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How to weather inflation in retirement

By | Retirement Planning

For the first time, it now costs £100 (on average) to fill up a car. Petrol prices have soared as oil prices have surged across the world – partly due to sanctions on Russia, a major global oil producer, over its invasion of Ukraine. Yet inflation, as a whole, has also been rising for some time. The overall cost of goods and services in the UK has now risen 9% in the 12 months prior to June 2022; the highest since the 1980s. This presents challenges to working households, of course. Yet what about those in retirement? 

Below, our financial planning team at WMM here in Oxfordshire offers some ideas to help pensioners (and those near retirement) to protect their savings and income.

 

Be wary of raising spending

With living costs going up, it is natural to want to meet the increase in your expenditure via higher levels of withdrawals from your pension. Yet this could result in your fund shrinking disproportionately. In the worst case, it could lead you to run out of money later in retirement. If you need to spend more on your essentials then perhaps you have other investments that could be used to provide a more efficient income stream. However, take care to not hold too much in cash, as inflation will erode the value very quickly.  

 

Consider working longer

Unfortunately, not everyone is in the position to draw upon multiple income streams to provide extra retirement spending. For some, it may be best to delay retirement for a few years – letting you build up more qualifying years on your National Insurance (NI) record so you can get more State Pension income. You need 35 “complete” years on your record to get the full new State Pension. Remember, the income rises each year by at least 2.5% under the “triple lock” system and usually follows/beats inflation – protecting its value. Working longer could also give you more time to contribute to your pension pot.

 

Remain true to your strategy

When inflation rises, it eats away at the “real returns” from your investments. For instance, if your overall return for one year is 7% but inflation is 5%, then the purchasing power of your portfolio has only grown by 2%. With inflation at 9% in 2022, many investors are tempted to take on more investment risk to try and keep up. Yet this is not always appropriate with an investor’s time horizon, personal risk tolerance and long-term strategy. 

This is not to say that you should sell your investments! However, those in/near retirement should be wary of changing the investment plan agreed with their financial planner simply to account for the present economic landscape. Although inflation is high right now, it could return to “normal” levels (2%, or close to it) in the coming years. Taking on more risk than you are comfortable with is likely to lead to costly mistakes later (e.g. “panic-selling” if the markets fall suddenly). If you are at all concerned about your investment strategy in light of the current 9% inflation rate, speak to your financial planner. They will hear your concerns and perhaps draw attention to important information or principles that you may have missed. 

 

Invitation

Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM. 

You can call us on 01869 331469 

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).

 

Investing in a recession: a short guide

By | Investment Planning

Nobody knows if the UK will enter a recession in 2022. Yet if it does, how can you ensure that your investments are protected? Some argue that the best safeguard is to invest in “actively managed” funds; i.e. those which employ a professional manager to “time the market” for you (aiming to sell shares before a crash, and buying others before they rise). However, this approach to investing rarely works. Over the last 10 years, for instance, only 17% of actively managed funds have beaten the S&P 500 benchmark. So, how can you invest in a possible recession (which usually, but not always, accompanies a “bear market”)?

 

#1 Continue contributing

There are two main ways to view a stock market crash. Firstly, you could see it as a disaster to avoid at all costs. Alternatively, you could see it as an opportunity to buy more investments “on the cheap” (due to falling share prices). This latter approach is helpful to show why continuing your contributions – e.g. to your pension – on a monthly basis is usually the best approach for individual investors. By drip-feeding your money, you limit the temptation to try and time the market and increase the likelihood that, over the long term, your portfolio will follow the market in its upward trajectory.

 

#2 Keep calm

During volatile markets, one of the worst things you can do is panic and sell investments out of knee-jerk reaction to bad news. Almost inevitably this only serves to crystallise your losses and potentially miss out on the (eventual) market recovery. Stay focused on your long-term goals and remember that you expected volatility along the journey when you originally crafted your strategy with your financial planner.

