sailors are in their element.

The national park also features some amazing wildlife. Visitors can find puffins and Manx shearwaters on the islands of Caldey, Grassholm, Skokholm, Skomer and Ramsey. On a sunny day, you might even see a seal snoozing in the sun.

Cairngorms

Located in North East Scotland, the Cairngorms is by far the country’s largest national park, stretching for 4,528 square kilometres. Despite its large size, the park sees just 1.5 million visitors each year. 

If it’s remoteness you’re after, this is the place to come. The park is home to some of the UK’s most spectacular scenery and the country’s second highest mountain, Ben Macdui. 

You can also find Scotland’s best established ski areas. Cairngorm Mountain near Aviemore can provide some excellent skiing or snowboarding if you get the conditions right. And if you’re blessed with a crisp, clear day, the views across the Cairngorms are truly a sight to behold.

Sources
https://www.nationalparks.uk/students/whatisanationalpark/factsandfigures

https://www.visitwales.com/destinations/west-wales/pembrokeshire/exploring-pembrokeshire-coast-national-park

The Chancellor’s Winter Economic Plan

In December 2019, the Conservatives won an 80 seat majority in the General Election and three months later, new Chancellor Rishi Sunak presented his first Budget. But by then there was a large cloud on the horizon – the outbreak of Covid-19. 

The Chancellor used his Budget speech in March to present a raft of measures to support businesses and jobs, promising to do “whatever it takes.” A week later he was back with more emergency measures and on Monday 23rd March, the UK went into full lockdown. 

Six months on from lockdown, the Treasury announced that the Chancellor’s traditional Budget speech had been cancelled for this year and instead a Winter Economic Plan was presented on Thursday 24th September.  

What has happened in the last six months? 

The last six months for the UK economy can perhaps be summarised in two words: ‘recession’ and ‘redundancies’. Figures released for the second quarter of the year – April to June – showed that the UK economy had shrunk by 20.4%. Early hopes of a ‘V-shaped recovery’ from the downturn quickly vanished.

The pandemic has unquestionably accelerated trends that may otherwise have taken 20 or 30 years to arrive. We may well all have been working from home by 2050 however, the Prime Minister has told office workers to do it for perhaps the next six months. That will surely have serious consequences for many town centres and the ‘commuter economy’. 

These changes have, inevitably, meant widespread redundancies. Figures recently released suggest that UK payrolls shrank by 695,000 in August as the Chancellor’s furlough scheme started to wind down. 

The Chancellor’s Speech 

The Chancellor, Rishi Sunak, was at pains to stress that he’d consulted both sides of industry on the measures he was going to introduce. He was photographed before the speech with Carolyn Fairbairn of the CBI, and Frances O’Grady of the TUC. 

He rose to his feet in a suitably socially-distanced House of Commons and stated that his aim was to protect jobs and the economy as winter approached, and to try and “strike a balance between the virus and the economy.” We were, he said, “in a fundamentally different position to March.” 

Rishi Sunak said that the UK had enjoyed “three months of growth” and that “millions of people” had come off the furlough scheme and returned to work. While ‘three months of growth’ is undoubtedly true, we must remember that the economy shrank by 20.4% in the second quarter. According to the Office for National Statistics, the economy grew by 6.6% in July – but it has only recovered just over half the activity lost because of the pandemic. 

The primary goal, the Chancellor stated, was “nurturing jobs through the winter” as we all faced up to the “new normal.” He conceded, though, that not all jobs could be protected and that people could not be kept in jobs that “only exist in furlough.” 

So what measures did the Chancellor propose? 

Emphasising that he could not protect “every business and every job” the Chancellor conceded that businesses faced uncertainty and reduced demand. In a bid to protect jobs through this period, the first measure he introduced was: 

The Job Support Scheme

  • This is a six month scheme, starting on 1st November 2020
  • To be eligible, employees must work a minimum of 33% of their normal hours 
  • For remaining hours not worked, the Government and the employer will each pay one third of the employee’s wages 
  • This means employees working at least 33% of their hours will receive at least 77% of their pay 
  • The Chancellor also announced that he was extending the support scheme for the self-employed on “similar terms” to the Job Support Scheme 

Pay as you Grow 

After ‘eat out to help out’, we now have the Chancellor’s next catchy slogan: pay as you grow. 

