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How a life insurance policy could help you preserve an inheritance for loved ones

If Inheritance Tax (IHT) is a concern for you, taking out a life insurance policy could mean your estate passes to loved ones intact. With some careful planning, a life insurance payout can cover your IHT liability and ensure assets are passed on to your loved ones.

Planning what will happen after your death isn’t easy, but being proactive is important and can help ensure your assets are passed on effectively.

£2.7 billion paid in IHT between April and August 2021

According to figures from HMRC, between April and August 2021, £2.7 billion was collected in IHT. The figure is around £0.7 billion higher than the same period in 2020. Most families don’t need to worry about IHT, but with a standard rate of 40%, it’s important to understand if your estate could be liable.

For the 2021/22 tax year, the threshold for paying IHT is £325,000. If the total value of all your assets is under this threshold, known as the “nil-rate band”, no IHT will be due. If you’re leaving your main home to children or grandchildren, you can also make use of the residence nil-rate band. For the 2021/22 tax year, this is £175,000. In effect, this means most people can pass on £500,000 before IHT is due.

It’s important to note you can pass on assets free from IHT to your spouse or civil partner. You can also pass on unused nil-rate band or residence nil-rate band allowances. So, if you’re planning as a couple, you could pass on up to £1 million of assets to loved ones jointly without worrying about IHT.

The nil-rate band and residence nil-rate band are now frozen until 2026. During this time, it’s likely that the value of assets, from your home to investments, will rise. As a result, more families will need to consider the impact of IHT on their estate. When estate planning, you need to consider how the value of your assets could change over the long term.

How does life insurance protect your estate?

A life insurance policy doesn’t reduce the amount of IHT due. Instead, it provides your loved ones with a way to pay the bill.

If you pass away during the term of a life insurance policy, it will pay out a lump sum to your loved ones. This sum can then be used to pay an IHT bill, ensuring your assets are passed on intact. It can provide you with peace of mind and ensure loved ones aren’t worrying about an IHT bill while grieving.

When using a life insurance policy to pay for an IHT bill, there are some things to keep in mind:

• The policy must be written in trust. Otherwise, the payout could form part of your estate and increase an IHT bill. By placing the policy in a trust, you can remove it from your estate.
• As you want the policy to pay out on your death, you should choose a whole-of-life life insurance policy.
• You can choose how much you want the policy to pay out. You should take some time to understand the value of your estate and how much IHT will be due. Keep in mind that the value of assets can change over time.

There are other steps you can take to manage an IHT bill, but a life insurance policy could be right for you.

With this option, you’ll retain control of your assets. You can keep and enjoy your assets to use during your lifetime. This means you don’t have to gift certain assets or place them in a trust. It’s an option that can provide you with more flexibility to use your wealth as your wish during your lifetime while still knowing you can pass it on to loved ones.

If a life insurance policy could help you, keep in mind that you will need to pay the policy premiums for the rest of your life. How much the premiums are will depend on a range of factors, including your health and lifestyle, as well as the level of cover you need. You should shop around to find a deal that is right for you and offers a competitive rate.

Building an estate plan that matches your goals

Whether a life insurance policy is right for you, or if other steps could help you pass on your estate efficiently, we’re here to help. Please contact us to discuss your estate plan and the impact Inheritance Tax could have.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate estate planning or tax planning.

Dividend Tax rate rise: Could it affect you?

Dividend Tax rates are set to rise, and it could affect the amount of tax you pay.

The chancellor announced a hike in Dividend Tax rates, along with the introduction of a new Health and Social Care levy, to help plug the gap in public finances after the pandemic. The government has said that some of the money raised through the increase will be used to clear the backlog the NHS is experiencing and to support social care costs.

A dividend is a regular payment of profit made by a company. If you’re an investor, some of your investments may be in dividend-paying companies. If you’re a company director, you may also choose to pay yourself in dividends.

Understanding if you could be affected by the new tax rates is important, as it can allow you to take steps to reduce the additional tax due.

Will you be affected by the Dividend Tax rate rise?

From the 2022/23 tax year, Dividend Tax rates will increase by 1.25 percentage points.

The Dividend Allowance will remain the same. So, if you receive £2,000 or less from dividends during a tax year, you will not have to pay tax on this income. If your dividends exceed £2,000, your tax band affects the rate you pay. The table below shows how your Dividend Tax rate will change.

How the rate hike will affect you will depend on the dividends you receive. The government estimates that affected taxpayers will pay on average £150 more on their dividend income from 2022/23. For higher-rate taxpayers, the estimated additional tax is £403.

