Category: news

Behavioural finance: 5 effective ways you can reduce the impact of bias

When you need to process information, it’s common to take shortcuts and rely on bias. It’s an approach that can be useful in some situations, but it can also lead to decisions that aren’t right for you.

If you’re making financial decisions, you know you should focus on facts, but emotions and other influences can creep into the decision-making process.

Last month, you read about some of the ways bias may affect your financial decisions. From herd mentality to confirmation bias, it can have a larger effect than you may think.

So, what can you do to reduce bias? Here are five effective ways you can focus on what’s important.

1. Learn to recognise when bias could be affecting you

One of the first things you can do to reduce the effect of financial bias is simply be aware that it could happen.

Understanding why bias happens and when it may affect your decisions means you’re more likely to take your time to think things through.

Asking yourself questions can be useful:

  • Is this investment appealing just because others are buying shares?
  • Am I dismissing information because it doesn’t paint the picture I want?
  • Have I researched my other options?

Sometimes just remembering that bias could occur is enough to make you take a closer look at your decisions.

2. Take your time when making financial decisions

While making quick decisions can be useful in some aspects of your life, taking a step back and giving yourself some time is often valuable when making financial ones.

Decisions around investing or your retirement could affect your wealth for years to come. So, it’s worth giving them the attention they deserve and thoroughly researching your options.

You’re more likely to overlook important information if you make a snap decision. To compensate for this, you may instead rely on biases or gut feelings. While it may feel right at the time, it means you could be making decisions that don’t make financial sense for you.

3. Tune out the short-term investment noise

One of the reasons that biases can affect investing is that it can be all too easy to focus on short-term market movements.

A company’s shares soaring or tumbling dramatically in a day makes a great headline or talking point among friends. But rarely is it something you should act on and it’s easy to attach too much importance to these short-term results.

When you first create an investment strategy, you should set out your long-term goals and how you’ll achieve them. Investment decisions should focus on the long term to reflect this. While looking at long-term performance may not be as exciting, as the peaks and troughs often smooth out, it can help you stick to your plan.

While it can be difficult, tuning out the noise and market volatility can help you focus on your investment strategy.

4. Scrutinise the decisions you make

When making financial decisions, playing devil’s advocate can be useful. It can help you question why you’re making certain choices and fully explore alternatives.

If someone else was asking for your advice, what questions would you ask? Would you be satisfied with the way they interpreted the data? Trying to look at your decisions from an outside perspective can be valuable. It allows you to re-evaluate the information and see if you draw the same conclusion.

5. Work with a financial planner

Sometimes, simply having someone to discuss your decisions with can help highlight where bias may be occurring.

As financial planners, we can work with you to create a financial plan that focuses on facts and long-term goals. Having a tailored financial plan can give you confidence and mean you’re less likely to act on bias.

We’re here to answer your questions too. So, next time you see an investment that you’re tempted by, but you aren’t sure if it’s right for you, you can contact us. Having someone to turn to can reduce the chance that you react to news or information quickly, rather than giving yourself time to process it.

If you’d like to arrange a meeting with us to discuss your investments or overall financial plan, 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 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.

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Your autumn statement update and what it means for you

It has been a tumultuous year in British politics, with three prime ministers and four chancellors holding office.

After the calamitous “mini-Budget” ushered in the demise of Liz Truss and Kwasi Kwarteng, new chancellor Jeremy Hunt has delivered his first autumn statement.

Hunt’s speech came at a tricky time for the UK economy, with inflation at a 41-year high and the Bank of England (BoE) reporting that the economy is expected to be in a recession for a prolonged period. Hunt said his plan was designed to “strengthen our public finances, bring down inflation and protect jobs”.

Here are the key points of the autumn statement, and what they might mean for you.

A reduction in tax-free allowances and exemptions

As part of his plan to raise tax revenue, the chancellor announced reductions to two key tax allowances.

Capital Gains Tax

The Capital Gains Tax (CGT) annual exempt amount will fall from £12,300 to £6,000 in April 2023, and to £3,000 in April 2024.

This means that you will only be able to make profits of £6,000 on non-ISA investments – such as company shares or second homes – in the 2023/24 tax year before CGT becomes due.

Dividend Tax

The Dividend Allowance – the amount you can earn from dividends before Dividend Tax is paid – will be reduced from £2,000 to £1,000 in April 2023, and then to £500 in April 2024.

If you receive any income from dividends, it’s likely that you will pay more tax on these dividends from April 2023 onwards.

These two combined measures will raise more than £1.2 billion a year from April 2025.

Inheritance Tax thresholds frozen for a further 2 years

The Inheritance Tax (IHT) nil-rate band has been at its current level of £325,000 since April 2009. The additional residence nil-rate band is set at £175,000 and normally applies if you leave your home to a child or grandchild.