  • Businesses which took loans guaranteed by the Government during the crisis will now be able to extend those loans from six years to ten years, “nearly halving the average monthly repayment,” said the Chancellor. 
  • There is also the option to move to interest only payments, or to suspend payments for six months if the business “is in real trouble,” with no impact on the business’s credit rating. 
  • Coronavirus Business Interruption Loans (CBILS), taken out by a reported 60,000 SMEs, can now also be extended to 10 years.
  • The Chancellor also promised a new government-backed loan scheme, to be introduced in January.

VAT Deferral 

  • Businesses who deferred their VAT during the crisis will no longer have to pay a lump sum at the end of March next year. 
  • They will have the option of splitting it into smaller, interest free payments during the 2021-2022 financial year. “This will benefit up to half a million businesses,” claimed the Chancellor. 

Income tax is deferred – but it still needs to be paid 

As we all know, death and taxes are inevitable. The Chancellor did at least delay one of them for many people…

  • He announced extra support to allow people to delay their income tax bill, which should benefit millions of the self-employed. 
  • Those with a debt of up to £30,000 will be able to go online and set up a repayment plan to January 2022.
  • Those with a debt over £30,000 should contact HMRC and set up a plan over the phone. 

The planned VAT increase is postponed 

  • The Chancellor’s final move was to give direct, targeted help to the tourism and hospitality sectors. 
  • These two sectors had benefitted from a lower VAT rate of 5%. This lower rate was due to end in January, but will now remain in force until 31st March 2021. 

What was the reaction to the speech? 

As with all Budget speeches, the reaction was mixed. Carolyn Fairbairn of the CBI praised the Chancellor for “bold steps which will save hundreds of thousands of viable jobs this winter.” 

Manufacturing group Make UK said the Chancellor ‘deserved credit’ for looking at action taken in other countries such as Germany and France and copying their successful ideas. 

The Adam Smith Institute was more cautious: the Chancellor’s plans were “sensible – but not costless.” Matthew Lesh, head of research at the free-market think tank said, “The Government must resist becoming addicted to spending. Temporary spending is sensible to keep struggling businesses afloat, but in the longer run we are going to have to get the national accounts in order.” 

There was, though, plenty of criticism, especially from the retail sector. Lord Wolfson, boss of Next, warned that ‘hundreds of thousands’ of retail jobs may now become ‘unviable’ in the wake of the crisis. “I wouldn’t want to underestimate the difficulty,” he said, “I think it is going to be very uncomfortable.” 

Where do we go from here? 

As we have commented above, six months, roughly to the end of March, now seems to be the accepted next phase of the fight against the pandemic. As people worry about whether they’ll be able to see their families over Christmas, many will also be worrying about their jobs.

In his speech, the Chancellor more than once stressed that he could not save ‘every job and every business’ and a sharp rise in unemployment through the winter seems inevitable, which will lead to more Government spending on benefits and lower tax receipts. 

The Treasury is already facing a significant shortfall and the Winter Economic Plan, although the level of Government support has been sharply scaled back, will only add to that. At some point, all the support will need to be paid for, either by increased taxes or more optimistically, a resurgent economy. 

What does this mean for my savings and investments? 

Many world stock markets have proved remarkably resilient to the pandemic and are showing gains this year. Unfortunately, the UK’s FTSE-100 index is not one of them: it ended 2019 at 7,542 and closed March as the country went into lockdown at 5,672. As we write this commentary (Friday morning), it is standing at 5,823, up 2.66% on the end of March. 

As we have stressed many times, saving and investing is a long-term commitment and, while there will undoubtedly be plenty of bumps in the road ahead, Governments and central banks around the world remain committed to an eventual economic recovery. Yes, the pandemic has accelerated trends and certain sectors of both the UK and world economies have suffered serious damage; but as we never tire of saying, new companies will find new ways to bring new products to new markets. 