5 steps that could reduce your Dividend Tax liability

1. Make full use of your Dividend Allowance

Making full use of your Dividend Allowance each tax year can help you generate an income that is free from tax. Keep track of the dividends you receive. In some cases, delaying taking dividends until a new tax year if you have control of this can help.

2. Plan as a couple

Each individual receives a Dividend Allowance, so planning as a couple can maximise the amount you can receive in dividends before tax is due. Passing on some dividend-paying stocks to your spouse or civil partner can effectively mean you’re able to receive up to £4,000 through dividends without paying tax.

3. Maximise your ISA allowance

If you’re making an income from investments, an ISA is a tax-efficient way to invest.

Dividends on shares within an ISA are tax-free and won’t impact your Dividend Allowance. Any profit you make when selling investments held in an ISA won’t be liable for Capital Gains Tax either. As a result, using an ISA to hold your investments can make sense from a tax perspective in the short and long term.

For 2021/22, you can place up to £20,000 a year into an ISA. You must use this allowance during the tax year as it cannot be carried forward. Again, the ISA subscription limit is for each individual. So, if you plan as a couple, you can add up to £40,000 into ISAs collectively.

4. Consider growth investments

When investing, you can do so to deliver an income or for growth. If your investment income exceeds the dividend allowance and you don’t need the income for day-to-day spending, switching to growth investments may be right for you.

Rather than paying out, a growth investment strategy will focus on investments that are expected to go up in value to deliver a return when you sell them. This strategy can reduce the amount you receive in dividends, so you don’t exceed the tax threshold.

However, keep in mind that you could still pay tax on these investments. When you dispose of an asset for a profit, Capital Gains Tax may be due. For the 2021/22 tax year, the Capital Gains tax-free allowance, known as the “Annual Exempt Amount”, is £12,300.

As with the Dividend Allowance, making full use of the Annual Exempt Amount each tax year, and planning as a couple, as the allowance is per individual, can help reduce tax liability.

5. Speak to a financial planner

Tax rules can be complex and while you may take steps to mitigate Dividend Tax, you could find your tax liability increases overall. We’re here to help you understand what steps you can take to reduce Dividend Tax and make the most of your money. There may be other steps that are appropriate for you, and we will explain the options you have.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Why you need to understand your State Pension entitlement

Your State Pension may only make up a relatively small portion of your retirement income, but it’s an important part of it, and so it’s crucial you understand your entitlement. The recent news of underpaid State Pensions shows that many people don’t know how much they should receive.

More than £1 billion unpaid to pensioners

While the State Pension can seem straightforward, in reality, it can sometimes be complex. Despite efforts to simplify the State Pension system, recent reports of pension underpayment to women have highlighted how many people still don’t understand what they’re entitled to.

Earlier this year, it was revealed that thousands of women had been underpaid by the government. It’s also estimated that around 134,000 pensioners haven’t been paid what they should. While the government is correcting the mistake, it could take years to distribute the £1 billion of underpayments. Those affected will receive an average payout of £8,900 each.

The error has mostly affected elderly, widowed or divorced women due to the complexities around married women claiming a basic State Pension based on their husband’s record of National Insurance contributions (NICs).

While the Department of Work and Pensions have said human error played a role in the mistakes made, the scandal does highlight how complicated it can be to calculate how much State Pension you should receive.

So, why do you need to know how much State Pension you’re entitled to?

1. Mistakes happen. As the recent underpayment highlights, mistakes do happen. If you understand how the State Pension works, you’re far more likely to notice if errors do occur and ensure these are rectified sooner.
2. You can spot gaps in your NICs record. How much State Pension you’re entitled to will depend on your NICs. In some cases, you may have an opportunity to fill in gaps on your record, which could increase the amount of State Pension you receive.
3. The State Pension provides a retirement income foundation. The State Pension provides a reliable income throughout retirement. As a result, it can play a valuable role in your long-term financial plan by providing security if other income sources are affected by things like investment market volatility.

Understanding the State Pension means you’re in a better position to create a long-term financial plan that helps you reach your goals.

How does the State Pension work?

If you reached the State Pension Age before 6 April 2016, the old State Pension rules will apply. However, most people planning for retirement now will qualify for the “new State Pension”, which sought to make the State Pension simpler.

Under these rules, you need at least 10 qualifying years on your NI record. They do not have to be consecutive years. To receive the full State Pension, £179.60 each week (£9,339.20 annually) in 2021/22, you’ll need 35 qualifying years on your NI record. If you have between 10 and 35 qualifying years, you’ll receive a proportion of the State Pension.

