Month: October 2024

High inflation has been a hot topic over the last couple of years, and as its pace stabilises, you might think it no longer needs to be part of your financial plan. Yet, skipping inflation when calculating your long-term finances could leave you with a shortfall.

The government sets the Bank of England (BoE) a target of keeping inflation at 2%.

The BoE explains that inflation that is too high or moves around a lot makes it hard for businesses to set the right prices and for people to plan their spending. However, inflation that is too low, or even negative, may put people off spending because they expect prices to fall. This hesitation to spend could lead to companies failing and people losing their jobs.

As a result, stable inflation is important for the economy.

A combination of the Covid-19 pandemic and the war in Ukraine, as well as other factors, led to the UK and many other countries experiencing a period of high inflation. Indeed, according to the Office for National Statistics (ONS), inflation reached a peak of 11.1% in October 2022 – the highest rate recorded in more than 40 years.

The good news is that the rate of inflation has since fallen and started to stabilise. In the 12 months to August 2024, the ONS reported inflation was slightly above the BoE’s target at 2.2%.

While the immediate pressure of prices rising sharply has eased, that doesn’t mean you can forget about inflation when you’re reviewing your long-term finances.

Even when inflation is stable, prices are often rising

While inflation meeting the BoE’s target won’t often make headlines, it still means that the cost of goods and services is rising. You might think 2% inflation won’t affect your finances too much. Yet, when you look at the long-term impact, the effect could be harmful if it’s something you’ve overlooked.

According to the BoE, inflation averaged 2% a year between 2010 and 2020. So, if you had £20,000 in 2010, you’d need almost £24,320 in 2020 just to maintain the spending power you had a decade ago.

That could have a substantial effect on some parts of your financial plan. For instance, if you’ve set a retirement income without considering how it may need to grow to support your lifestyle, you could find you face a shortfall. During a retirement that could span decades, the effects of even 2% inflation might really add up.

Inflation has only hit the target rate 30% of the time since 1997

What’s more, while the BoE has an inflation target, there are factors outside of its control that may cause it to rise or fall, as the last few years have demonstrated.

Indeed, according to a report in FTAdviser, since 1997, the BoE has missed its target around 70% of the time, and it’s more likely to be above the target than below it.

As a result, even if you’ve factored a 2% rise in inflation into your long-term plan, you could still experience outgoings rising at a quicker pace than your income. Considering the effects of a high inflation environment may help you secure your finances and keep goals on track even when factors outside of your control lead to expenses increasing.

Making inflation part of your financial plan

It’s impossible to know what the rate of inflation will be next year, and when you’re creating a long-term financial plan, you might want to weigh up the effect of inflation over decades. While you can’t predict what will happen, there are often steps you can take to incorporate it into your finances and provide security.

As part of your financial plan, you might consider how to:

• Create a financial buffer in case inflation is higher than you expect
• Use other assets to support your income during periods of high inflation
• Grow your wealth at a pace that could match or beat the rate of inflation
• Regularly review your short- and long-term finances to ensure they continue to reflect your current circumstances.

An effective financial plan could help you prepare for the unknown, including the inflation rate.

Contact us to discuss how to incorporate inflation into your financial plan

If you’d like to review your financial plan and understand how inflation might affect your outgoings, we could help. Please contact us to arrange a meeting with our team.

Please note:

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

What’s stopping you from retiring sooner? For many, it’s not just finances that are holding them back but their mindset too. If the excitement of retiring is also mixed with nerves, a financial plan could give you the confidence boost you need to take a step back from work.

Finances may play a role in the hesitancy to retire for some people. Yet, others are in a financial position to retire but are still worried about taking that next step. It’s easy to see why you might not want to plunge straight into retirement – it could represent a huge lifestyle change.

So, how could financial planning help you retire sooner? It may provide the confidence boost you need to start the next chapter of your life.