We can, in the long term, still face the future with confidence but we appreciate that some clients may have understandable short term concerns. 

If you have any questions on this report, or on any aspect of the current situation, please do not hesitate to get in touch with us. 

The Chancellor has, we think, taken sensible and prudent action. As he said, “life can no longer be put on hold” and let us hope that economic activity in the UK – and the wider world – quickly reflects that. 

Sources
https://www.gov.uk/government/speeches/chancellor-of-the-exchequer-rishi-sunak-on-the-winter-economy-plan

How much should I be saving towards my pension?

Research shows that we put ambitious targets on our retirement income and then underestimate how much we need to save to get there.

Before we delve into how much you should be saving, here’s a quick overview of the two main types of pension schemes:

In a defined benefit scheme your employer promises to deliver you an income in retirement. You’ll most likely have to contribute each month too, putting in a required amount.

These ‘gold-plated’ schemes are increasingly rare.

The other type of scheme is a defined contribution scheme. If you have this type of scheme, you will save into this and get contributions from your employer too. The money is invested to build a pot which will then fund your retirement.

If you have a defined benefit scheme, you just need to save as much as your employer says. But with a defined contribution scheme things are a little more complicated… The onus is on you to deliver the money you need in retirement – the more you save, the more you get.

How much will I need in retirement?

In retirement, your outgoings are likely to be lower. For instance, most people will be mortgage free and not supporting children. In the finance industry, there’s a vague rule that some currently aged 40 would need around 50% of their current income to have the same standard of life in retirement.

You should also factor in the state pension. Under the new flat-rate scheme this is worth £155.65 per week (£8,094 per year). So, someone targeting a retirement income of £23,000 would need to contribute £16,000 from their own pensions.

How much should I be saving?

Naturally, the amount you need to save depends on the size of the pension you want. However, it also depends on your age.

For instance, putting 12% of your salary towards your pension might be enough if you start in your 20s, but if you leave it until you’re 40, you might need to pay in closer to 20% to get the same level of income.

It’s sometimes said that the rule for working out what percentage of your salary needs to be going into a pension is half the age from when you started saving. So, if you started at age 30 it would be 15%.

This said, given the variation in salaries and personal circumstances, it can be a good idea to get a slightly more profound insight into your finances. 

You could use some sort of pension calculator. There are plenty of different calculators online that let you play around with the numbers. A quick search on Google will reveal plenty. 

All things considered, this can’t give you quite as clear a view on your financial retirement scenario as speaking to an independent financial adviser. They should have the knowledge and experience to help you get both a clear view of your current situation and the changes you could make so that your money works harder towards your goals.

Sources
https://www.thisismoney.co.uk/money/howmoneyworks/article-3177112/How-money-need-save-pension.html

House prices have rebounded, but is it a “false dawn”?

At first glance, recent figures from the housing markets appear wholly positive. During July, Nationwide reported a 1.7% leap in prices. 

However, the country’s largest building society warned of a “false dawn” when they announced these figures. They highlighted that much of the rise can be attributed to pent up demand and people deciding they want to move after being confined at home for several months.

Nationwide said that if redundancies continue, the market could slow down later in the year. Their general message seemed to emphasise that we’re not out of the woods yet. 

The property market has had a busy few months since it was released from lockdown restrictions in mid-May. Across the country, lenders and estate agents have reported a flurry of demand which was further fuelled by the Stamp Duty holiday announced by Rishi Sunak in early July.

Nationwide’s research showed that the average price of a UK home in July had risen to £220,936, higher than in June, but still below April’s figure of £222,915. Overall, prices have fallen by 1.6% over the past three months. 

The positive news is that activity has actually recovered far more rapidly than many had previously expected. Some feared that physical distancing measures would temporarily derail the housing sector.

However, when it comes to the long-term future, Nationwide took a restrained tone, unsurprising since most forecasters expect the employment situation to worsen over the next few months. This could have heavy ramifications for the housing market.

Property giant Savills echoed Nationwide’s cautious tones. It said the market had been more robust than expected but urged caution when reading the figures. 