If you have fewer than 35 years on your NI record, you can often buy additional years to increase how much you’ll receive from the State Pension.

In addition to the amount you’re eligible to receive, you need to know when you can claim it. The State Pension Age for men and women has now equalised and is gradually rising. In October 2020, the State Pension Age hit 66 and will reach 67 by 2028. It is being kept under review and could rise further in the future.

To understand what you’re entitled to under the State Pension, you need to know your State Pension Age and how many qualifying years you have on your NI record. The government’s State Pension forecast can help you understand what to expect.

How the State Pension can help you maintain your spending power

While other sources of income in retirement may fluctuate depending on your circumstances or investment performance, your State Pension is valuable because it’s reliable. It also rises each tax year, helping to maintain your spending power.

As the cost of living rises, an income that remains the same will gradually buy less. Over a retirement that could span decades, even small increases in inflation can have an impact on the lifestyle you can afford. So, an income that rises alongside this is important.

Usually, the State Pension annual rise is protected by the triple lock. This means that the State Pension will rise by the highest of:

• Average earnings growth year-on-year for the May–July period
• Inflation in the year to September, measured by the Consumer Price Index
• 2.5%.

However, average earnings growth will not be included when measuring how the State Pension will increase for the 2022/23 tax year. In 2020 during the May–July period, the country was in lockdown due to Covid-19. Many people experienced reduced wages due to receiving 80% of their usual salary under the Job Retention Scheme when they were unable to work. As the economy began to reopen, this inflated earnings figures, and the triple lock meant that pensioners would have received a record 8.8% boost.

The government has argued the earnings growth for this period don’t reflect reality and will not use this measure when calculating the State Pension increase for the 2022/23 tax year. As a result, the new State Pension will increase by 3.1% for the 2022/23 tax year and pensioners will receive £185.15 a week (£9,627.80 annually).

If you need help understanding how your State Pension fits into your wider retirement plans, we’re here to help. Please get in touch to arrange a meeting.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Why you still need emergency savings in retirement

Hopefully, you head into retirement confident in your finances and your retirement income. While your financial commitments and dependents may be fewer in retirement, it’s still important to have a safety net to fall back on when you need it most.

According to a report in Money Age, 49% of those aged over 65 describe themselves as in “excellent” or “good” financial shape. Yet just 21% think they have plenty of money set aside for emergencies, which could leave the remaining people exposed to financial shocks.

While an emergency savings account isn’t something you use day-to-day, it plays an important role in your financial security. Ahead of retirement, you may have paid off your mortgage or no longer be supporting children. So, maintaining an emergency fund may have slipped down your priorities.

Maintaining a rainy-day fund can help ensure you remain financially secure, even when the unexpected happens.

How much you should have in your emergency fund depends on your circumstances. As a general rule of thumb, it’s a good idea to have three to six months of outgoings in an easily accessibly account to tide you over when it’s needed most. As you want to be able to access these savings as soon as you need them, a cash account makes sense for most people.

Planning for unexpected expenses

Your expenses might go down in retirement, but the unexpected can still happen. From a roof needing repairs to a boiler breaking down, you never know when you might need to dip into savings to cover unexpected costs. Having an emergency fund means you can rest assured that you’ll be able to cover these expenses should you need to.

Keeping an emergency fund ready for these circumstances can help ensure your retirement plans stay on track.

Providing a safety net against market volatility

As a retiree, it’s not just unexpected costs that can affect your income. You may be withdrawing an income from investments and market volatility could have an impact.

If you’ve chosen to access your pension through flexi-access drawdown, the value of your pension can also be affected by investment performance. With flexi-access drawdown, you can take a flexible income to suit you. The remainder of your pension will usually remain invested. As a result, the value will rise and fall.

If investment values fall and you continue to withdraw the same income, you’ll have to sell more units to achieve this. This means you could deplete your pension or investment portfolio quicker than you expected, and no longer have enough to maintain your standard of living for the rest of your life.

Having an emergency fund you can use amid market volatility, such as that experienced in 2020 during the first Covid-19 lockdown, means you can reduce the amount you withdraw from your pension. This means you won’t have to sell units when prices are low. Historically, markets have recovered from volatility and investment values have risen following dips. While guarantees can’t be made, having a financial buffer can help you ride out short-term volatility and minimise the long-term impact.

Managing pension investment risk in retirement

As well as having an emergency fund to fall back on, there are other steps you can take to manage the impact of market volatility on your pension and retirement income.