These two thresholds had already been frozen until 2026. The chancellor announced an extension to this freeze, meaning that the nil-rate bands will remain at these levels until at least 2028.

Qualifying estates can continue to pass on up to £500,000 and the qualifying estate of a surviving spouse or civil partner can continue to pass on up to £1 million without an IHT liability.

As house prices and asset values rise, it is likely that more and more estates will face an IHT bill over the next five years.

A cut to the level at which you pay additional-rate Income Tax

In a considerable change of direction from the former administration, Hunt reduced the threshold at which individuals pay additional-rate Income Tax.

Unlike his predecessor, Kwasi Kwarteng, who abolished the additional rate of tax (45%) – a move that was swiftly reversed – Hunt’s announcement means higher earners will pay 45% tax on more of their earnings.

The 45% rate will now apply for earnings above £125,140 rather than the previous level of £150,000. It means if you earn £150,000 or more, you will pay just over £1,200 more in Income Tax each year.

Hunt also froze the Income Tax Personal Allowance – the amount an individual can typically earn before paying Income Tax – at the current level of £12,570 until 2028. Additionally, he fixed the higher-rate threshold at £50,270 and the National Insurance thresholds at their current level to 2028.

All these measures are also likely to increase your personal tax burden. As earnings rise, more of your income will be subject to tax than if the allowances had risen in line with inflation.

The State Pension “triple lock” to be honoured

Under the “triple lock”, the State Pension increases each year by the higher of:

  • Inflation, as measured by the Consumer Price Index (CPI) in September (of the previous year)
  • The average increase in wages across the UK
  • or 2.5%.

After months in which no senior politician would commit to honouring the government’s pledge, Hunt announced that he would increase the State Pension in line with inflation.

This means pensioners can expect a boost of just over 10% to their State Pension from April 2023. For someone on the full, new State Pension, that will represent an additional payment of more than £900 a year.

Pension Credit will also rise by 10.1% in April 2023 and benefits will be uprated by inflation, too.

As a result of uprating both working age and pension benefits, around 19 million families will see their benefit payments increase from April 2023.

An increase in the Energy Price Guarantee

Hunt announced that the government’s Energy Price Guarantee – an initiative of the Truss administration – would continue in its present guise until April 2023.

Under the guarantee, for six months from 1 October 2022, the average household will pay energy bills of around £2,500 a year.

The scheme will then become less generous from April 2023. The guarantee will rise to £3,000 for a further 12 months, meaning your energy bills will likely rise again in the spring.

The government say this equates to an average of £500 support for households in 2023/24.

There will be additional support for more vulnerable households.

Increase to windfall taxes

Jeremy Hunt announced a significant increase in windfall taxes. The oil and gas companies’ tax rate will increase from 25% to 35% of profits on UK operations from January 2023 until March 2028, extended from December 2025.

There will also be a 45% tax on profits of older renewable and nuclear electricity generation.

Together, these measures will raise more than £55 billion from this year until 2027/28.

Stamp Duty reductions to end in 2025

In September’s “mini-Budget”, Kwasi Kwarteng announced some increases in the thresholds at which Stamp Duty would be payable.

The £125,000 threshold increased to £250,000 while he increased the minimum threshold for first-time buyers from £300,000 to £450,000.

Jeremy Hunt announced that while these changes will remain, they will now be time-limited, ending on 31 March 2025. They are designed “to support the housing market and the hundreds of thousands of jobs and businesses which rely on it”.

Other measures

National living wage

Hunt announced the largest-ever rise in the UK’s national living wage. For workers aged 23 and over, it will rise by 9.7% to £10.42 an hour from April 2023.

This represents an increase of more than £1,600 to the annual earnings of a full-time worker on the national living wage and is expected to benefit more than 2 million workers.

Electric vehicles

From April 2025, electric cars, vans, and motorcycles will begin to pay Vehicle Excise Duty in the same way as petrol and diesel vehicles. The government says that this will “ensure that all road users begin to pay a fair tax contribution as the take up of electric vehicles continues to accelerate”.

Health and social care

Hunt announced spending of £2.8 billion in 2023/24 and £4.7 billion in 2024/25 for adult social care, to help the most vulnerable.

He also committed an additional £3.3 billion in 2023/24 and a further £3.3 billion in 2024/25 to improve the performance of the NHS.

Furthermore, the chancellor  announced that the lifetime cap on social care costs in England due to come into force in October 2023 will be delayed by two years.

Education

There will be an increase to the education budget of £2.3 billion in 2023/24 and £2.3 billion the year after, taking the core schools budget to a total of £58.8 billion in 2024/25.

Business rates

There will be a £13.6 billion package of business rates support over the next five years.

The business rates multipliers will be frozen in 2023/24, and upward transitional relief caps will provide support to ratepayers facing large bill increases following the revaluation. Additionally, the relief for retail, hospitality, and leisure sectors will be extended and increased to 75%.