 

#3 Ensure diversification

One of the difficulties of staying true to your investment strategy during a volatile market is that your mixture of assets can veer off course. For instance, suppose you started a portfolio one year ago with a 60:40 split of equities to bonds. 12 months later, the market crashes and leads your equities (shares) to comprise a smaller part of your portfolio – such as 45:55. Eventually, it may be necessary to rebalance everything (e.g. by selling bonds and buying more shares) so you stay on track. However, when should you do this and which assets should you sell? Here, a financial planner can help ensure that you choose the right approach and avoid concentrating too much of your portfolio in a single asset, market or company.

 

#4 Remember your plan

Before you built your portfolio with your financial adviser, you should have addressed a set of crucial questions that would help you know how to navigate a possible future recession or bear market. One of these is: when will you need the money? If you were looking to use the money within the next 5 years, for instance, then you likely will have “de-risked” your portfolio by moving more of it into “safer” assets – e.g. dividend-paying stocks and bonds – in case a crash occurred before your withdrawal date. However, if you knew that you had 30+ years to invest before needing to withdraw it, then you could decide to take more risks. After all, if a crash does occur in that timeframe (and history strongly suggests that at least one will), then you have plenty of time for your portfolio to recover. Remembering your original investment plan, therefore, can help bring clarity regarding the best way forwards if the UK enters a recession.

 

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Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM. 

You can call us on 01869 331469 

 

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).

 

An example of a financial planning “road map”

By | Financial Planning

What is a financial planning “road map”, and how does it benefit you? Just like a long road trip, a financial road map plots your life journey towards your financial goals. Not only does it help you determine where you are right now, but it reveals the different directions you could go and highlights the distance/work required to reach your destination. Here at WMM, in this article we offer an example of what this can look like. We hope this is helpful and invite you to get in touch to discuss your own road map via a free, no-commitment consultation.

 

Location

Where do your finances stand right now? Gaining a clear picture of your assets and liabilities is key to determining where your goals are realistic. For instance, perhaps in your case the former includes £50,000 cash savings, a £300,000 pension pot, a final salary pension (from a previous employer), a house which is nearly paid off and a large share in a business that you founded. 

However, your liabilities might include your outstanding mortgage, some personal debt (e.g. unpaid credit cards) and a loan used to invest in your business

It is also important to determine the “liquidity” of your assets; that is, how easily they can be converted to cash, for spending. Your business share may be an asset on paper, for instance, but does it produce a regular income? Could you sell it easily and generate a healthy profit if you wanted to, or would you have to lose a lot of value and income in a ‘fire sale’ if needed?

 

Destination

What would you like to achieve in the future? Perhaps you’d like to retire early, at 57. Or, maybe your dream is to travel the world with your spouse after the kids have left home. Whatever your goals, wealth will play a key role in making them a reality. Here, it is important to consider some vital questions to give the best chance of success. For example, how long are you likely to live? (Be optimistic!). What are your income and expenses likely to be in retirement? 

Perhaps your costs will go down since the mortgage will be paid off, the children will (hopefully) be living independently and you no longer commute to work. However, your lifestyle may rise in retirement as you take up new hobbies, make home improvements and travel. Living costs will also be higher due to inflation. Your pension and other savings will need to account for all these factors, and more.

 

Organisation

With your goals now established, it is time to construct a plan (the “road map”) to move you towards them. Suppose your goal is to retire at 52. Assuming your financial planner agrees this is possible, you can start crafting a strategy to achieve this. 

For instance, you will need to factor in that you cannot access your State Pension until much later (e.g. 67 or 68). Also, you cannot access pension funds until age 55 (rising to 57 in the future). So, initially you will need to draw from other income sources – such as your ISAs, regular savings and perhaps income from Buy to Let (BTL) property. This can also make sense from an inheritance tax (IHT) perspective, since ISAs and BTL properties are not automatically exempt from IHT like a pension pot is, or your family home (assuming its value falls under your IHTfree allowance). 

If you also intend on leaving an inheritance to your loved ones, then the plan will also need to ensure that you do not spend so much in retirement that nothing is left for them when you die. Here, a financial planner can help determine a “safe withdrawal rate” for your pension – so there are sufficient funds for a comfortable retirement, but also funds left to pass down later.


Invitation

Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM. 

You can call us on 01869 331469 

 

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).

 

How much pension to retire at 55?