Leaving your pension invested can make sense, but it’s important to understand that it does come with risks. By leaving your pension invested, you’re providing it with a chance to grow over the long term. With average retirement lasting decades, you can still benefit from long-term investment trends to help your pension go further.

If you choose this option, one thing you will need to consider is how much investment risk is appropriate for you. This should consider a range of factors, from what other assets you hold, to what your goals are. If you’re not sure how much risk you should be taking with your pension, please contact us.

Remember, flexi-access drawdown isn’t your only option when taking an income from a defined contribution (DC) pension either. If you’d prefer security over flexibility, an annuity can make sense. An annuity is something you buy with a lump sum, which then provides a guaranteed income for life. In some cases, the income delivered from an annuity can be linked to inflation to preserve your spending power. This means you won’t need to worry about investment volatility affecting your income.

Whether you’re nearing retirement or are already retired, it’s important to have confidence in the choices you make. We can help you understand what your options are and how to mitigate risks, including creating an emergency fund.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances. Levels, bases of and reliefs from taxation may change in subsequent Finance Acts.

More people plan to work past traditional retirement age. Here’s what they need to consider

Everything you need to know about the 2021 Autumn Budget

“Employment is up, investment is growing, public services are improving, the public finances are stabilising, and wages are rising.” This is the backdrop against which Rishi Sunak presented the 2021 Autumn Budget.

Promising “a stronger economy for the British people”, the chancellor outlined his taxation and spending proposals. Here’s a summary of the key points and what they mean for you.

Firstly, though, a reminder of two important tax changes that have already been unveiled.

2 important announcements already made

Back in September, the prime minister made two headline-grabbing tax announcements.

From April 2022, National Insurance rates for both employees and the self-employed will rise by 1.25 percentage points across earnings bands. Millions of employees and many employers will see their National Insurance contributions increase, raising around £12 billion a year for the Treasury.

This rise will be rebranded as a “Health and Social Care Levy” from April 2023, when National Insurance rates will revert to their current levels.

From April 2023, anyone who is working beyond the State Pension Age will be asked to pay 1.25% on their earned income for the first time.

In addition, Dividend Tax rates will also rise 1.25 percentage points from April 2022. The £2,000 allowance will remain, but anyone earning more than £2,000 in dividends will pay a higher rate of tax.

The economy is recovering quicker than expected

The chancellor began his speech by outlining Office for Budget Responsibility (OBR) data that expects the economy to return to pre-Covid levels at the start of 2022.

The OBR has revised their growth estimate for the UK economy from 4% to 6.5% in 2021, then forecasts 6% growth in 2022, followed by 2.1%, 1.3% and 1.6% over the next three years. They also revised down the effect of Covid “scarring” on the economy from 3% to 2%.

Sunak also said that he expects inflation to average 4% over the next year. He highlighted two reasons for this:

• As economies around the world reopen, demand for goods has increased more quickly than supply chains can meet
• The pressures caused by supply chains and energy prices will take months to ease.

“I am in regular communication with finance ministers around the world and it’s clear these are shared global problems, neither unique to the UK, nor possible for us to address on our own,” he added.

The improving fiscal position also means that the chancellor forecasts a return to spending 0.7% of GDP on foreign aid before the end of this parliament.

The chancellor also confirmed that every government department will get a real terms rise in spending each year.

Tax

While the main tax announcements have already been made, the chancellor announced several reforms:

• A new 4% levy on property developers with profits of more than £25 million, to help fund a £5 billion fund to remove unsafe cladding
• A reduction in air passenger duty for domestic flights between UK airports from April 2023. 9 million passengers will see their duty cut by half, boosting regional airports. There will also be an increase in duty for long-haul flights of more than 5,500 miles
• The bank surcharge, levied on bank profits, will reduce from 8% to 3% from April 2023. The chancellor said that this should help bolster London’s competitiveness as a global financial centre after Brexit
• The planned rise in fuel duty has been cancelled. The average car driver now saves £1,900 a year because of a 12-year freeze in fuel duty.

In a tiny technical change, the deadline for residents to report and pay Capital Gains Tax after selling UK residential property will increase from 30 days after the completion date to 60 days.

The chancellor also set out plans to reform alcohol duty, made possible because the UK has now left the European Union.

Arguing that the tax, first introduced in 1643 to pay for the Civil War is “a mess”, the main duty rates will reduce from 15 to 6 around the general principle of “the stronger the drink, the higher the rate”.

