Tuesday 15 November 2016

The High Cost of Bad Behaviour



Behavioural finance, the idea that we make choices based on intuition and emotion more than rational thought, helps us understand what drives our decisions – our biases, fears, and overall feelings about money. But emotion and intuition rarely pave the way for sound decision-making.

The need to make decisions, big or small, is present every day, including choices about money. From saving and investing to paying down debt, making the “right” decisions is not always black and white.

If you want to avoid making costly mistakes with your financial planning, here are the things you will need to understand.

Identifying Behavioural Biases

No matter how rational you think you are, we are all human and act on emotion from time to time.

Several biases, or triggers, are built on this premise, here are some of the most common that relate to your money:

  - Overconfidence: the tendency to place too much confidence in your choices about money (like when we found that one ‘star’ fund manager)

  - Anchoring: using old, outdated information or rules of thumb to justify past decisions

  - Representativeness: making connections that aren’t really there (Trump won the election, the market went up, so that must be good for the economy, right?)

  - Loss aversion: a reluctance to accepting loss, even if it’s costing you money (I won’t sell it now, because it’s sure to come back)

  - Regret reduction: avoiding certain actions so regret is not an option

  - Blind spots: failing to see the behaviours that hold you back


Each of these biases in financial decision-making can cost you significantly. For example, being overconfident about your goals may mean you fail to spot check them periodically, which could mean falling short of your objectives.

Failing to see the missteps in your financial behaviours or the holes in your plan may result in not saving nearly enough or continuously selecting the wrong investment.

Likewise, holding on to a poorly performing investment simply because you don’t want to realise the loss can mean even bigger losses down the line.

If you’re avoiding regret, it usually means you’re not taking the right actions to reach your objectives. You may have been burned by the market before and are sitting on the sidelines waiting for your time to get in. But the evidence shows it’s ‘time in the market’, not ‘timing the market’ that really counts.

Biased short-term perspectives based on emotional responses result in lost opportunities, wasted costs, and more importantly, unhappy and subpar investment returns.

How To Overcome Your Behavioural Biases

So, how do you overcome behavioural pitfalls with your financial planning?

First, you have to recognise that decisions based on emotions are likely to be poor decisions.

For instance, according to behavioural finance research, by focusing your attention on emotional feelings instead of proven, rational methods, this can cost you 4-5% in lost returns on your investments each year. Now that’s an expensive mistake!

Understanding what triggers you to make, or avoid making, certain decisions is the next step. If you see yourself falling into one of these categories, try setting up a list of hard and fast rules that can help steer your next move.

For example, never make investment decisions straight after reading the morning papers. Instead, take some time to cool down and reflect before coming to your decision.

How a REAL Adviser Can Help

If after this, you found that you’re still succumbing to behavioural biases, there is where working with a REAL financial adviser can help

Getting advice from an experienced professional who not only understands these biases but also works to stand objectively in between you and the big mistake is a service worth paying for in its own right.

REAL advisers do just that. We provide unbiased professional advice when it’s needed most – when your circumstances change, when markets are volatile, or when there’s doubt about your future success.


Thursday 13 October 2016

How to Steady the Ship After your Divorce



Ending a marriage comes with a large handful of challenges, with money usually topping the list.

As a divorcing woman, you may feel overwhelmed because you spent your married years letting your spouse handle your financial picture. It’s time to take the bull by the horns and set yourself up for success by following these tried and true steps.

1. Update your accounts

The first step in steadying the ship is to take back control over your accounts.

If you have changed your name, you will need to update your bank and investment accounts. Identification cards, passports, and other property in your name will also need to be updated as soon as possible.

It’s not exciting, it is boring, but it’s a necessary step toward protecting what is rightfully yours while getting yourself organised for your new life.

2. Create your own goals

Throughout your marriage, you probably had a number of financial goals you were working toward with the help of your spouse - paying off the mortgage, university fees and so on.

You now need to create your own goals, remember it probably wasn’t raining when Noah built the ark!

Getting ready for retirement, paying down mortgages or loans or funding an account for travel all look a little different when you’re on your own.

Knowing what you want is the best place to start.

3. Have a plan in place

After you’ve determined what you’d like to achieve, you need to work out how you’re going to achieve it...

Your new financial plan should answer questions like:

  -  When do I want to reach these goals?

  -  How could I use my current and future assets to help me get what I want out of life?

  -  What does success look like within this new plan?

Getting clear about the path you will pave to secure the things you want in your financial life is a powerful step toward securing a stable future. For help with creating an actionable financial plan, check out our guide here.

4. Focus on what you can control

Emotions run high during and after a divorce, and they have a tendency to get in the way of reaching your new found freedom.

To steer clear of emotional pitfalls, focus on taking control where you are able. These areas may include paying yourself first through automated savings plans and investing with a long-term perspective in mind.

