Financial Planning

£32 Billion Hole In UK Savings Pots

Rise in living costs forcing many people to dip into their financial reserves

The average cost of housing, food, and energy bills have increased by nearly £500 per month as of September last year compared to August 2022, according to statistics regarding the cost of living in the country[1]. This rise in living costs has forced many people to dip into their financial reserves.
Financial Planning

Bridging The Pension Generation Gap

Urgency for younger generations to access improved financial education

The chasm between generations regarding retirement prospects is glaringly apparent, as 78% of individuals believe their predecessors had more favourable pension plans or brighter retirement futures. According to recent research, this data highlights a stark revelation that underscores the urgency for younger generations to access improved financial education[1].
Financial Planning

The Power Of Prevention

An effective financial plan acts as your protective shield

In the realm of financial well-being, an old adage rings particularly true: ‘Prevention is better than cure.’ An effective financial plan acts as your protective shield, specially designed to weather any economic storm that may come your way. It offers comfort and control, ensuring that you are steering the ship of your finances, not vice versa.
Financial Planning

Gender Pension Gap

The potential barrier to reaching the same savings levels as men

The gender pension gap is an issue that extends beyond just the disparity in earnings between men and women. It also encompasses other aspects such as financial confidence, engagement with financial products, and socio-economic factors. According to new research, women are 33% more likely than men to say they do not understand how their pension works, indicating a lack of financial confidence[1]. This lack of confidence may explain why some women are less likely to engage with financial products. For instance, women are 38% less likely than men to have a Stocks & Shares ISA and 32% less likely to have a private pension.

Career breaks for childcare

This engagement gap, along with other factors like the gender pay gap, could result in young women in the UK (aged 22 to 32) having just £12,873 per year by the time they retire in the 2060s1. In contrast, young men are projected to have nearly a third more, receiving an average of £19,803 in annual income. The research highlights the gender pay gap also contributes significantly to the gender pensions gap. By the age of 27, women already earn £10,000 less than men of the same age. Other factors impacting women’s pension savings include being less likely to hold senior leadership positions and being more likely to take career breaks for childcare.

Reaching the same savings levels

According to the research, young women are currently projected to have £300k less in their pension pots than their male counterparts by the time they reach the current state pension age. Women are also more likely to work part-time or on reduced hours, take career breaks for childcare, act as unpaid carers, or need time off work for medical reasons, such as menopause. In addition, women often self-identify as having lower confidence regarding savings and investments. This presents another potential barrier to reaching the same savings levels as men. Addressing this issue requires a multi-faceted approach that includes promoting financial literacy among women, creating policies that support women during career breaks, and addressing the gender pay gap. Source data: [1] Analysis based on the following research and assumptions for Legal & General by Opinium Research conducted 2,000 online interviews of people aged 22-32 between the 15th and 29th August 2023 – CPI = 3% • Salary premium = 1% – Salary increase = 4% p.a. (this assumes that salary increases on an annual basis up to retirement at 68) – Median male salary at age 27 = 35,000 – Median female salary at age 27 = 25,000 – Start saving into a workplace pension at age 22, retiring at age 68 -Investment return on pension pot, assuming broad 60/40 asset split, (7% p.a., 4% real) – Qualifying earnings – Currently (£6,240 to £50,270), Historical years (actual LEL and UEL), Future years (increased annually by CPI assumption) – Income based on current Legal & General annuity – fixed rate, single person annuity at age 68, with a 10-year GMPP. Women are 33% more likely than men to say they do not understand how their pension works – 320 (men) – 425 (women) = 105. 105 / 320 = 32.8125% (33%) Women are 38% less likely than men to have a stocks and shares ISA – 324 (men) – 201 (women) = 123. 123 / 324 = 37.962962962963% (38%) Women are 32% less likely to have a private pension -324 (men) – 221 (women) = 103. 103 / 324 = 31.79012345679% (32%) THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE. A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE PLAN HAS A PROTECTED PENSION AGE). THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY THE INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS.

Active Vs. Passive

This topic is as old as retail investing itself. Does an actively managed fund really deliver the premium returns that warrant the additional expense.