• Small Brewers Relief will be extended to cider makers and other producers making drinks less than 8.5% ABV
• The duty premium on sparkling wines will end, so drinkers will pay the same duty on prosecco and English and Welsh sparkling wine as on still wines
• A new “draft relief” will see a lower duty rate on draft beer and cider. Set to benefit community pubs, this cuts duty by 5% and represents the biggest cut to cider duty since 1923 and the biggest cut to beer duty for 50 years.

Shares in pub chain JD Wetherspoon jumped 5.5% on the news.

Finally, the chancellor announced a total of £7 billion of cuts to business rates. The retail, hospitality, and leisure sectors will benefit from a 50% business rates cut for one year, enabling businesses to claim a discount on their bill up to £110,000. This will benefit cinemas, music venues and so on.

Sunak concluded his speech by confirming that “my goal is to reduce taxes” calling it “my mission for the remainder of this parliament”.

Despite this, the OBR has confirmed that the tax burden is set to rise from 33.5% of GDP recorded before the pandemic in 2019/20 to 36.2% of GDP by 2026/27.

This is the highest level since late in Clement Attlee’s post-war Labour government in the early 1950s, when the economy was struggling after the economic shock of the second world war.

Housing

To boost the building of new homes, the chancellor announced an £11.5 billion fund to build up to 180,000 new affordable homes. He described it as “the largest cash investment in a decade, 20% more than the previous programme”.

Sunak also confirmed a £1.8 billion brownfield fund, which will help “unlock 1 million new homes”.

Savings

The chancellor announced the creation of a new National Savings & Investment (NS&I) Green Savings Bond.

These were made available to customers via NS&I on 22 October and will be on sale for a minimum of three months. These three-year fixed-term savings products will pay an interest rate of 0.65% and customers can invest between £100 and £100,000.

As with all NS&I products, the Green Savings Bonds come with a HM Treasury-backed 100% guarantee.

The Treasury also announced that the Individual Savings Account (ISA) annual subscription limit will remain at £20,000 in 2022/23. The annual subscription limit for Junior ISAs and Child Trust Funds for 2022/23 will be maintained at £9,000.

Changes to the National Living Wage and Universal Credit

The National Living Wage (the minimum wage) for over-23s will increase from £8.91 to £9.50 an hour. This represents an increase of £1,000 a year for a full-time worker and more than 2 million people will benefit.

“To make sure work pays”, the chancellor announced a change to the Universal Credit taper from 63p to 55p and promised to introduce this before December 1. He will also increase work allowances by £500 a year to help working families with the cost of living.

This enables more working families on the lowest incomes but working to keep more of their earnings. Sunak says that a single mother of two renting, and working full-time on the National Living Wage, will be better off by around £1,200.

Other spending announcements

Sunak unveiled a raft of spending commitments in areas from education to health.

• £21 billion on roads and £46 billion on railways
• A guarantee to spend £5.7 billion for London-style transport systems across city regions
• Spending on cycling infrastructure of more than £5 billion
• 20,000 new police officers, an extra £2.2 billion for courts and rehab facilities, and £3.8 billion for prison-building
• £300 million towards A Start for Life, supporting new parents, and £150 million for Early Years training and holiday programmes
• At least 100 places will benefit from the “levelling up” fund. The first round of successful bids to the fund, worth £1.7 billion, have been announced, including projects in Stoke-on-Trent, Bury and Burnley
• £500 million in funding to help people back into work in “the most wide-ranging skills agenda this country has seen in decades”. This includes careers help for older workers and builds on extra funding for apprenticeships and traineeships already announced in the spring.

Sunak also announced £205 million to transform grass-roots sport by funding up to 8,000 community sports pitches. He also committed £11 million towards the FA bid to host the 2030 World Cup.

There will also be £2 million for a new Beatles attraction on the Liverpool waterfront.

Get in touch

If you have any questions about how the Autumn Budget will affect you and your finances, please get in touch.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

Investment market update: September 2021

While the direct impact of the Covid-19 pandemic has lessened for many economies, businesses are now struggling with the indirect consequences, such as supply chain issues. From microchips to aluminium cans, firms around the world are facing challenges getting hold of the materials and goods they need.

Markets have largely recovered from the Covid-19 volatility, but global investors expect a market correction, according to a Deutsch Bank survey. Some 58% of investors said they expect a correction between 5% and 10% by the end of the year.

UK

Government announcements could have an impact on both employees and employers. An increase in National Insurance contributions (NICs) from April 2022, which will become a separate health and social care levy from 2023, will increase outgoings for both individuals and businesses. NICs will increase by 1.25 percentage points.