In addition to taking charge of your savings and investments, understanding the difference between what’s coming in the door (income) and what’s going out (expenses) each month is necessary for maintaining a tight grip on your plan. Know your budget inside and out, and make it work in line with your overall goals – without getting caught up in the things you can’t control.

5. Get help

Finding financial stability after divorce doesn’t mean you have to go it alone. At Jones Hill, we understand the financial complexities that come with ending a marriage and work to help you  move forward in the best way possible.

We lend an expert hand in building a new financial plan that fits your updated needs and goals. 

To schedule your consultation and get started down your post-divorce financial path, contact us today.

Wednesday 12 October 2016

WASPI -Why some women born in the 50’s have been stung...twice!



You may have heard me on BBC Wiltshire yesterday morning talking about the Petition that is being put forward by Women Against State Pension Inequality (WASPI) for the government to help ease the financial uncertainty for women born in the 1950’s who say they have received little or no notice that the state pension age for women is being delayed by up to 6 years.

Firstly, a bit of history - back in 1908 the Government of the day set up the ‘old age pension’ aimed to help those over age 70 earning less than £2,000 a year (in today’s money).  It was generous for it’s time and was means tested.

In 1925 it morphed into becoming contribution based, i.e. you had to pay into to it to receive it, and the start point was age 65 of the youngest spouse.

Under those rules Michael Douglas would be 90 years old before he could get his old age pension (are he and Catherine Zeta Jones still married?).  This was deemed unfair, so just after the outbreak of WW2 women’s old age pension age was dropped to 60.  And there it stayed for 55 years!

In 1995 we started the process of reducing some of the discrimination between men and women.  Many ex-communist countries have opted not to reduce the discrimination as they believe women are disadvantaged by usually being the one to bring up the children.  

In 2007 the Labour government decided to increase state pension age again eventually up to age 68, just 2 years off what it was originally set at in 1908!  But it’s still not means tested...not yet anyway!

The decision was then taken that, in 2010, state pension age would start to increase and by 2020 would be complete. In 2011 this date was brought forward to 2018. 

Of course people are living longer too, so delaying state pension for everyone will save the government a lot of money.

Apparently the government wrote to those concerned, and put adverts in the press, however when pushed for evidence of this under Freedom of Information, they refused as the cost to do so would be more than £600.  No one remembers getting a letter or seeing any adverts. In 1995, only 1% of the population, 600,000 people, had internet access - remember 26K modems and the funny noises they made when they connected?

If the DWP gets mail returned, it doesn’t always try to track you down, and they freely admit that a sizeable proportion of their mail doesn’t even get opened. Can you imagine expecting to be claiming your state pension in a year or two, only to find that it’s been delayed by up to a further 6 years!  Somewhere between 300,000 - 500,000 women are affected.

Some women were delayed by the first change to 65, and then by the second change as well.  Many didn’t know about the first change and so the double whammy will have sent them into shock.

Men’s state pension age was delayed too.  But they were given over 7 year’s notice of a 1 year delay.  

Ex pensions minister, Baroness Ros Altmann, said that at least 10 year’s notice should be required to give people adequate time to make alternative arrangements.  It took them 14 years to write to those affected by this debacle, but they say there is no wiggle room to put it right.

To compound the problem, at best, many women affected have small private or company pensions as companies used to exclude women and part timers from their company schemes.  They were highly reliant on getting their state pension, and it’s been thrust beyond their grasp, twice.  They were also much more reliant on their husbands staying in work for longer than expected.

Previous Pensions Minister Steve Webb said he acted too hard and too fast.  Despite this, Baroness Altmann ruled out any help on 26 Sept 2015 even though when she was Director General of Saga in 2011 she called for a slower timetable and better information.

There was a debate, which the government refused to take part in, on 7 January 2016 and it had unanimous support from those attending.  But, as a backbench motion it had no force to make the government act and DWP & Justice Minister Shailesh Vara said there would be no change.

The second debate on 1st February 2016 was also rejected by stonewall Shailesh Vara, although she said that the women could of course claim Job Seeker’s Allowance instead.  This is worth much, much less than state pension and comes with a raft of terms and conditions designed to reduce how much you can have.  

You can understand why women affected are very unhappy!

Here’s hoping that something more positive comes from this latest petition. We know there is going to need to be a compromise but it’s likely that one party will be compromising much more than the other.

If you want to know your state pension age, click here.

Remember that, at best, basic state pension is often little more than £20 a day, so you absolutely need to provide for yourself - if you’d like to talk pensions then get in touch.