By | Pensions

For many people, retiring in your 50s is a primary financial goal. It can open up freedom to pursue the things you enjoy – such as sports, travel and voluntary work. Yet many people also underestimate how much they need to save to retire at 55. After all, UK life expectancy is over 81 years and, in one year, over 15,000 people may live to over 100. Retiring from 55, therefore, could mean needing a pension that lasts multiple decades. In this article, our financial planning team at WMM explores how much pension you need to retire at 55 – suggesting ideas to help people achieve their goals.

 

How much pension to retire at 55?

Everyone’s income needs are different in retirement. However, studies suggest that in 2022 a couple needs at least £15,700 to cover their basic needs in retirement (or, £29,100 to have a “comfortable” retirement). A single person could live a moderate lifestyle with about £20,000 per year. Assume, therefore, that you retire at 55 and live until 85. This means multiplying these figures by 30, at a minimum, to start to get an idea of how much pension you need to save.

Suppose you need £20,000 per year in retirement. To make this last over 30 years from age 55, you’d need at least £600,000 saved in your pension(s). However, things get more complicated due to different types of pension, as well as inflation.

First of all, most retired people do not simply live on income from a pension “pot” (e.g. from their workplace). They tend to also rely heavily on the State Pension, which comes from the UK government. In 2022-23, the full new State Pension is £185.15 per week (£9,627.80 per year) and requires 35 “qualifying years” on your National Insurance record. This takes away a lot of the pressure to save everything you need for retirement yourself, into a pension pot.

However, secondly, inflation erodes the value of money over time. £20,000 in 2022, for example, will buy fewer goods/services in 2030. This “downward pressure” on the value of your pension pot(s) typically means saving more than you might think you need, to account for the rising cost of living. Fortunately, the State Pension rises each tax year in line with inflation (at minimum). Many “final salary” pensions and annuities also do this. However, you will likely still need to take account of inflation in your pension investment strategy – both before and during retirement.

 

Ideas to retire at 55

To have a chance of retiring at 55, you first need to understand the pension landscape. Pension “pots” can be accessed from this age (rising to 57 in the future), yet some final salary schemes may not be available until later. Your State Pension, moreover, will not provide an income until you reach State Pension age – i.e. your late 60s. Earlier in your retirement from 55, therefore, it will be wise to consider other tax-efficient investment “vehicles” to provide an income until you can start accessing your pension(s). Here, a stocks & shares ISA can be a good option, since the capital can be accessed at any time.

Also, the less you need to spend in retirement, the less you need to save. For instance, having no mortgage from age 55 would take away a large monthly expense (although this goal may not be a priority or achievable for everyone). 

Finally, consider seeking financial advice if you want to retire from age 55. A financial planner can help you think through issues or opportunities you may not have considered. Bear in mind that the earlier you want to retire, the harder it is to project your cash flow, so you may benefit from the software and expertise our experts can offer.

 

Invitation

Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM. 

You can call us on 01869 331469 

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).

 

Could switching these 5 financial products help grow your savings?

By | Money Tips

It is no secret that costs are rising in 2022. Inflation, at the time of writing, now stands at 6.2%, the highest CPI 12-month inflation rate since 1997, and is very much expected to rise further. Households are understandably seeking greater financial stability. Yet many people do not consider switching key financial products or utility costs, which could help save money. Below, our financial planning team at WMM shares 5 of these to consider in 2022. We hope you find these suggestions helpful.

 

#1 Broadband

Those who want an ultrafast broadband, phone and TV bundle are likely to pay an average of £79.40 per month in 2022. The average UK spending is £56.99. 

Of course, in today’s world of increasing home working, a fast internet connection is important. Yet many people are paying too much, or for more than they need. You may be able to find deals close to £15-20 per month.

 

#2 Mobile phone

According to Which?, 40% of customers have stuck with their mobile phone provider for more than 5 years. This has left many people paying more than they should. 

The average UK mobile phone bill is £439 per year (about £36 per month). Yet you could bring this down to nearly £10 with a SIM-only deal, after you have paid off your handset. This means staying with your device rather than upgrading, however.

 

#3 Mortgage provider

For most homeowners, their mortgage will be their highest monthly expense. With interest rates steadily rising in 2022 to help curb inflation, this is driving up the cost of many mortgages on a variable rate. Getting a fixed deal (e.g. 2-5 years) could help provide some stability.