To start on a negative note for active investing here is an article from the New York Times which points out that in the five years to 2022 not one of 2,132 mutual funds beat the market consistently for a five year period.

Despite the above it is essential to weigh up the pro’s and cons –

Pro’s and Con’s of Active Investing

Passive Investing Advantages

Some of the key benefits of passive investing are:

  • Ultra-low fees: No one picks stocks, so oversight is much less expensive. Passive funds simply follow the index they use as their benchmark
  • Transparency: It’s always clear which assets are in an index fund.
  • Tax efficiency: Their buy-and-hold strategy doesn’t normally result in capital gains taxes due

Passive Investing Disadvantages

Proponents of active investing would say that passive strategies have these weaknesses:

  • Too limited: Passive funds are limited to a specific index or predetermined set of investments with little to no variance; thus, investors are locked into those holdings, no matter what happens in the market.
  • Small returns: By definition, passive funds will pretty much never beat the market, even during times of turmoil, as their core holdings are locked in to track the market. Sometimes, a passive fund may beat the market by a little, but it will never post the significant returns active managers crave unless the market itself booms.
  • Reliance on others: Because passive investors generally rely on fund managers to make decisions, they don’t specifically get to say in what they’re invested in.

Pro’s and Con’s of Active Investing

There are also several strengths and weaknesses of active investing.

Active Investing Advantages

Advantages to active investing:

  • Flexibility: Active managers aren’t required to follow a specific index. They can buy those “diamond in the rough” stocks they believe they’ve found.
  • Hedging: Active managers can also hedge their bets using various techniques often not available in passive strategies such as short selling.
  • Tax management: Even though this strategy could trigger a capital gains tax, advisors can tailor tax management strategies to individual investors, such as by selling investments that are losing money to offset the taxes on the big winners.

Active Investing Disadvantages

But active strategies have these shortcomings:

  • Cost: The average expense ratio at 0.68% for an actively managed equity fund, compared to only 0.06% for the average passive equity fund.
  • Active risk: Active managers are free to buy any investment they believe meets their criteria
  • Management risk: Fund managers are human, so they can make costly investing mistakes.

Listing the above I think their are other things to consider on a more localized basis. For example the stock markets of India and the US are hugely different, with the US being much more mature as a stock market with many decades of existence, high amounts of regulation and oversight and a huge investor base. Compare that to India whose main NSE index is only 32 years old and the picture is quite different. If you were looking to put a significant investment into Indian stocks I think it could strongly be argued that using an active manager with ‘boots on the ground’ and a team of analysts reviewing individual stocks makes a lot more sense than putting it into a tracker.

Ultimately it depends on the individual and whether or not they see value in a team of professionals constantly reviewing a fund or whether they feel ‘Mr. Market’ is the best person to help. Furthermore it always make sense to sit down with a financial professional to run through your own personal thoughts on this and review the options that fit your risk profile.

Financial Planning

Heightened Interest Rates Increase Demand For Annuities

What will you do with your hard-earned pension pot at retirement?

As we navigate life’s journey, retirement presents both a dream and a challenge. It’s the stage where we finally enjoy the fruits of our labour, a time for relaxation, exploration, and personal growth. But the question that often looms is how can we ensure a steady income stream that keeps pace with our aspirations and maintains our lifestyle? Enter the world of annuities. Annuities in recent years have often been overlooked in the retirement planning conversation. But current heightened interest rates have increased demand for annuities, offering unparalleled peace of mind, knowing that your basic needs will be covered, irrespective of how the financial markets perform.

Securing the best possible deal

They offer a steady, guaranteed income throughout your retirement years or for a specific period. But given the irreversible nature of purchasing an annuity, it’s imperative to thoroughly explore your choices, select the most suitable type and secure the best possible deal. Annuities provide a practical means of converting your accumulated pension savings into a lifelong source of income. Comparing rates across various providers is essential once you determine your required income level. This process, known as the ‘open market option’, allows you to bypass your provider’s offer and potentially secure a higher rate with another provider.