Friday 7 October 2016

The Active/Passive Debate




A heated debate over the benefits – and drawbacks – of active and passive investment management has been a constant in the investment world for years. Supporters for active investment focus on the potential for high returns, while passive investment fans focus on low fees and simplicity in portfolio construction. At Jones Hill, we understand the need for both, but we want to shed some light on the differences.

Confused about how active or passive management fit into your investing goals? We’ve got you covered.

 The Lure of Active Management

Active investment managers put together a mix of investments meant to outperform the broad market. They may look at economic factors, sector or company research, and market trends to pick and choose which investments to include in a portfolio. These strategies are based on one tempting principal: to beat the market (or appropriate benchmark). 

While active management is attractive on its face, the strategy comes at a cost. Actively managed funds are more expensive than their passive counterparts which ultimately eats away at your returns. To add to the pain of active management, most managers fail to outperform the market – especially when it comes to core holdings like large company stocks. If you don’t feel like spending your time chasing returns, active management probably isn’t for you.

 Logic in Passive Management

On the flip side of the investment coin is passive management – a portfolio strategy that uses simple tracking of an index to generate investment returns. Passive managers don’t try to reinvent the wheel; instead, they select the same stocks found in a particular index, for instance, the FTSE 100, and put together a portfolio that mimics those holdings.

Because passive management doesn’t include in-depth research or ongoing buying and selling in an attempt to boost returns, investments here are much less costly. Instead of focusing your time and energy on chasing unrealistic returns to make up for fees, you can sit back, relax, and know your investment is using proven logic to give you a respectable return over time.

 Who Wins the Investment Debate?

Both active and passive investment styles can help you reach your investment goals, but there is a clear winner in certain situations. Passive investments are a smart choice for your core holdings since history has shown us that active investments simply don’t live up to the performance hype. However, adding low-cost active investments as a small portion of your portfolio gives you access to specific sectors or certain market trends, potentially enhancing performance.

At Jones Hill, we are strong supporters of the low-cost, sound investment strategies represented by passive management styles. But we also understand how active management can play a small part in your overall portfolio design. If you want an expert to help you navigate the world of active versus passive investment strategies, contact us today. 

Tuesday 4 October 2016

Risk Tolerance - Meet Mr Risky and Mrs Cautious


Well, “the risk tolerance chat” is the investment equivalent of the “birds & the bees chat”, important stuff to say the least! 

Properly understanding your risk tolerance allows you to be invested in line with your goals and objectives instead of lying awake at night worrying what your investments are up to. 

Investment risk and risk tolerance, you’ve probably heard tons about it, but might still find yourself scratching your head thinking.. “what on earth is it?” 

What On Earth Is Risk Tolerance?

Risk tolerance is how much risk you can handle in your portfolio and is determined by your investment goals. For example, Mrs Cautious has modest financial goals and a long time to achieve them, therefore she doesn’t need to take on much risk and would likely have a low risk tolerance. After all, why take more risk than you need to?

On the other hand, Mr Risky has more ambitious goals and he’s in something of a hurry (think Friday evening rush hour commuters). Mr Risky is more likely to hit the gas and cut a few corners because, in his view, the reward is worth the risk.

Understanding where you sit between Mrs Cautious and Mr Risky is the art of risk profiling. 

Mr Risky Meets Mrs Cautious 

But what if you have the needs of Mr Risky but the personality of Mrs Cautious? For lots of people, the answer is just to invest in riskier stuff, right? 

Unfortunately not, and this is where we find a lot of people get stuck and worried about what their investments are doing (Up.. Down.. Up.. Down). 

If you’re in this situation, don’t jeopardise your nest egg. Instead, consider revising your investment goals to something a little more modest (do I really need 2 weeks in Fiji?), or putting a few more quid into your monthly savings plan. 

The Behaviour Gap

For years there have been attempts to simplify the process of identifying risk tolerance by using questionnaires and other tools, but the truth is there are no shortcuts (listen up Mr Risky).

One reason for this is the difference between what we think we would do in a particular circumstance and what we would actually when that circumstance arises. This is called the “behaviour gap”. 

For example, in the annual fire drill at the office, everyone knows not to fetch their coat / briefcase / favourite stapler, but we just can’t help it, we just need that stapler right?

This is the behaviour gap in action, we know what to do when the fire bell rings, but when it happens, we go searching for our belongings - and that’s the risk tolerance conundrum!

In an investment context, the equivalent is sitting in your financial adviser’s office, calmly informing them that you can live with a market fall of, say, 20%, but when you start to see red, the first thing you want to do is pick up the phone and scream SELL, SELL, SELL! 

At Jones Hill, we realise that properly understanding your risk tolerance is an important part of the financial process. That’s why we ask searching questions and listen attentively, so that we can design a portfolio that’s just right for you.