Lucian Cook, Head of Residential Research at Savills, said: “The market is currently being driven by those with the security in their household finances to be able to act on the lifestyle changes and desire for more space that the experience of the lockdown has brought about.”

According to Savills’s analysis of the property market, there has been a strong sales bounce for homes worth more than £500,000 since the end of lockdown. However, at the other end of the market, sales numbers were taking far longer to recover and could be hit later in the year as the furlough scheme comes to an end. 

Although there are positive signs, further price falls remain very much a possibility as pent up demand cools off and unemployment creeps up.

Sources
https://www.theguardian.com/money/2020/jul/31/nationwide-warns-of-false-dawn-after-uk-house-prices-leap

Alternative ways to celebrate

Each year we celebrate Christmas and each year the novelty of the event grows fainter. It can sometimes feel like the whole holiday experience has become rather repetitive. If you feel like you’re stuck in a bit of a Christmas rut, don’t despair! We’ve got you covered with some ways you can do Christmas a little differently this year. You might be surprised as to what’s in store…

Get cultural 

One of the most exciting things about Christmas is the fact that it’s celebrated all over the world in so many different ways. Why not celebrate Christmas in the style of another country? Decorate your home according to their style, imitate their traditions and cook their national dishes. You could even mix and match for a truly international festive celebration!

Skip presents

A controversial choice to be sure, but hear us out. Foregoing gift giving is not only a great way to save money, it also opens up other options. You and your loved ones could have a whip round for your favourite charity or all chip in for an experience you can share together rather than buying individual presents. Why not go to a play or a concert or organise a get-together at a restaurant? 

There’s even a growing trend surrounding self-gifting. Instead of spending an arm and a leg on a plethora of presents, you could spend a smaller sum, but on yourself and the things you need. Just make sure to consult your family first or there might be a lot of coal in your stocking this year. 

Get crafty

Some say that time is one of the most valuable things we have to give. So putting a little bit of your time into creating something with your hands can make a present that will be treasured for years to come. Make a decoration for the tree, cook up your own pasta sauce or write a story. The only limit with a gift you create yourself is your imagination – and a created gift will last longer in the memories of your loved ones than any Playstation or coffee machine that you purchase. 

They’re also cheaper to boot… 

Change the main course

As we mentioned above, jumping head first into another culture style of Christmas is a great way to change things up. However, for those of you who don’t have the time to organise an entirely culturally-themed Christmas, why not focus on one of the most popular parts of Christmas – the food? 

Many countries have a whole host of different traditional Christmas dishes – you’ll see what we mean when you begin your research. There are fish dishes, spicy dishes, sweet dishes, exotic dishes – the list goes on and on. This is another Christmas tip where the limit is your imagination. 

And maybe your culinary skills… 

Start your new year early

Making new year resolutions only to promptly forget them in the first week of January seems to be an unwritten tradition all over the world. So why not start your new resolutions a week or two before the 1st of January? This way, you can give your new habits a test run before you jump straight into the new year.

Think about what financial resolutions you want to make. Are you spending too much on a certain aspect of your life? Is there a particular habit that prevents you from hitting your savings milestones? Get ahead of the game by starting early – that way you can hit the ground running on 1st January. 

Christmas represents the beginning of new things and it’s the perfect time to try something different as the year comes to a close. Why not give it a go? You never know what new and exciting traditions will become a part of your festive calendar. All it takes is that first step… 

Sources

https://www.lifehack.org/articles/lifestyle/8-fun-yet-non-traditional-ways-celebrate-christmas-this-year.html

Capital gains tax: What could the review mean?

Rishi Sunak recently announced a surprise review of capital gains tax (CGT), following a report by the Office for Budget Responsibility (OBR) that highlighted how the growing deficit in government spending was likely to exceed £350bn in 2020. The Chancellor asked the Office for Tax Simplification to report on how CGT rates compare with other taxes and how present rules may distort taxpayer behaviour.

There could be widespread tax rises as the government attempts to claw back the cost of extra spending during the coronavirus pandemic. The OBR said the Treasury was likely to suffer steep falls in capital gains tax receipts over the next two years as property and other assets fall in value. A tax rise could fill this gap.