Corporation Tax

As confirmed in October 2022, the main rate of Corporation Tax will increase to 25% from April 2023.

Infrastructure projects

The chancellor confirmed the government’s commitment to High Speed 2 (HS2) to Manchester, the Northern Powerhouse Rail core network, and East West Rail, along with gigabit broadband rollout.

Get in touch

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

All information is from the autumn statement 2022 document and the government’s autumn statement news bulletin.

The content of this autumn statement summary is intended for general information purposes only. The content should not be relied upon in its entirety and shall not be deemed to be or constitute advice.

While we believe this interpretation to be correct, it cannot be guaranteed and we cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained within this summary. Please obtain professional advice before entering into or altering any new arrangement.

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Why it’s important to remain calm amid continuing economic uncertainty

It would be fair to say that the recent “mini-Budget” ended up being anything but.

A series of tax cuts, the reversal of both the National Insurance increase and a planned Corporation Tax rise, and an eye-wateringly large intervention in energy markets prompted unprecedented market movements and even a rebuke from the International Monetary Fund (IMF).

The announcement was swiftly followed by the pound falling to a record low against the dollar (although it has now recovered, somewhat) and a sharp rise in the interest rate the UK pays on longer-term borrowing.

The volatility also resulted in emergency intervention from the Bank of England (BoE) and a U-turn on plans to abolish the 45p additional rate of Income Tax.

It’s natural that you may be concerned about your finances in light of these events. So, read on as we cut through some of the more sensational headlines and focus on how the recent uncertainty likely affects you.

A brief summary of recent events

  • The recent mini-Budget caused volatility in markets, with a fall in the value of the pound and sharp rises in the cost of government borrowing
  • The BoE stepped in to reassure markets, particularly with regard to cash calls on pension funds
  • To calm markets, the chancellor announced that the government were no longer going to abolish the 45p rate of Income Tax
  • The mortgage market was thrown into turmoil as lenders withdrew products and replaced them with more expensive deals
  • A weakened pound and high inflation likely mean further increases in interest rates.

If you’d like more detail on any of these areas, read on and you’ll find more analysis.

Or, of course, if you’re worried about current events please get in touch for a chat. We understand that, for many people, these events are unsettling and we’re here to help you understand what they mean for you.

Firstly, though, read about two behavioural biases you should keep in mind during these uncertain times.

2 behavioural biases to be aware of in uncertain times

When you’re faced with a sea of worrying news headlines, it’s very easy for your subconscious biases to take over. Making knee-jerk, emotional decisions may help you to feel “in control”, but these can often have a detrimental effect on your long-term financial security.

Here are two biases that you should be aware of.

1. Loss aversion

The theory of “loss aversion” posits that humans feel the pain of losses twice as strongly as the pleasure of gains.

In falling markets, the fear of “losing” money can lead you to cash in investments. However, this often simply turns a paper loss into an actual loss, and it means you don’t benefit from positive returns when markets recover.

While markets are likely to remain volatile over the coming weeks and months, over time prices will more closely reflect the economic characteristics of the asset.

Loss aversion may also mean you take too little risk with your investments, in fear of losing money. For example, you may decide to invest in “safe” securities that offer lower potential returns, but are less volatile. While you may potentially avoid some risk, it could mean that your investments and pension don’t grow as much as they need to for you to achieve the lifestyle you want in later life.

2. Familiarity bias

When you’re investing, diversification is vital if you want to mitigate risk. So, it’s important not to limit your investments to companies or regions you “know”.

At a very basic level, familiarity bias might mean you have significant holdings in your own employer. On a wider level it might mean you’re predominantly or even exclusively invested in the UK – in household names you’re familiar with.

While it is good to invest in the areas you’re knowledgeable in, you still need to diversify and not just invest in what you know. This will help you to avoid familiarity bias.

A good example of this is that the UK stock market only represents around 4% of the overall value of global equity markets. If you hold more than 4% of your wealth in UK shares, you’re displaying familiarity bias since you are investing in “what you know”.

A falling pound and high inflation mean interest rates will likely rise sharply

One of the immediate consequences of the mini-Budget was that markets reacted negatively to announcements about tax cuts funded through borrowing.

Sky News reports that, at one point, sterling slipped by nearly 5% to a low of $1.0327. That’s an all-time low against the dollar, surpassing the previous low point set in February 1985.

A weakened pound makes imports more expensive, which could further push up inflation. In addition, interest rates often rise during periods of currency weakness to attract money into the economy.

It’s worth noting that, after the reversal of the abolition of the 45p tax rate, the pound rallied, returning to the level seen before the mini-Budget, at around $1.13.

The likely result of the weakness in the pound is that interest rates will rise sharply. Schroders expect the base rate to rise to 5.25% in the middle of 2023 – more than twice the current level.

