Human nature kicks in and rash financial decisions are made. It's foolish though, as you say, because even a casual glance at the stock market suggests that it's important to just sit tight and hang on in there. The old "time in the market, not timing the market" again. I saw a comment recently from someone losing it over the ups and downs of the current market and wondering what to do. A reply to them that summed it up said typically you have two options

- to lose money quickly
- to make money slowly

Constant rash decisions lead to the former!

Hi GM
Just seen nationwide has increased its LTV rate.
Problems or sensible and will it affect you and your customers generally? It doesnt affect me as I'm not moving or buying but imo seems harsh and lacking in faith in the individual not the market.
I would have thought a system of deferring the extra 10% or increasing the term on that bit to reduce the payment amount with the option to pay a bit extra on that portion when you can. Might be too complicated but some now wont be able to buy.

Building a successful savings plan

It’s easy to save money, right? Wrong! If you’re one of those whose money runs out a few days before pay day and you’re surviving on beans on toast, you’re not alone. This article is designed to encourage better behaviours to help you reach your financial freedom.

Here some key stats from April 2020:

• 1 in 10 (10%) Brits have no savings at all
• A third of Brits have less than £600 in savings
• The average amount invested is now just £813, down from £1,050 just two years ago
• The average Brit has £6,756.81 put away for a rainy day.
• 40.93% of Brits don’t have enough savings to live for a month without income.
• While 22-29 year olds are the least likely to save, with 53% having no savings at all

Why aren’t Brits saving?

• 40% reported lacklustre earnings as the reason for not saving
• While nearly two thirds of Brits didn’t have a financial plan in place
• 91% of Brits did report they planned to add the same if not more to their savings in 2018 than they did in 2017

Here are some suggestions to help combat these.

Step 1 – Work out your income and expenditure

Quite simply, if you don’t know how much money you need each month to cover your livings costs and bills, how do you know how much you can afford to save each month? Going through this exercise works as a real motivator. You’ll often be surprised at how much surplus income you actually have.

If you budget, say £2,400 per year on holidays, be disciplined and pay £200 per month into a separate ‘holiday account’. This will avoid the need to pay large lump sums, or even loans, and won’t feel like such big hit when holidays come around. The same goes for hefty annual subscriptions you may have.

If you are genuinely struggling to cover your living expenses, try to adjust and see where you can cut costs. Packed lunches and avoiding your morning Starbucks are two easy wins.

Lastly, pay yourself at the start of the month, not the end.

Step 2 – Build an ‘emergency fund’

It is recommended that individuals build an emergency fund equal to at least 3 months salary. This should be held in an instantly accessible cash account and only used to pay for unexpected costs such as replacing a kitchen appliance or a new boiler, or even worse, replacing your income if you find yourself out of work.

Stage 3 – Building your investment pots

By following the first two steps, your investment pot should be able to grow uninterrupted and benefit from long term compounding – this is the ‘snowball’ effect.

It’s vital that you identify an end goal for your investment pot, such as what is the savings pot for and when are you looking to achieve it? It’s important as the length of the investment will impact how much risk you can afford to take. The general principal is that the longer the time horizon, the more risk you can absorb, as a long-term investment has time to recover from short term volatility, whereas a short one doesn’t. History has so far proved that stock market investing over the long term outperforms all the other main asset classes. Separate your pots for each of your goals and treat each pot differently.

An example of a ‘short-term pot’ might be saving to pay for a wedding or a mortgage deposit. If this is less than 5 years away, a ‘cautious’ investment approach would be sensible.

A typical ‘long-term pot’ would be your pension savings. For someone with 15+ years to retirement, although it may seem daunting, an ‘adventurous’ investment approach should be strongly considered to maximise the growth. Over time, a pension pot would eventually become a short-term pot and the investments can be adjusted accordingly then.

The majority of people in the UK build their long-term savings in cash as it is deemed ‘safe’. This is one of the mostly costly financial mistakes you can make. If interest rates are at 0.5% and inflation is at 2.5%, the spending power of cash reduces by 2% per year. Imagine this over 20 years. In the year 2000, 30p would buy me Mars bar, today it would buy me a Freddo! Don’t make this mistake.

Remember that investments can go up and down in value, so you could get back less than you put in.

If you need help with a budgeting questionnaire or help choosing the right investment, please don’t hesitate to make contact.

How much do I need to save for retirement?

Where do I start with this? Research from Fidelity suggests that ‘savers should be putting away at least 13% of their pre-retirement annual income before tax, each year, from the age of 25’.

25-years olds are typically saving for their first deposit, wedding or have kids. How can they possibly afford 13 percent per month?

The introduction of Auto Enrolment, which is the requirement for employers to automatically enrol new starters into the workplace pension scheme, has helped but the minimum contribution requirement is 3% from the employer plus 5% from the employee. This is still 5% short of Fidelity’s 13% suggestion.

Now factor in the ageing population in the UK with the plans to increase the State Pension age beyond 67. This clearly raises questions about the sustainability of the State Pension. Will Millennial's even have a State Pension in 40 years’ time?

If any of this is worrying you, then good. This is designed to shock as too many are sleeping walking into financial worry.

My issue with Fidelity’s statement is that it is far too simplistic. Someone with a desired retirement age of 55 will need to save considerably more than someone who wants to retire at 70. One person’s dream retirement could be to travel the world and take up new hobbies, which will require more income than their best mate who just wants to watch telly and walk the dog. Retirement planning is complex and unique as there so many variables to consider.

Here are a few steps to hopefully put you on track.