What is CGT?

CGT is a tax on the profit when you sell something that has increased in value. You are only taxed on the amount it has gained in value. Most often it applies to gains made on property and shares, but may also apply to assets like art works. The OBR previously forecast that the tax would raise £9.1bn in the 2019/20 tax year, accounting for 1.1% of all tax paid in the UK.

Private homes are exempt from this tax, but you still need to pay it when selling a second home or investment property. You pay CGT when you sell something that has made gains of more than £12,300 for the current tax year. So a £10,000 investment profit would not incur CGT.

At the moment, the CGT levy is 18% on second homes and buy-to-let properties, and 10% on other assets. For higher rate taxpayers, these rates rise to 28% and 20% respectively.

Why is it being reviewed?

The Conservative Party vowed not to raise income tax, National Insurance or VAT in their last election manifesto, so there are few places left for Sunak to find desperately needed income. 

There are also concerns that CGT is less than income tax, meaning that those who possess a large portfolio of assets are taxed at a rate that is lower than working people pay.

How could it change? 

Essentially the Chancellor has three choices: reduce the allowance (for example, abolish the current £12,300 annual CGT allowance), levy it against other assets (such as classic cars), or raise the rates.

While it’s highly unlikely that Sunak will abolish the CGT exemption for primary residences, he could target second homes and buy-to-lets. It’s possible that the CGT rate could be aligned with other income tax rates, at 20%, 40% and 45%, meaning those with a property portfolio could be hit hard.

Other changes could include a reduction to Business Asset Disposal relief, which currently means that business owners and significant shareholders (over 5%) effectively pay a CGT rate of 10% on lifetime gains up to £1 million. Elsewhere, the treasury could overhaul the various mechanisms accountants use to defer CGT or offset gains, with losses made elsewhere.

Sources
https://www.theguardian.com/money/2020/jul/14/rishi-sunaks-capital-gains-tax-review-may-usher-in-higher-taxes-on-wealthy

https://www.theguardian.com/money/2020/jul/15/capital-gains-tax-review-your-questions-answered

Could over-40s pay more tax to solve the social care crisis?

The question of who should pay for social care is a pressing one; successive governments have grappled with the issue and none have found a concrete solution. At the moment, some people who don’t qualify for local council funded care have to sell their homes to cover the costs, which can exceed £1,500 a week. 

Last year, in his first speech as Prime Minister, Johnson outlined the need for a reform of the current system and back in March, the government launched a parliamentary inquiry into the shortage of care available on the NHS. Since then, the large number of coronavirus deaths in care homes across the country has kept the issue firmly in the spotlight.

Ministers in Boris Jonhnson’s health and social care taskforce are currently studying a scheme where everyone over 40 would start contributing towards the cost of care in later life. Over 40s would have to pay more in tax or national insurance, or be obliged to insure themselves against hefty care bills.

Matt Hancock, the Health Secretary, is a keen advocate of the plan and is committed to coming up with a solution.

The system that ministers are considering draws on pre-existing models for funding social care in Japan and Germany. Both systems have drawn admiration as sustainable ways of solving the challenges that an ageing population brings.

Under the German system, everyone starts contributing to the scheme when they start working, and employers match their contributions, similar to workplace pension schemes in the UK. At the moment, 1.5% of each person’s salary, plus a 1.5% employer contribution, are ring fenced for social care in later life.

Elderly Germans can use this money to pay carers to help them at home or use them for care home fees. They can even give them to relatives and friends for helping to look after them. 

The Japanese scheme is similar, but people only start contributing when they are 40.

At the moment, nothing has been confirmed. Officials are still looking into the exact mechanism by which over 40s would pay. However, social care experts have cautioned that an insurance model would have to be compulsory to ensure people paid.

The scheme under consideration has found favour with campaigners. Caroline Abrahams, the charity director at Age UK, said the scheme “may be rather a good deal, since that system offers a level of provision and reassurance that we can only dream of here at the moment.” She added that the scheme would “arguably [be] an appropriate act of national atonement after the catastrophic loss of life we’ve seen in care homes during the pandemic”.