Friday 30 September 2016

The Hype of Past Performance

In the world of investing, we all should consider a few things before picking where to park our hard-earned money. Questions about how much volatility you can stomach, how long you will invest, and the purpose behind the investment are common, but if you’re like most investors, some attention is given to performance. And so it should be!

But is past performance the best indicator of future performance? Based on research and experience, our vote is a big NO!

A Major Player in Fund Performance

It’s easy to be drawn to high performing funds. Who doesn’t want an impressive rate of return – which may or may not come with some bragging rights? Despite the appeal of double-digit earnings, a handful of studies show that past performance isn’t a real indicator of future reward. In fact, the biggest predictor of a fund’s performance is cost.

Every fund has a built-in cost of doing business, known as the expense ratio. Portfolio managers are paid to create and maintain a bundle of various investments within a single fund, making it easy for you as the investor to participate in a well-rounded, diversified investment. The expense ratio pays for that convenience by reducing your total return.

A recent study by Morningstar, the leading global research provider on investments, broke down the importance of costs when it comes to picking your investments. The data reveals that across all asset classes, the least expensive funds outperformed more costly options each and every time. 

Staying in Control

So how do you make sure you stay in control of your investment portfolio’s overall cost and total performance? Start with your investment style. Active funds, or those which chase returns in an attempt to outperform the market, have higher costs than their passive counterparts. Despite the appeal in terms of performance, research shows that active funds do not consistently provide higher returns over time (that’s before and especially after costs!). 

That’s because chasing performance is less about skill and more about uncontrollable luck.

Passive investments – those which track an index in an attempt to reflect the performance of a specific market – have far lower fees, leading to less drag on your total return. Investment managers who follow a passive management style don’t get caught up trying to beat the market, but instead, they focus on creating consistency and simplicity in their investment choices.   

At Jones Hill, we understand that to reach your goals you need investments that perform well over time. Instead of focusing on the hype of outperformance, we help you construct investment portfolios that are low-cost, tax-efficient, and in line with your tolerance for risk – all which allow you to enjoy your life without wasting time chasing unicorn returns. 

Contact us today for a discussion about your investment objectives and how we can lend a helping hand. 

Tuesday 27 September 2016

Should I Get A Financial Adviser (And Is It Worth It?)


Financial advisers, are they worth it? It’s a challenging question for any professional, so here’s the how to guide to know if a financial adviser is right for you.

Free Financial Guidance

The Internet can tell you a lot about investment and retirement planning, and best of all it won’t charge you a thing! 

Prefer a bit of human contact? Then get in touch with Pension Wise. Although strictly speaking they’re not advisers, they can provide you with some guidance and point you in the right direction free of charge.

Financial Adviser Charges

The other option is to get real financial advice. But be warned, the old days of ‘free’ financial advice are over. Nowadays fees must be expressed clearly and fairly. There are a number of different pricing models, but these essentially boil down to three main categories:

     1. Hourly - typically around £200 per hour
     2. Fixed fee – a flat fee which typically depends  on the time, complexity and value of the 
    work involved
     3. Percentage of assets under investment – typically around 4% of your assets 

Cards on the table – at Jones Hill we offer fixed flat fees. We always disclose the fees you will pay (in a format you can understand!) and explain our charges fully before undertaking any work on your behalf. We prefer fixed fees as they give you the peace of mind by knowing exactly what you will pay and it means that you are not being penalised simply for having more money (as percentages do). 

So how do the numbers stack up for a typical client who invests £150,000?

     1. Hourly – a full financial plan is likely to take around 15 hours, so will set you back               around
    £3,000.
     2. Fixed fee – typically range from £750 - £2,500
     3. Percentage of assets under investment – around £4,500 

Financial Adviser Value

Those are some pretty big numbers, so the real question is will a financial adviser improve returns enough to cover their own fees (and then some)?

In most instances, the answer is yes. A number of studies have shown that advisers help clients to reduce the ‘behaviour gap’, often to the tune of 1 – 2% per year. An adviser is more likely than you are to be able to see the big picture and take the long term view (remember Brexit?). They will be also able to improve your tax position and save you £££’s in otherwise paid tax. 

But there are other sources of adviser value that are just as real but won’t necessarily show up in your bank account. You might call this lifestyle value. 

Consider the time, knowledge and inclination required for self-managing your own investment and retirement plans. If you’re the type of person who doesn’t find reading personal finance particularly interesting, or has more exciting things to do with your life, then you likely would benefit from having a financial adviser. By being able to hand off your financial affairs to a professional, qualified expert you will gain the time and peace of mind to do the things you enjoy most. 

The bottom line is this, financial advisers aren’t right for everyone. For many people, a bit of Internet research, topped up by a visit to Pension Wise is likely to be just fine. But if you’re financial affairs are complex and you value spending the time on the things you enjoy, then you will likely to benefit from having a financial adviser. 