It may also be possible to save by remortgaging with another lender, which offers a better rate. Those coming to the end of their current fixed deal, therefore, should consider shopping around. This could save you £100s each month.

Of course, remortgaging is a big, personal decision and it may not be right for you (e.g. if you are in negative equity). Bear in mind that you can remortgage at any time, but there may be a charge involved if you end your current fixed-deal early.

A financial planner can help you explore the options and come to an informed decision about the right deal, and timing, for remortgaging.

 

#4 Credit cards

Ideally, households should aim for no credit card debt at all. Interest rates are high in 2022 – standing at an average 21.46% APR. 

However, if you have ended up with debt, you may be able to move it to a credit card with a lower rate – e.g. 9.9%. There are even deals offering 0% interest for a limited time (e.g. 36 months), which can make it easier to repay the debt if you are disciplined.

 

#5 Bank accounts

Many people are unhappy with their bank, yet 50% of Britons have never switched providers for their current account. However, doing so could open up opportunities for better overdrafts, more competitive interest rates and higher quality service.

In fact, some banks even offer new customers a “golden handshake” (financial reward) for moving over to them. Switching may seem like a hassle, but it is usually quite easy under the Current Account Switch guarantee.

 

Invitation

Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM. 

You can call us on 01869 331469 

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).

 

3 ways to keep staff during “the Great Resignation”

By | Financial Planning

A third of UK workers are considering a career change in 2022, with the sectors most likely to be affected including Legal, IT & Telecoms and Sales, Media & Marketing. Indeed, many analysts have called 2022 a “job seekers market”, with many sectors offering more vacancies than they seem able to fill. The age groups most affected appear to be 18-24 and those age 65+. Many of the former moved back in with parents since the 2020 pandemic, whilst many of the latter took early retirement (with too many unprepared, financially). 

The reasons cited by workers for leaving employment include a lack of pay rises or bonuses, limited flexibility (e.g. home working options) and feeling disrespected. In 2022, therefore, how can business owners ensure they keep their best staff? What kinds of qualities can employees look for in a good employer? Below, we suggest 3 benefits to keep in mind..

 

Put in a solid employee package

It might sound obvious, but offering a fair salary and decent employee benefits will be strong positive drivers in helping to retain staff. Unfortunately, many business owners do not keep an eye on market rates in their area/industry – leaving them vulnerable to poaching. Be careful not to assume that employees just care about pay, however. You can make a contract much more compelling with tax-efficient ideas such as the following:

  • Matching employee pension contributions (rather than just offering 3%).
  • Offering “death in service” benefits, as a type of life cover.
  • Providing long-term sick pay.
  • Making “salary sacrifice” schemes such as the ‘Cycle to Work scheme’ available.

 

Foster a healthy work environment

Few things are as likely to alienate employees as a toxic workplace. Perhaps discrimination is tolerated to some degree, making people feel unvalued and unwelcome. Maybe there is just a general atmosphere of unfriendliness, gossip or lack of trust between team members. Managers can also be overbearing, or disinterested.

Owners and directors play a key role in setting the tone and culture of the work environment. Part of this means prioritising staff training and team building exercises (e.g. fun days out). It also involves regular check-ins with employees to see how they are doing, encouraging team communication and opportunities to share fears/grievances. 

Finally, showing appreciation – with your words and even with gifts – can go a long way to help people feel appreciated and that their work is recognised.

 

Identify progression opportunities

Not everyone in a job wants to progress up the career ladder. Perhaps they are quite happy in their role, where they are. However, many people do want the opportunity to earn better pay and take on new, interesting responsibilities. If their job feels like a “dead end”, however, then they may start to look outside your organisation to meet these needs.

Small business owners may find this a particular challenge since, by nature, there are fewer job opportunities in the company compared to a larger one. However, if the business is growing and adding more people to the team, then you can paint a vision of where the company could be in, say, 5 years’ time – and the role that your employee could progress into, if they work hard.

Vision and momentum are really important. If people in your team feel like the organisation is not really “going anywhere”, then they might see limited future opportunities to develop their skills and earning potential. You can help address this by providing regular “strategy” meetings throughout the year about where you want the business to go. From there, make sure you follow through and deliver. If not, your team will likely start to see your “strategies” as not grounded in reality or real promises.