It will be interesting to see how the government eventually decides to finance its scheme. Watch this space.

Sources
https://www.localgov.co.uk/Social-care-crisis-inquiry-launched/50147

https://www.theguardian.com/society/2020/jul/26/uk-ministers-looking-at-plans-to-raise-taxes-for-over-40s-to-pay-for-social-care

The emotions that arise when investing

Emotions are important. We should listen to them… most of the time at least. However, investing is one case when it’s best to let rational thought take priority over your emotions. By all means, listen to your emotions, but don’t be led by them.

Here’s a slightly shocking fact: In 2018, the S&P 500 generated an average return of 9.85% annually. However, research by Dalbar found that the average investor earned roughly half of that: 5.19%.

 Why? Humans are emotional creatures and investing is an emotional experience, therefore investors are tempted to make rash decisions like rapidly selling during a market downturn. 

When investing, a patient, logical approach is usually the most effective over the years. This means prioritising long-term investments over the impulse to buy and sell based on your emotions or short-term goals. 

We’ll admit that it’s hard to avoid becoming entangled in media hype or fear, something that can lead you to buying at the peak and selling at the bottom of the market, so you need to be self-aware enough to recognise when this is happening.

The cycle of investor emotions

It’s common for investors’ emotions to move in something of a cycle, similar to the one shown in the diagram below. The point of maximum financial risk lies at the top of the market curve. Here, there is the potential to make a decision motivated by short term gains, when it’s likely that the best gains have already passed.

Investors who wait until this point are often at risk of ploughing their cash into a market that might soon crash.

On the other hand, during times of rising market volatility, investors should remember the importance of looking beyond short-term market fluctuations and remember that although markets take time to recover, they usually do. If you sell during a downturn due to fear, you risk selling at the point where markets are lowest. 

You are essentially at much greater risk of being harmed by the adverse effects of ‘bad timing’ if you let your emotions get the better of you.

A better perspective

Resisting your emotional impulses isn’t easy while in the grip of a savage bear market or a raging bull. Because of the risk of long term goals being overtaken by emotionally motivated decisions, a mindset shift is necessary.

You should try to avoid thinking of your investments as immediate assets and stop dwelling on the daily fluctuations to your net worth. Rather than thinking “I lost £15,000 today” on the day of a large market fall, try to think in terms of your averages and your long term financial goals. You might have lost £15,000 on a single, awful day, such as some we saw in the ‘Covid Crash’ earlier this year. However, your portfolio might have gained £300,000 in overall value.

A balanced, long term investment strategy generally has a couple of features: 

Firstly, it takes into account that stock markets aren’t rational. You can’t rely on predicting the future of stock markets – billions have been lost on global markets to testify this. 

When looking back at stocks, it’s easy to fall into the trap of thinking “I wish I had invested at this time”. Unfortunately, it’s impossible to actually work out when the perfect time to buy or sell is when it’s actually happening. 

For instance, when markets fall, they often have small rises that form part of an overall downward slope. An investor might think that they are being smart by investing heavily in one of these ‘mini-troughs’, following the much lauded ‘buy low and sell high’ investment strategy. However, there’s no way of knowing for certain that this is actually the lowest point on the stock market. It might just be a momentary trough as part of a much steeper decline.

Another approach could be to consider ‘drip-feeding’ your money into investments, a strategy known as Pound Cost Averaging. 

Secondly, stronger investment portfolios tend to be diversified. There’s that old saying about not putting your eggs in one basket. Investing all your money in one place makes you far more financially vulnerable if those stocks crash. 

A stronger investment strategy would spread your money through different asset classes and different assets within each asset class. 

Whatever investment strategy you use, it’s best to try to gain a bit of emotional distance from your investments. Understanding what emotions you’re likely to be feeling is a good way to enable you to make effective decisions, but don’t let these emotions rule you. 

Sources
https://www.moneycrashers.com/emotion-enemy-investing/

https://www.moneycrashers.com/reasons-shouldnt-time-market/