Remember, money comes and goes, time only goes. 

Monday 26 September 2016

So Brangelina are to divorce – What happens to the money?



It’s all over the media – press, radio, TV, Facebook & Twitter - Brad Pitt and Angelina Jolie are to divorce! The questions many are asking are “who cheated?” and “with whom?” but more practical considerations arise. 

When there’s a split, how do you disentangle your financial and lifestyle plans from those of your partner?

Sometimes life serves you lemons …

The typical Jones Hill client may not have the finances and lifestyle of Brad & Angelina (possibly a rash assumption on our part!), but they’d be wise to involve a financial adviser in the separation negotiations. In the absence of a pre-nuptial agreement (Apparently Brad & Angelina didn’t have one, so you’re in good company!) you would be foolhardy not to take specialist advice before agreeing on the terms of a split. 

It’s true that a financial adviser will add to the costs of the separation, but the arguments for consulting a financial adviser regarding a divorce are similar to the arguments for consulting one at all – please also see our blog post “Are financial advisers worth it?”

In a separation there may be investments, pensions, property (eg a family home, holiday home) and financial liabilities (eg a mortgage) to be split. Pensions can be split on value (for younger clients) or on income (for more mature clients).  It may be prudent to balance a pension against other assets to avoid having to cash-in and start afresh (offsetting) or it may be possible to have a portion of a pension paid to another party (earmarking) rather than start new separate pensions (splitting).

Market conditions or other reasons may make it undesirable to sell property, and in that case, a balance will have to be achieved using other assets. The division of mortgage liabilities will likewise need careful consideration according to the age, employment situation and other liabilities of the parties.

The tax efficiency of any financial arrangements should not be overlooked. Whilst gifts between married couples or civil partners are tax-free, the transfer of assets may give rise to Capital Gains Tax liabilities, and the post-split tax situation of the parties may be very different from each other.

Whether you’re married, in a civil partnership or co-habiting, if separation is on the cards, don’t forget to contact your financial adviser as well as your divorce lawyer.

PS – Brad/Angelina – remember, if you’re calling Jones Hill from outside the UK, add +44 in front of our telephone number!

OK Brad, we can understand that if Angelina has just announced she’s divorcing you, then making lemonade won’t be high on your list of priorities.

Friday 23 September 2016

Get SMART About your Goals


Nothing feels better than accomplishing a goal you’ve set for yourself. Maybe you’ve been burning the midnight oil at the office and finally got that big promotion, or maybe you’ve put in countless hours of sweat into a home renovation. Regardless of your objective, seeing the end result is a beautiful thing.

It’s no different with goals related to your money, but for some reason, for a lot of people financial objectives seem a bit more challenging.

Goals that Work – and Ones that Don’t

Would you set off on a cross-country road trip without some idea of where you were headed or when you wanted to arrive? Most of us would avoid that disaster by having some sort of plan in place. Your financial goals should follow the same thought process: what do I want and when do I want it? In other words, they should be SMART: specific, measurable, achievable, relevant, and trackable.

You can work hard and set aside a few pounds here and there, but without setting specific goals, you are likely to feel a bit lost. Setting objectives for your financial life starts with understanding the specific “thing” you’re aiming for and then defining what success means in the context of that objective.

For example, your objective of wanting to retire by age 60 with enough assets to draw 75% of current income is a specific, measurable goal that you can track periodically. Simply stating you want to retire one day is lofty at best and sets no parameters for measuring your progress. Knowing where you want to go is great, but if you have little to no idea where you’re starting from, you’re in trouble!

Action is Everything

Your ’retire by age 60, drawing 75% of your current income’ objective only works when you figure out what’s needed to get there. To frame your goal, you will need to ask intelligent questions, such as:

  • How much do you need to save now in order to reach the right account balance?
  • Which investment vehicles do you need to set up to save in a tax efficient way?

Answer these questions and you’ll be on your way to sketching an actionable financial plan.

But if you’ve struggled with major financial goals, you’re not alone. Working toward something as far off as retirement, buying a second property or funding your children’s education can be overwhelming to think about, let alone plan for. These goals seem too big and too distant, but breaking down your financial goals into smaller, manageable chunks can help.

Let’s go back to our retirement goal – start with the big picture. If your lifestyle in retirement involves expensive hobbies, you’ll probably need more than someone who plans to just potter ‘round the garden.  

Focus on understanding the big number first, and then break that down into smaller pieces that fit into your everyday life right now. Establish milestones for yourself that are realistic (i.e. savings X amount by the end of next year) so you don’t set yourself up for missing the mark.

Accountability Along the Way

If you’re like most people, setting a goal is not where the problem lies. Of course, you want to retire, or buy a beach home, or send the kids off to school without the burden of tuition – these goals are not uncommon. Unfortunately, reaching them without too many hiccups is. If you are struggling with reaching financial objectives, it’s time to get SMART about what you want. 