 

Invitation

Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM. 

You can call us on 01869 331469 

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).

 

Watch out, scammers about!

By | Money Tips

Scams have always existed, however through the increased use of social media and online accounts scams have become far more common and, often times, harder to spot. 

We’re happy to report that none of our clients have been affected by any of the scams mentioned, however it’s important to remain vigilant. 

In this article, we offer some advice on how to spot a scam and ways to check if it is a genuine offer.

 

How do the scammers get my information?

Data is widely available for sale, with databases often sold on from all kinds of establishments from phone companies to insurance providers to holiday agents. These databases are available to pretty much anyone who is willing to pay for them. Ticking the “no contact” and “no third parties” options on any forms you complete is a good way of limiting the number of databases you appear on. Also, depending on the scale of the scam, experts are employed to hack into databases and steal the data. And sometimes, it’s just pot luck.

 

How to spot a scam and avoid it

  • You’re likely aware of the scam phone call where someone claims to be from your bank. If you don’t have an account with the quoted bank, then it’s more obvious to spot that it’s likely to be a scam. But eventually they will come across someone who does have that account, and may believe it’s a genuine call from their bank. Here, we would recommend ending the conversation, and ringing your bank directly on the usual customer contact number. Don’t use the number supplied by the caller. If it is a genuine call from your bank, the caller will not mind you ending the conversation
  • We have personally received similar calls from someone pertaining to be from our broadband supplier, stating there has been unusual activity reported via our router. They then direct you to a website, often a legitimate screen-sharing or file transfer site, the end result being that your activity and passwords can be recorded. The interesting thing about this particular attempt, is that broadband providers rarely, if ever, make such calls. Again, our advice here would be to end the call and ring your provider directly on the usual customer advice number if you are in any doubt.
  • Many scams are now sent via email invitations to click a link, which in turn downloads spyware to your computer, which records regular activity and passwords. These can often be harder to spot, as they mask email addresses to look very close to genuine. Here, especially if the email is unexpected, we would recommend closing the email, and logging in directly to your relevant account, without using any links in the email. If the email looks like it’s from a friend, but is only a photo or a link without your usual conversation, try calling them or email them directly in a new email to check. 

We’ve recently been made aware whereby a client of another financial advice company fell foul of an email scam. The client was contacted by email about a new high interest deposit account, suggesting it may be of interest. Of course, in these times, high interest would be very appealing. The ‘senders’ email address had been masked to look very similar to the genuine email address of the client’s actual adviser. This only became clear it was a scam some months later, when the client made a passing comment to their adviser about receiving no paperwork yet. The adviser confirmed not having made such a recommendation or issuing any emails about the account in question. Unfortunately, by this time the client had already ‘deposited’ several large sums into the account, none of which were protected against this type of fraud.

These scams can be harder to spot. We will never contact you about a new investment or account by email, without a prior meeting or phone call with your financial planner. If you’re ever in doubt, or don’t recognise the name of the person calling, then hang up and call us directly on the office number.

 

In summary, we would always recommend:

  • End any unsolicited calls straight away and phone your bank or provider back on their usual customer service number, not a number supplied by the caller.
  • Don’t click on any links or files in emails that you’re not absolutely sure of. Log in to your bank or provider portal directly, using your usual app or web address. Do not use the link in the email.
  • We will never contact you by email to suggest an investment into a new company or account. If you’re ever in doubt, or don’t recognise the name of the person calling, then hang up and call us directly on the office number.

 

You can call us on 01869 331469 if you have any concerns.

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).

 

What is happening with the pension triple lock?

By | Pensions

The State Pension is changing, and many people in receipt of it are asking what may lie ahead for their retirement income. The “triple lock” system, in particular, has raised fresh questions as the Government confirmed its suspension in the 2022-23 tax year (started on the 6th April 2022). Below, our financial planning team at WMM explains how the system works, how it has changed and what could lie ahead for the State Pension.

 

How the triple lock works

Income from the State Pension, in recent years, rises every tax year (April-April) in line with the highest of three measures:

  • 2.5% (a flat rise).
  • Inflation (measured in the previous September).
  • Growth in average UK earnings (measured from May to July).