For business owners and investors, the government’s announcement of dividend tax rates increasing by 1.25 percentage points from April 2022 could have an impact too.

Figures suggest that UK businesses are struggling with supply chain issues caused by the pandemic, Brexit, and other factors. The IHS Markit Purchasing Managers Index (PMI) monitoring business activity fell to 55. While the reading indicates growth, it has fallen to a six-month low that has been linked to supply chain challenges.

The challenges have affected a range of industries, including construction. “Sustained and severe” supply chain issues were blamed for the PMI falling from 58.7 in July to 55.2 in August. The British Retail Consortium (BRC) suggests UK shop price increases of 0.4% in August were also related to shortages in microchips and shipping problems. The organisation added that supply chains are on the edge of coping.

Throughout the month, shortages of food, energy, and fuel have also been widely reported. While steps have been taken to reduce the impact, including the military being drafted in to help deliver fuel, the CBI warned that the labour crisis could last up to two years.

This is reflected in the number of businesses struggling to fill vacant roles. According to the Office of National Statistics, 13% of businesses said vacancies have become more difficult to fill when compared to last year in September. This compares to 9% that said the same thing in August. The hospitality industry in particular is facing challenges. Some 30% of accommodation and food service firms highlighted challenges finding workers.

It’s not just imports that are slowing. UK exports to the EU fell by around £900 million in July, a 65% drop. Rising exports outside of the bloc didn’t make up the shortfall.

Demand and challenges facing businesses mean inflation is above the 2% Bank of England target. Michael Saunders, a member of the bank’s Monetary Policy Committee, suggested higher rates of inflation could mean that interest rates will begin to rise next year, affecting both borrowers and savers across the UK.

In other news, Morrisons and Meggitt were both promoted to the FTSE 100. The share prices of both firms surged after attractive takeover bids, meaning they were worth enough to be included in the index. However, it could be short-lived as both firms would be delisted if the takeover bids go ahead.

Europe

Eurozone GDP figures show economies within the bloc are recovering stronger than initially thought. The GDP figure for April-June has been revised upwards from 2% to 2.2%.

Germany is also leading the way with an unexpected surge in factory orders for major goods, like ships. Official data from Destatis shows a 3.4% rise despite expectations of a fall.

US

Supply chain challenges are also having an impact in the US. While the manufacturing sector is still growing, the pace is slowing down. The PMI data from IHS Markit fell from 63.4 in July to 61.1 in August.

Another area that has disappointed, is job growth. Just 235,000 new jobs were created in the US in August, a significant slowdown when compared to a month earlier and a figure that falls short of expectations. The data would suggest the pandemic is continuing to have an impact on the labour market, with no jobs added to the leisure and hospitality sectors as concerns around the spread of the Delta variant remain.

Asia

Data from China shows that the pandemic continues to have an impact on activity and demand. The country’s service sector’s PMI data in August fell to 46.7 from 54.9 in July. The below-50 reading means the sector is contracting. Increased restrictions to curb the spread of the Delta variant have been blamed.

However, export figures suggest the outlook in China isn’t glum. Exports increased by 25.6% in dollar terms in August, according to official data. Exports reached $294.3 billion, which helped to calm the worries of a slowdown.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

5 behavioural biases that lead to investment mistakes

Investment decisions should be based on logic and fact. But it’s easy for emotions and biases to affect your decisions, and this can lead to investment mistakes.

Behavioural bias can be useful in some circumstances. It’s a way of making mental shortcuts when you need to make complex decisions. When you consider how many decisions you need to make day-to-day, being able to make quick decisions is important. However, it’s just as important to recognise when biases can be harmful, and investing is one example.

Biases may come from your past experiences, unconscious beliefs, or the way you use information. Being aware of how biases may influence you can help you reduce the risk of making a mistake. Here are five common cognitive biases that could have an impact on your investments.

1. Confirmation bias

When you’re deciding which stocks, shares, or funds to invest in, you’ll seek out information to help you make a decision. However, in many cases, you will already have a preconceived idea about whether an investment opportunity is “good” or “bad”.

Confirmation bias refers to the tendency to place a great emphasis on information that supports your existing beliefs. With so much information on your fingertips online, it’s often easy to find something that fits in with this. While placing importance on the source that supports your views, you may also disregard information that doesn’t fit your existing ideas. It can mean you end up making investment decisions based on a small sample of information without fully assessing how reliable or relevant it is. Being critical of information is crucial.