Being accountable to another person who understands what you are trying to achieve is a powerful step in actually reaching your goals. At Jones Hill we know what it takes to get to the next level of your plan, and we bring a perspective that is both unbiased and proactive. We will boost your level of understanding about different methods to achieve your goals, leading to an ongoing relationship that helps you build, achieve and maintain your best financial life.

Friday 16 September 2016

What investment questions should I ask my adviser?


Unlike “the answer to life, the universe and everything” in the Hitchhiker’s Guide to the Galaxy, this question has no simple answer. However, just as a journey of a thousand miles starts with but a single step, here are three questions that will help to get your relationship with your adviser off on a sound footing.

1. What’s my investment philosophy?

There are several investment ‘styles’. To some extent the styles available will depend on your own and your adviser’s investment philosophy. This is why it’s important to choose an adviser who is sympathetic to your needs and objectives and doesn’t try and shoehorn you into something you don’t understand.

At Jones Hill, we see it as our job to work with you to achieve outstanding outcomes. An important aspect is whether you want to limit investments to companies trying to achieve certain moral or ethical standards, for example by specifically excluding companies that invest in tobacco or weapons.

Whatever you decide, flexibility is key so that if events – whether market or personal – take an unexpected turn, you are not stuck with an unsuitable plan.

2. What’s my risk profile?

Before making a single investment your adviser needs to assess your attitude to risk. In a nutshell, the higher the risk, potentially (not always!) the better the return, but also the greater the risk of failure. How much risk can you stand without it keeping you awake at night?

Well, younger people can generally afford to be a little more adventurous as they have longer to recover from any market setbacks. But for those of us who are a little older, we may want to settle for something a bit safer, which provides more stable and predictable returns.  Boring as this may sound, it can be an effective strategy. 

No conversation about risk is complete without mentioning Diversification, the golden goose of finance! In essence, diversification means not having all your eggs in one basket, whether that be stocks, bonds or property. 

The reason being that sometimes one asset class is hot and sometimes it’s not, but it’s unlikely that all asset classes (property, bonds or equities) will all be swinging the same way at any one time. 

3. When can I retire?

The £64,000 question! Why? Because it might be today, in 5 years or 25 years. The problem is, if you don’t know, then you’ll likely just keep plodding on aimlessly when you could have hung your boots up years ago. 

The most significant factor in investments is time. The longer you save, the more your “retirement pot” is likely to contain. Whilst this may seem like a statement of the bleeding obvious, the fact is that most people leave it too late to start serious saving. Get ahead of the curve by knowing where you’re heading and when you need to be there.

In summary, make sure that you prepare for your first meeting with your adviser by thinking through the questions and topics you want to discuss, it will enrich the conversation and allow you to discuss the things that are most important to you. 

Wednesday 14 September 2016

Savings Methods for Joining the Property Ladder


Helping the Children onto the Property Ladder


It’s common for youngsters to want a place to call their own, but getting to the first rung of the property ladder can seem out of reach for most. If you’re a parent, you probably feel a bit obligated to give them a financial boost. 

A number of schemes are out there that might be looking into to make getting your children into their own home – and out of yours – less of a stretch.


Help to Buy ISA


First-time homebuyers – those who have never owned property in or outside the UK – have an opportunity to save within a Help to Buy ISA. 

The account offers a tax-benefited way to set aside funds specifically for the mortgage completion deposit with the potential to gain up to a 25% bonus on savings from the Government. 

Account owners can save up to £200 on a monthly basis, with an initial deposit of up to £1200 in the first month.

Setting your kids up with a Help to Buy ISA lessens the financial blow of buying a home because the Government pays a bonus of up to £3,000 at the time the sale is complete. 

So long as your children aren’t purchasing a home that costs more than £250,000 (£450,000 in London), the extra cash is theirs for the taking. While a Help to Buy ISA scheme can be helpful for your as parents, there are some things to watch out for.

The tax-free bonus is only applied to the first £12,000 saved, and a minimum of £1,600 must have been put away to receive any bonus at all. Additionally, the bonus is not applied until mortgage completion, meaning funds cannot be used for an exchange deposit. 

The Help to Buy ISA must be held in cash, no investments, which means that due to low interest rates, you will only receive an interest rate of a couple of percent at best. 

It is also important to note that Help to Buy ISAs must be used for properties purchased with a mortgage, not cash, and there is currently no assistance for prospective homebuyers who wish to rent the purchased home. 

Account owners must also meet the following requirements: be a resident of the UK 16 years or older, and not have another active cash ISA established within the same tax year.