Step 1:
In today's terms, try to estimate how much income you need to fund your lifestyle. Things to consider include deducting expenses which will be gone by retirement such as kids becoming financially independent, mortgage cleared, and costs associated with work i.e. travel and clothing. You also need to factor in possible additional costs such as increased holidays or that new golf membership.

Step 2:
Increase the figure from step 1 to account for future inflation up until your desired retirement age. Inflation averages at roughly 2.5% over the long term. If you don’t know the calculation, this can be found on the internet. As an example, if I need £20,000 income today, in 10 years
time I’ll need £25,601.

Step 3:
This is where it becomes tricky. Try to guess how many years you will live. The average 65-year-old male will live to 85 whereas the average female will live to 87. Consider the history of longevity in your family and how your current health may impact this. Multiply this by the figure in step 2 and factor in even more future inflation. Suddenly the numbers become very daunting.

To put this into context, if you are cautiously minded and are attracted to the simplicity of a guaranteed income for life in retirement (known as a lifetime annuity), a £10,000 per annum inflation linked income with no death benefits or guarantees would cost a healthy 65-year old approximately £375,000.

Try this pension shortfall calculator to see where you currently are: [Link]

Ultimately, the only person who can help you, is you.

Here are my tips:

• Start saving early. The effects of compounding (the snowball effect) will be far greater for someone starting in their 20’s compared with someone in their 40’s.

• Maximise your employer contribution. Most settle for the default minimum contribution upon joining the workplace pension. Speak to your HR department as many employers will increase their contribution if you do. If your company will offer you free money, you might as well take it, right?

• Review your pension investment. The default choice will be a run of the mill ‘lifestyle’ approach which gradually de-risks as you get to within 10 years of your selected retirement age. Many employer sponsored arrangements have up to 200 other funds to choose from. Is there a better option to make your investment work harder for you?

• Keep track of previous pensions. There is over £10 billion of lost pensions in the UK as people move job and forget about their old pension. It often make sense to transfer your old pension into your current one for ease of administration, but check charges before doing this. Here is the link to the governments Pension Tracing Service: [Link]

• Use the correct tax wrapper. A pension will benefit from full tax relief on a contribution and growth will also be tax free. I recently met a client who had been saving towards retirement via a stocks and shares ISA. 20 years of contributions had been missing out on 20% tax relief and investment growth.

• Love your pension. You may not feel it now, but one day you will be grateful for the small sacrifices. Get in the habit of checking your pension value at least once a month.

A financial planner will have access to cashflow forecasting software which will help you to project into the future and identify any shortfall.

As always, comments and questions are welcome. Feel free to PM me if you'd like any assistance with your own arrangements.

Helping your elderly relatives and planning for the future (part 2)

Caring for elderly relatives is stressful. As it happens to virtually all of us at some point in our lives, there are certain decisions you can make today to make life easier for both you and your relatives or parents.

Previously we discussed the importance of making sure wills and powers of attorney are in place as well as reviewing current policies and establishing an overall financial position. That was step 1. Now we move onto the more practical side of step 2 which is paying for care that your loved ones may need.

Paying for care

It is usually a big decision to move a parent into a care home. It is unlikely that the council will fund care home fees so normally they come down to the family. With fees potentially around £50,000 – £70,000 per year it is not cheap. At this point, most families look around and realise the only option is to sell their parent’s property. Once the family (as in all the family – it’s normally the children who find this the most difficult) have accepted the fact that the property is the only way to fund these fees, this is done. So, in most situations this creates a pot of cash which is then used to pay for care over your loved ones remaining years. The funds are normally held in cash because nobody wants to risk anything and are moved over every year to the care home, as the entire family watch their parent’s wealth (and potential inheritance) gradually disappear.

a. Care home annuity

This involves using a lump sum to purchase an annuity (a guaranteed income) to pay all or some of the care home fees. The payments are tax-free and can be indexed to increase with the care home fees over time.

The main advantage of this option is that you can earmark a lump sum to accomplish the goal of paying care home fees, then once this is in place, it’s done. There is nothing more to worry about in terms of paying for care which allows your relatives or you to make active planning decisions with the balance of the funds potentially around inheritance tax planning (I’ll go through these options shortly). Given inheritance tax is 40% above the nil-rate band, this potentially can save a huge amount of tax.

b. Equity Release

Equity Release previously has had a somewhat questionable reputation however the industry has cleaned itself up over the past decade with better regulation and far larger players getting involved improving the rates for the end customer.

In principle it involves handing the value of the property over to the mortgage provider for either lump sums of cash where the interest is either rolled up (lifetime mortgage) or discounted off the initial lump sum (home reversion).

With property prices being relatively strong over the last 20 years, there are a number of elderly people with significant value tied up in their properties. Without selling, this is one of the few ways to access that value.

Typically seen as a last resort option to access capital, however once the family have again accepted that the property may not be passed down, it can be a significant source of capital for your elderly relatives.

Please note, both Care Home Annuities and Equity Release Mortgages required specialist financial advice.

As always, please feel free to ask questions on the thread, or via pm

Edited by Goal Machine (20 Jul 2020 9.04am)

It certainly isn't for everyone.

Ideal for those who don't want to move out of their home but are in need of liquidity. The roll up interest rates are high so eat away at your estate pretty quickly. In your situation with no children, it might be the ideal solution - might as well spend the money and enjoy it if you can.

Where ER is starting to be used differently in recent years are for individuals with large Defined Contribution pensions and properties valued over £1m. Property is included within the estate for IHT purposes whereas the pension isn't. If there is no desire to pass on the property to your children, it is more tax efficient for the beneficiary to receive the pension tax free than a property with the excess over £1m taxed at 40%.