2. Loss aversion

When you think of potential investment mistakes, it’s likely that taking too much risk is what comes to mind first. Yet, taking too little risk can be just as damaging.

Previous research suggests that people are more sensitives to losses than wins. So, you’ll feel more pain from a loss than you’d feel joy from a win. In investment scenarios, it can mean you avoid taking risks even when evidence suggests it’s worth it. As a general rule of thumb, the more investment risk you take, the better the potential returns, so loss aversion can mean you miss out.

However, it’s important to take a balanced view of risk. Investment values fluctuate and can fall as well as rise. You need to consider what your risk profile is when investing. It can help you avoid loss aversion while still choosing investments that are appropriate for you.

3. Anchoring bias

How do you decide what a piece of information is worth? Anchoring bias refers to the phenomenon of placing too much emphasis on a single piece of information and anchoring your views to this.

Let’s say you purchased a share and evidence suggests it’s time to sell. Anchoring bias can mean you hold onto the share for longer because you’ve anchored on the higher price you bought it at. This anchoring can give you the view that the share is more valuable than it actually is. This is despite the share price you purchased it at having no impact on the present.

As with confirmation bias, being critical of the information available is important.

4. Hindsight bias

It’s natural to look back at investment decisions and consider what you could have done differently. However, hindsight bias means you attribute different levels of control to decisions depending on their outcome.

It’s a tendency to see beneficial past events as predictable. So, if you made an investment decision that’s performed well, you’d put it down to you foreseeing that the company would perform well. In contrast, you consider bad events as unpredictable, so if an investment performs badly, it’s because it was out of your control. Hindsight bias can make it difficult to objectively look at past investment decisions.

5. Bandwagon effect

Investment decisions should reflect your circumstances and goals, but the bandwagon effect means you make decisions because it appears many people are doing the same thing.

For example, after reading a news article about how everyone is investing in Silicon Valley stocks, would you be tempted to invest in opportunities within this sector? It could be right for you, but if you haven’t reviewed your current portfolio, risk profile, or the investment themselves you could be making a mistake. Speculative bubbles are often the result of the bandwagon effect.

Need help making investment decisions?

Working with a financial planner can help you reduce the impact that bias has on your investments and other financial areas. Being able to discuss your investments and why you’re making certain decisions can be all you need to highlight where bias is occurring. We can also help you understand which investment decisions make sense for you with your goals and situation in mind. Please contact us to talk about your investment portfolio.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Inflation is set to reach 4% this year. What does it mean for your spending power?

From the State Pension triple lock to the cost of living, Covid-19 is affecting economic figures. As the economy reopens, you may have noticed the price of things has risen. From your grocery shopping to days out, inflation means the cost of living is rising and could reach 4% this year.

A small amount of inflation is often seen as a good thing. Prices gradually rising can encourage demand, but higher levels of inflation can suggest demand is outstripping supply and that the economy is running into difficulties.

The Bank of England carefully monitors inflation and can take steps to keep it in check. It has a target of 2% inflation each year, but the inflation rate for 2021 could be double this.

The pandemic impacts the cost of living

According to the central bank’s latest Monetary Policy Report, inflation is expected to temporarily reach 4% in the near term. It notes that this rise largely reflects the impact of the pandemic as the economy recovers, which has led to higher energy and goods prices. However, the report adds inflation is projected to return close to the 2% target in the medium term.

The rate of inflation can seem small, even when it’s double the target. Yet, this can add up to more than you think and affect your short- and long-term finances. It means you could see your day-to-day expenses creep up in line with rising prices.

It works in reverse too and you can see the impact when looking at how the value of money has changed. Let’s say you had £1,000 in 2000. According to the Bank of England, in 2020 you’d need £1,721.35 to achieve the same spending power due to the impact of inflation.

So, inflation means your outgoings are rising, while some of your assets and income are gradually becoming less valuable. If you don’t consider inflation when financial planning, you could end up with an unexpected shortfall.

Retirement is a good example of this. If you set out the level of income you need at the start of retirement and expect to draw the same income for the rest of your life, you’re likely to find it’s not enough to maintain your lifestyle in your later years. You need to consider how the rising cost of living will affect the income you need.

Could rising inflation lead to interest rates rising?

Interest rates have been at record lows for 12 years. The Bank of England first slashed interest rates during the 2008 financial crisis, and has kept them low to support the economy ever since.

While no announcement has been made, the Bank’s latest report does hint that it would be willing to raise interest rates to reduce inflation if necessary. For some, it would be a welcome move, but it could cost others money.