This “triple lock” system is designed to help ensure that the State Pension rises each year at least in line with the cost of living.

 

Recent changes

When COVID-19 brought an unprecedented shutdown to the UK economy from March 2020, the government introduced a range of measures to help support businesses and the wider population (e.g. furlough). These required huge amounts of borrowing – e.g. £297.7bn in the 12 months prior to March 2021 – which the government now faces increasing pressure to repay.

Moreover, one of the knock-on effects of furlough was that this distorted average earnings growth (point 2 3 above) as lockdown measures lifted, employers brought more workers back into the office and reinstated their normal wages. This pushed the growth figure to over 7.3%.

As such, this would have required the State Pension to rise by at least 7.3% in April 2022 – putting huge pressure on the public finances. To counter this, the government announced that the triple lock system would be suspended in 2022-23.

Instead, the State Pension has risen by 3.1%

 

Possible roads ahead

This 3.1% rise feels like a blow to many retired people. Not only is it less than half of what they would have received under the triple lock system, but it mirrors the inflation rate in September 2021. In 2022, however, inflation has risen considerably higher. 

In the 12 months to February 2022, the Consumer Prices Index (CPI) has gone up by 5.5%. The Bank of England (BoE), moreover, anticipates that this could go as high as 8% later in the year. This, naturally, raises a lot of questions. Will inflation be brought under control before the next tax year? If not, could the triple lock be suspended again?

A precedent has been set by the government, so these are legitimate questions. The current administration has clearly stated that they do not think the triple lock system should be around indefinitely. Rather, the commitment has been for the existing parliamentary term (i.e. up until 2024). Other major UK parties support keeping it, so the issue is likely to be debated fiercely in the coming general election.

It is a good idea to regularly review your income sources for your retirement. Your State Pension will likely be important, of course, but it will also help to have other pension schemes (e.g. a workplace and/or private pension) to help support your lifestyle. There are also other assets you can use, too, such as dividends and income from your ISA(s), rental income etc. 

With a diversified retirement portfolio, you can help mitigate the risks associated with specific assets or income streams (e.g. your State Pension).

 

Invitation

Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM. 

You can call us on 01869 331469 

 

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).

 

How unemployment can affect your returns

By | Investment Planning

Most of us intuitively know that the wider UK economy affects investment returns. Interest rates, for instance, are set by the Bank of England (BoE) and can affect the stock market – providing downward pressure if rates go up (as ‘less- risk’ is perceived for higher short-term returns) and providing buoyancy when rates are lowered. One interesting relationship between investment returns and the economy concerns unemployment. For instance, does it help – or hinder – the stock market if more people are in stable, paid work? Below, our financial planning team at WMM offers some reflections.

 

How unemployment affects the economy

It is, firstly, important to define what unemployment is and how it is measured. Broadly speaking, unemployment refers to the percentage of a workforce that is actively looking for paid work – but unable to find it. Already, this raises questions. In particular, how do you determine whether someone without a job is looking for one? After all, many people are highly employable but might want a “career break” (e.g. 1-2 years) before trying something new.

The UK government defines unemployment as “The number of unemployed people divided by the economically active population”. This is based on the Labour Force Survey which asks 40,000 households every month about their employment status. To count as an “unemployed” person, a jobless interviewee must state that either:

  • They have found a new job which they plan to start within the next 2 weeks. Or;
  • They have looked for work in the last 4 weeks and can start work in the next 2 weeks.

Generally, the UK government seeks to keep unemployment as low as possible. This is partly for political reasons, so they can boast about their record (particularly in the run-up to elections). However, it is also for economic reasons. For instance, more people in paid work means more wages that can be taxed – providing more revenue for the treasury.

 

Unemployment and investments

Fewer people in work means less money coming to the government, and perhaps more going out (in the form of state benefits). Yet unemployment also means less money for people to go out and spend on products/services offered by businesses. This means less sales and lower profits, which applies downward pressure to growth and, by extension, company valuations (unwelcome news for shareholders).