That’s bad news for borrowers, but potentially good news for savers.

You will have seen the headlines that many mortgage lenders immediately withdrew their mortgage deals, with Moneyfacts reporting that almost 1,000 products were removed from the market in just a few days after the mini-Budget. Many of these have been repriced at higher rates.

The BBC reports that the average rate on two-year fixed mortgage deals jumped to 5.75% on Monday 3 October, up from 4.74% on the day of the mini-Budget.

This means that anyone looking for a mortgage into 2023 will likely pay a significant amount more than before, and those coming off the low-cost deals popular over the last five years will see their repayments rise sharply.

In theory, savers should also benefit from higher interest rates on cash savings, but these have yet to filter through to the market in a meaningful way.

BoE action supported pension funds

It’s likely that you’ve seen some pretty alarming headlines over the last couple of weeks. The Telegraph’s “Pension funds crisis forces £65 billion bailout by Bank” is typical of the media reporting of the fallout of the mini-Budget – but it’s important to note that BoE action was designed to protect pension funds.

If you have a “final salary” or defined benefit (DB) pension

The recent sell-off of British government bonds (“gilts”) caused the rate of return the bond generates (the “yield”) to dramatically increase.

This affected defined benefit (DB) or “final salary” pension funds because the pension schemes typically invest more than half of their assets in bonds, in order to pay pension liabilities decades into the future.

To avoid being exposed to market volatility, these pension schemes typically hedge their positions through gilt derivatives managed by so-called liability-driven investment (LDI) funds overseen by major fund managers such as BlackRock, Legal & General, and Schroders.

If yields rise too far and too fast – as they did after the mini-Budget – the schemes need to provide more cash to the LDI funds because they end up paying out more money in the transaction than they are receiving.

The recent sharp moves prompted emergency calls for the pension funds to provide collateral, so they may only have had a couple of days to find this cash. This led to the headlines about the funds potentially “going bust”.

The BoE’s intervention – they stepped in to buy billions of pounds of British government bonds – calmed the market, as it gave pension schemes time to process transactions in an orderly manner to secure their positions.

What it means for you is that, as long as the employer sponsoring your pension scheme remains solvent, there is little risk of your pension not being paid in full.

If you have a “money purchase” or defined contribution (DC) pension

Most UK workers saving into a pension are members of a defined contribution (DC) scheme.

Although you can usually decide where your money is invested, the default option is typically a mixture of equities, bonds, gilts, and other assets. If you’ve checked your valuation in recent months, it’s likely that you have seen a fall in value – mainly as most developed stock markets have fallen in 2022.

If you have years to go until your retirement, there is plenty of chance for markets – and the value of your fund – to recover in the coming years.

Vanguard say that the average “bear market” in the UK – when values are falling – lasts for just over a year, whereas the average “bull market” – where prices are rising – lasts for almost six years.

If you’re nearer to retirement, it’s worth consulting us to determine the best way to draw income. We understand that it’s a tricky time, and we’re here for you.

Accessing income from sources other than your pension could ensure the long-term sustainability of your fund, while a knock-on effect of the current economic situation is that annuity rates have improved in the last few months. This means you may be able to “buy” a higher income for your investment.

2 quick reasons recent market moves could benefit investors

1. The stock market is not the economy

Firstly, it’s important to note that the recent turmoil hasn’t had a dramatic impact on stock markets. The UK’s FTSE 100 – an index of the 100 largest companies in the UK by market capitalisation – fell from 7,159 the day before the mini-Budget to 6,893 at the end of September 2022 – a drop of around 3.5%.

Part of the reason for this is that more than 75% of the revenues of the largest 100 companies listed on the London Stock Exchange are derived from overseas.

In many cases, these profits will be boosted by the recent decline in the value of the pound. This combination of higher profits and lower share prices improves the attractiveness of UK shares and should lead to higher long-term returns.

Additionally, if you have a well-diversified portfolio, the rising value of the US dollar provides a positive contribution to sterling-based returns, as US assets are worth more. This has helped to shore up portfolio returns for many.

2. A fall in stock markets means the opportunity to buy “cheaper” assets

Legendary American investor, Warren Buffett, famously said: “Be greedy when others are fearful, and fearful when others are greedy”.

Many investors believe that it is good to buy at a time when stock markets are low. The principle is that you can buy more shares or units for your money, leading to a boost in profits as and when markets pick up again.

While it’s impossible to time the market, drip-feeding investments in an uncertain market is one possible approach. If the markets go down further, you’re buying at a cheaper level. This could help smooth out your returns, with the hope they recover and grow in the longer term.

Get in touch

If you’re concerned about recent events, or you’d like to have a chat, we’re always here to help. We can talk through your current position and the effect of the mini-Budget on your finances.

Please note

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

All contents are based on our understanding of HMRC legislation, which is subject to change.

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.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.

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