For savers, rising interest rates could help their money keep pace with inflation. Current interest rates mean it’s likely that money held in a savings account has fallen in value in real terms over the last decade. An increase in rates could provide an opportunity for savings to grow in real terms.

For borrowers, it would mean outgoings rise further. The interest you pay on a mortgage, credit card, or loan, for example, will also rise if you’re on a variable rate.

Whether an interest rate rise is good for you will depend on if you’re a saver or borrower.

How can your savings beat inflation?

While rising interest rates could help savers maintain their spending power, it’s unlikely large rises will happen any time soon. It’s far more likely that the Bank of England will make gradual increases to the interest rate, and it could take years for it to be on par with the rate of inflation.

If you want to maintain or grow your spending power, your money will need to work harder. There are several ways of doing this, and, in some cases, investing your money can provide a solution.

Investing does come with risks, and values can rise as well as fall. However, historically, investment values have risen, despite short-term volatility, and it can be a way to increase the value of your money in real terms if returns outstrip the pace of inflation.

When investing, it’s important you set out what your goals are and consider your risk profile. You may be tempted to invest money held in your savings account, but if it’s part of your emergency fund, it should be readily accessible and investing likely isn’t the right option for you.

Whether you’re a professional or a retiree, inflation has an impact on your finances. If you’d like to discuss what you can do to manage the impact of inflation, please contact us.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Why you should consider involving your family in your financial plan

When you consider your financial plan, who do you involve? Often, it’s done independently or with a partner, but there could be advantages to making your wider family part of the process. If it’s not something you’re already doing, here are five reasons to involve children, grandchildren, and others in your plans.

1. It could encourage younger generations to consider their own financial plan

First, it could be beneficial to them. Being involved in your financial plan can mean they start thinking about their own long-term financial security.

While still working, it’s common not to think about retirement, even though the decisions professionals make, even early in their careers, can have an impact on the retirement they enjoy. Seeing the decisions you need to make about retirement and how to create an income could make them more engaged with the process and set them on the path to greater financial freedom. It could also mean they consider things they may have overlooked before, such as the need for financial protection, or when to choose investments over savings.

2. It can help you understand how to help your family reach their goals

You may know what your loved ones are hoping to achieve, but do you know the details? After talking through their goals, you may want to lend a financial helping hand and that could change your own financial plan.

According to an FTAdviser report, just 13% of parents over the age of 60 plan to pass on wealth to their children during their lifetime. However, in some cases, a gift now can have a far greater impact on their life than an inheritance will have.

Helping children and grandchildren to buy a home is a common example. With many of the younger generation struggling to save a deposit, a financial gift now could provide more security in the short and long term. If you knew this was a goal of your child, would you reduce their inheritance to provide a gift? By talking through their plans, you have an opportunity to understand how your wealth can have the greatest impact.

3. Discussing inheritances can lead to better financial decisions

The FTAdviser report found 72% of parents plan to pass on wealth to their children after their death. However, two-thirds said they rarely or never discuss inheritance with their children.

Talking about inheritance can be difficult and can bring up many emotions. Yet, it can help your loved ones plan their own futures more effectively. If they believe they’ll receive a greater inheritance than they actually will, they could be more reckless than they otherwise would be. Honest conversations about investment could also provide them with clarity and confidence about their future.

With more time to think about how they’d use an inheritance, your loved ones could make better financial decisions when they receive it.

4. It can improve your later-life plans and provide confidence in them

Later-life planning is an important part of creating a long-term financial plan. Yet, 4 in 10 parents have not discussed their later-life plans with their children. Again, it can be difficult to think about how your lifestyle and needs will change in your later years, but it is important.

It can provide both you and your children with greater confidence and ensure your wishes are carried out. The FTAdviser report highlights that a third of adults aged 30–59 with at least one surviving parent are worried about the prospect of managing the finances of their parents if they can no longer do it themselves. By involving them in the financial planning process sooner, they will be in a better position to make decisions on your behalf should they need to.

5. It can help you create an effective estate plan

Almost 80% of families do not have any estate planning strategy in place. Of those that do, less than half of parents said their children knew exactly what the plan was. An effective estate plan can help you ensure that loved ones benefit from your wealth when you pass away.

It may include discussing Inheritance Tax or how to make provisions for grandchildren who are too young to manage an inheritance themselves. Involving family in this process can help you understand concerns they may have and create a solution that suits your wishes.

If you’d like to involve your family in your financial plan, we can help. Whether you want to be open about the inheritance they can expect to receive in the future or get a better understanding of how you can financially support their goals, please get in touch.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate estate planning.