In an economy with high unemployment, even those with jobs are often less likely to spend money. After all, job security seems less certain in such an environment – so people tend to save more in case they come upon hard times. This is partly the reason why the UK national savings rate rose so much higher after COVID-19 hit the UK, since many people feared that their job might not be there when lockdown was lifted (although lockdown, itself, prevented spending in the wider economy – e.g. on the high street).

At this point, investors may rightly ask: “What is the state of UK employment right now, and where could things go in the near future?” Currently, employment is standing very high (in historical terms) at 75.6%. This is not quite the high of March 2020 (when it was 76.6%), but figures are not far off. This is good news for the stock market, although other forces – such as rising UK inflation – are pulling equities in other directions. 

The future, of course, is uncertain. Whilst the UK appears to be on a journey of economic recovery from COVID-19, events could undermine efforts to build on this. A new variant may arrive – bringing a return to lockdown. Wars can also disrupt the global economy and unsettle markets. Here at WMM, we are here to help guide your financial decisions and build in greater security when events – such as a job loss or damage in the wider economy – might affect your financial plan. 

 

Invitation

Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM. 

You can call us on 01869 331469 

 

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).

 

What is the role of bonds within a portfolio?

By | Investment Planning

Have you wondered what it might be like to “be the bank”, when lending money? With bonds, you can do just that. In effect, when you buy a bond, you lend to a Government (or business) on the understanding that they will repay you at the maturity date (e.g. in 10 years’ time). In the meantime, you receive interest payments (“coupons”) periodically – say, once every 6 months. 

For many investors, this asset class is an attractive option when building a portfolio. Yet what are the different types of bonds, and how do they work? How can bonds feature within a wider investment strategy? Let’s turn to these questions below.

 

Types of bonds

Bonds can be divided into various different categories. First of all, there is, of course, a lending risk for the investor which may be lower/greater depending on who is asking for the money. This is where credit agencies come in – such as Standard & Poor’s (S&P), Moody’s Investor Services (Moody’s), and Fitch IBCA (Fitch). These companies “rate” different bond issuers to indicate the level of risk involved for investors. For instance, a “AAA” rating is considered the best, whilst “C” rated bonds are regarded as higher risk (and so are often called “junk” bonds”).

Secondly, bond issuers can be divided into corporate and governmental. The former are issued by companies and the latter by national governments. Neither is inherently more risky than the other. Indeed, certain companies may have a better bond repayment track record than many governments! The major difference is that Governments can print money or raise taxes to repay debt, whereas Corporates cannot. Bonds can be bought individually by investors or collectively, via bond funds. Most retail investors will purchase the latter when including bonds in a portfolio.

Finally, bonds can be classed either as “normal” or “inflation-linked”. An illustrative example can help show the differences, here. With the former, suppose you bought a 30-year bond in 1998 for £100, with a 5% coupon (paid twice per year). In 2028, when the bond matures, you will get your £100 back and, twice per year in the interim, you get a fixed £5 coupon. However, with an inflation-linked bond, differences would include the coupon rate (i.e. it would be lower) and the semi-annual coupons would rise/fall with the rate of inflation. When you get the principal back in 2028, moreover, this will also rise with inflation so you get your £100 back, in “real value”).

 

Bonds & investment strategy

These features raise a number of additional questions for investors. What percentage of your portfolio should comprise bonds (versus, say, equities)? Which types of bonds should you put inside? Here, two crucial factors are your risk tolerance and your investment horizon.

Concerning the former, if you feel highly averse to the idea of your investments going up and down a lot in a short period of time, then bonds can hold a lot of appeal. Whilst stock market investments tend to offer better (i.e. higher) long-term returns, they are often volatile in the short term. Bonds tend to be much more stable in the short-term. 

On the latter, you need to consider how long you plan to invest (and how this relates to your goals). For instance, if you are nearing retirement then you likely want to focus more on wealth preservation rather than growth. Moreover, you may also want some of your portfolio to produce a regular income. In which case, bonds can be an attractive option. However, if you are early in your career and want to build wealth over, say, 30+ years then holding lots of your portfolio in bonds may not be a “bold” enough investment strategy. Instead, high-growth-potential equities may be a better route to reach your goals (assuming you are happy with the risk involved).

 

Invitation

Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM. 

You can call us on 01869 331469 

 

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).