Savings and Investment Alternatives


In addition to the Help to Buy ISA, conventional savings and investment accounts can work to the make your children’s home buying dreams a reality. Regular savings accounts pay minimal interest but do allow for an easy way to shore up a mortgage or exchange deposit well before funds are needed. 

Importantly, some of these accounts have restrictions on how many withdrawals can be made in a given time frame, while others require funds to be locked in for a set period of time prior to opening.

Investments also offer a method to save toward home buying goals without the contribution limits tied to ISAs. And while some investments provide a higher rate of return than conventional savings or Help to Buy ISAs, the risk of loss of capital is real.

In order to get your children out of your home and into their own, your upfront financial assistance may be a necessary factor. Help to Buy ISAs are a smart way to earn a bonus on funds without the tax burden, but it's important to understand the limitations. 

Savings and investments also help towards reaching a certain amount of savings for a home purchase, but only when risk is balanced with potential reward. 

To successfully get your children onto the property ladder, consider which methods or combination of accounts fit your circumstances best. 

Friday 9 September 2016

A Woman’s Guide to Pension Sharing in Divorce


If you’re a woman, you’re statistically more likely to experience financial and emotional hardship throughout the process of divorce, especially if you are on the brink of retirement. One of the main challenges you may face at the moment is trying to pick your way through pension sharing, knowing that if it goes wrong you could be left short of money in later years.

What is Pension Sharing?

Pension sharing is the process of splitting pension schemes built up during working years. Any one of your ex-partner's personal or work-related pensions can be shared based on a percentage dictated by the financial settlement agreed during the divorce process. Pension sharing effectively awards a partner with a transferable credit for sticking it out in the relationship, creating a way to use funds that would have been available to both parties should the marriage have remained intact.

Considerations for Divorcing Women

If you are considering a pension sharing order, special care should be given to certain aspects of the process. First, pension sharing is based on a percentage of your partner’s pension valuation – not a hard and fast amount. This creates complexity due to the length of time that passes between agreement on that percentage and when the transfer credit takes place. Pension values fluctuate over time, especially when underlying investments are relatively high-risk. If markets take a turn for the worse, you may be left with far less than anticipated.


As an example, let’s say Mary is set to receive 50 per cent of Tom’s personal pension, currently valued at £250,000. Four months pass between the time a pension sharing order is granted and when the transfer credit is implemented, and Tom’s pension valuation has dropped to £170,000. Instead of receiving half the initial valuation, Mary is left with half of the current pension value - a difference of £40,000!

Managing the Time Risk

Remedies that lessen the blow of the moving target of pension valuation are scarce, but you can work quickly when pension sharing orders are in play to ease concerns. Overarching rules provide that pension sharing orders are required to be completed within four months, and pension providers must act swiftly to deliver the transfer credit. Also, asking for a pension valuation near the start of the implementation process is a sound strategy to safeguard yourself from drastically lower valuations.


Additionally, knowing where the pension credit is to be transferred well before the transfer credit is implemented is a critical step. It is rare that you are eligible to take ownership of a transfer credit under the same work or personal pension scheme already in place by your partner. Instead, transfer credits are applied to pensions in your name. If you do not have a pension prior to a pension sharing order being granted, you should work with a professional to create one.


Speed and planning ahead are not the only means to a successful end with pension sharing orders; you have the opportunity to protect yourself from lower valuations and transfer credits by building some flexibility into financial settlement documents. For instance, if other marital assets – cash, property, collectibles etc. – are available, these can be offered up to make up for any delay between the initial valuation and the actual transfer credit.

The Bottom Line

Pension sharing can be a viable method to achieve financial stability long after your divorce is finalised, but only when expectations are realistically set. Be proactive when it comes to obtaining the valuation and determining where the transfer credit will ultimately land, and make sure that you know your options if a shortage surfaces. The financial aspects of divorce are far more manageable when you remember the process of pension sharing requires equal parts time and patience, with a pinch of flexibility thrown in for good measure.

Tuesday 6 September 2016

Minding the Retirement Income Gap


Achieving a degree of financial stability throughout retirement years does not happen on a wink and prayer alone. Without a respectable amount of effort put into planning for sustainable income prior to leaving the workforce, your dream retirement years could quickly turn into a far different, rather dreary reality. 

Fortunately, minding the retirement income gap – that is, making sure you do not outlive your assets – can be achieved by focusing on two crucial components of income planning: longevity and investment performance.

The Challenges

Part of the struggle in planning for the appropriate amount of income in retirement is the unpredictability of life expectancy. Although research provides data on average lifespan for males and females born in certain years, pinpointing the exact moment income is no longer needed is an impossible task. You may initially base retirement income needs on a 20-year retirement, but should health or other circumstances change, you may be forced to stretch your assets an additional five, 10 or even 15 years. 