Boosting your retirement income

Shopping around could boost your retirement income by as much as 20%. To put it in perspective, simply by exploring your options, you could increase your retirement earnings by nearly £6,000. Recent analysis reveals that a 66-year-old with a £100,000 pension pot can now purchase an annuity yielding an annual income of £7,000 – an increase of £174 compared to last year[1]. The analysis highlights a striking difference between the best and worst annuities available. For a 66-year-old with a £100,000 pension pot, rates can vary by up to 3.6% – equating to a potential annual income discrepancy of £254 or £5,945 over an average retirement period[2].

Making the right choice

Securing the right annuity for your needs can seem daunting, given the variety of options available. This one-time, typically irreversible decision is vital, and understanding the different types of annuities can greatly facilitate the process. When choosing an annuity, you can select a conventional level-income annuity, which ensures consistent payments throughout your life. Alternatively, an increasing annuity starts with a lower initial income, but your payments increase annually in line with inflation or a predetermined rate, such as 3% or 5%. It’s essential to carefully consider the options’ costs and benefits to make the most suitable choice.

Selecting an annuity

Your marital status is another significant factor in selecting an annuity. If you opt for a single-life annuity, it will only pay out during your lifetime. In contrast, a joint-life annuity provides a full payout to you during your life, and after your death, it typically pays 50% of that amount to your partner until their demise. Another option worth considering is a guaranteed income period. Under this plan, payments continue until the end of a chosen period (usually five or ten years), even if you pass away prematurely. In such a scenario, the income would be paid to your beneficiaries or estate, offering them financial security.

Certain lifestyle conditions

An enhanced annuity may be the right option for those with certain lifestyle conditions or medical history. Whether you smoke, are overweight, have type 2 diabetes, or have suffered from cancer, heart disease, or other life-threatening conditions, you may be eligible for an enhanced annuity, which results in higher payouts. The rates are increased to reflect the potential impact of these conditions on your lifespan. Even conditions like excess weight or high blood pressure could qualify you for an enhanced annuity. Source data: [1] As of 30/9/23, a standard lifetime annuity with a rate of 7% for a single life with a £100k premium, 66 years old, with a 5-year guarantee. Based on a level benefit that is paid monthly in advance. [2] As of 30/09/2023, Legal & General Retail estimates that an average 66-year-old with a standard level of health will have a life expectancy of 90 years. THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE. A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE PLAN HAS A PROTECTED PENSION AGE). THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY THE INTEREST RATES AT THE TIME YOU TAKE YOUR BENEF
Financial Planning

Securing Retirement

The art of de-risking

For many individuals, their pension investments are allocated to funds. These could be funds selected by their pension provider or ones they’ve chosen independently. Traditionally, retirement planning has centred around investing in shares-based funds during one’s younger years. As retirement approaches, the strategy typically shifts to de-risking the portfolio, diversifying into bonds, cash, and shares.

Running With Bulls

With the S&P 500 hitting an all time high last week capping off a stellar six month period for the index, it does leave many wondering will the bull run continue.

In 2023, 62% of the S&P 500’s 26.29% total return was produced by what are referred to as “The Magnificent Seven” stocks – Amazon, Alphabet (Google), Apple, Meta (Facebook), Microsoft, Nvidia, and Tesla. That is a very small band of stocks doing a gargantuan amount of heavy lifting. Whilst the largest of these stocks have a higher market cap than the GDP of the vast majority of countries, they still continue to add significant chunks of value to their share price. Most Western governments would give up most of their castles and national parks to have even a tenth of the levels of growth these companies can have in a year!

With a US election looming and the state of the economy inevitably linked to a Presidents electoral performance, I would think Biden and his team will do everything they can to continue the strong economic performance of 2023 and bring that momentum to November 2024.

My personal view is there will be a continuation of growth in the magnificent seven although not as strong as 2023. Historically, all-time highs follow more all-time highs. The S&P 500 averages a total return of 10.9% over the next year so whilst history can’t predict the future it is certainly a solid indicator.

Financial Planning

Charting Your Financial Future

Tackling retirement anxieties requires understanding your current financial resources

Retirement is often seen as the golden phase of life, a period earmarked for relaxation and pursuing personal interests. However, a recent study has pointed towards an increasing trend of ‘retirement anxiety’, especially among individuals aged over 40[1].