Similarly, adverse health diagnoses may mean an increase of income for a shorter period of time. If you selected an annuity as the sole vehicle for generating retirement income, shifting cash-flow to meet changing needs is not an option. When flexibility is not infused into your retirement income plan from the start, specifically through diversification of income sources, minding that gap may be out of the question.

Mr Market


Market performance lends a hand in retirement income planning as well. In an ideal plan, underlying investments are able to generate a return high enough to sustain a selected withdrawal rate. For instance, following the conventional rule of thumb suggesting one take no more than a 4% withdrawal from assets each year typically allows retirees the ability to survive the worst of what the broad market has to offer in terms of performance, all while sustaining an adequate level of income.

Managing Drawdown


However, research has found that maintaining a 4% withdrawal rate throughout retirement years actually results in excess funds – more than double initial asset worth for 2/3 of individuals. The traditional school of thought surrounding the 4% rule is a safe place to start when it comes to not outliving assets, but money is left on the table for a large number of retirees who do not include some degree of flexibility within their overarching plan.

Sound income planning is paramount for individuals if they want to ensure the hard-earned money set aside specifically for retirement is able to satisfy cash flow needs over time. However, the unpredictability of market performance and longevity make creating a concrete income plan a true challenge. To mind the retirement income gap, it is necessary for individuals to create a plan that carries a degree of flexibility, not only in terms of the source of retirement income but also as it relates to the amount withdrawn each year.

Thursday 28 January 2016

Will your pension leave you stuck in the mud or free as a bird?


If you are retiring soon you’re probably looking forward to taking advantage of the new pension freedoms, which give you more flexibility and control over your retirement savings. 

However, before you go jumping in with both feet it might be worthwhile giving some thought to the challenges that you are likely to face in arranging a secure and flexible income for retirement. 

Now that you’re no longer required to purchase a lifetime income annuity, there are a few questions to consider:

* Should I buy an annuity at all?

* If not, then how should I manage my pension pot to make sure I have enough income to cover my spending?

*And perhaps most concerning of all; am I likely to outlive my savings?


A report by Retirement Advantage, published last week highlights the compromise between having a secure income and having the flexibility of a drawdown pension. It turns out that what most people value above anything else is security and certainty of income (43%), and coming a close second was flexibility (34%). 

Unfortunately, it can be tricky to find a middle ground between the security of a guaranteed income and the flexibility of being able to access larger sums in case of unexpected circumstances.

Long lives the annuity  

While the days of the traditional annuity-for-all might be over, the certainty of a guaranteed income still makes good sense for those who value security, especially if the annuity is set to rise with inflation. Annuities are still one of the only options for insuring you against outliving your savings. 

But annuities aren’t for everyone, particularly if you’re looking for flexibility. Annuities are a one-size-fits-all deal, which won’t adapt to your changing needs. For example:

* If you are unfortunate enough to die 5 years into retirement an annuity won’t leave anything behind for your loved ones. 

* Or if after signing the contract you learn that you have an incurable disease that will reduce your life expectancy to a precious few years. In this case, your annuity won’t give you any flexibility to take extra income so that you can enjoy your final years.

Drawing on flexibility 

An alternative approach might be to self manage your retirement savings through a drawdown pension. 

The safest way to go about this would be to pick a reasonable life expectancy (say 100), invest your pension pot in line with your attitude to risk, and each year withdraw enough money to cover your expenditures ensuring that you don’t leave yourself short for the future.

The increased flexibility of being able to withdraw money as and when you need it is likely to have a wide appeal, particularly as life is uncertain and often results in unexpected costs. 

However, what is gained in flexibility is fundamentally lost in security. You can have no certainty that your pension pot won’t run out during your lifetime, particularly as the value of your pot is linked to the uncertainty of your investments. 

Additionally, tough spending decisions will need to be made at least annually because you now have the prospect of outliving your pension. 

The best of both

So is it possible to have both a secure and flexible retirement income?

One option might be to use your pension to annuitise your essential expenditure and invest the remaining amount into a drawdown pension. 

This would provide you with the security of a guaranteed income each year for the rest of your life to cover your basic needs, whilst delivering the flexibility to drawdown additional income, as you require it.  

An important decision

You will have worked hard throughout your life to ensure you have a secure income in retirement that is flexible enough to meet your changing needs. This should be a simple and straightforward affair, however as the landscape changes, challenges are likely to present themselves. 

Securing a certain and flexible retirement income is one of the most important decisions you are likely to ever make, at this important juncture in your life serious consideration should be given to how best to manage these potential pitfalls.



 

Why we do it

Everyone deserves to lead a rich and fulfilling life without the worry of running short of money.

 

 

News and views

News, views and our thoughts on what is happening in the world of finance.

 

 

Get in touch

For further information, please don’t hesitate to contact us. We usually repsond very quickly!