A retirement plan starts with setting out your goals

If you had more free time, how would you spend your days? Retirement is a great opportunity to think about what makes you happy and build a lifestyle around those activities.

Setting out how you’d like to spend your days in retirement could make the lifestyle shift seem less daunting.

For some, that might mean enjoying a slower pace of life now you don’t have to adhere to a work schedule. For others, days packed with plans could be far more appealing, so think about what works for you.

You might look forward to being able to spend more time with grandchildren during the school holidays. Or maybe you’ve got plans to transform your garden. 

As well as the day-to-day lifestyle, you might want to consider one-off experiences you’d love to make part of your retirement plan too. Perhaps you’ve always wanted to go on a cruise to Alaska, take a university course, or train for a marathon – now could be the perfect time to think about the things you’ve wanted to try and simply put off or haven’t had the time to do.

While setting out your retirement lifestyle could be the nudge you need to give up work, the financial side of retirement might still be a cause of worry for some people. Fortunately, with your goals laid out, you can start to calculate how much you’d need to secure the retirement you want, and assess if you have “enough”.

Most people retire between the age of 55 and 65

According to a report from the Institute for Fiscal Studies, most people retire between the ages of 55 and 65. At age 55, 81% of men are in paid work, and this figure falls to 44% by age 65. For women, the employment rates fall from 74% to 34% over the same ages.

That means many people are retiring before the State Pension Age, which is currently 66 and gradually rising to 68. So, if you aim to retire sooner, you might need to consider how to use your assets to fund all your outgoings initially.

Even when you reach the State Pension Age, the income you receive from the State Pension often isn’t enough to meet all your expenses. In 2024/25, those entitled to the full new State Pension receive around £11,500 a year.

As a result, your retirement plan is likely to need to consider how to supplement the State Pension during retirement.

Understanding how to create a sustainable income in retirement can be challenging, and there are lots of factors you might need to consider, such as longevity and the effect of inflation on your income needs.

A financial plan that’s tailored to you and the lifestyle you want in retirement could help you assess how to create an income and how your wealth will change during your lifetime. Having a financial plan you can have confidence in could give you the freedom to really enjoy your retirement.

Contact us to talk to us about your aspirations for retirement

If you’re thinking about retirement and could benefit from a confidence boost, we’re here to help. We’ll work with you to create a financial plan that brings together your retirement aspirations and financial circumstances. Please get in touch to arrange a meeting to talk to our team.

Please note:

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

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

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

Economic data suggesting some developed countries, including the US, could fall into a recession continued to affect investment markets in September 2024. Read on to discover other factors that may have affected the performance of your investments. 

UK

Data from the Office for National Statistics (ONS) shows inflation remained stable at 2.2% in the 12 months to August. The figure is slightly above the Bank of England’s (BoE) 2% target.

Despite speculation that inflation data would lead to the BoE cutting interest rates, the Bank opted to maintain its base rate at 5%. While good news for savers, it means borrowers, including mortgage holders, are still likely to face higher outgoings when compared to 2021.

Many economists expect the BoE will make an interest rate cut before the end of the year. Indeed, investment bank Goldman Sachs predicts the interest rate will fall to 3% over the next 12 months.

GDP data showed the UK economy returned to growth in July after a plateau in June. However, the figures were disappointing, with just 0.5% growth in the three months to July 2024. 

There could be more positive news in the coming months though. Investment bank Peel Hunt optimistically said the UK economy is heading for “above-average growth” as inflation stabilises and consumer demand picks up.

A report from the Office for Budget Responsibility (OBR) provided a less cheerful outlook for the UK. The latest risk and sustainability report warned the UK, and other countries in the world, face long-term pressures, such as an ageing population, climate change, and rising geopolitical tensions.

In addition, the OBR said, based on current policy, public debt is projected to almost triple to more than 270% of GDP over the next 50 years. The comments highlight the challenging backdrop chancellor Rachel Reeves will need to consider as she prepares to deliver her first Budget on 30 October.

There was positive data released from the manufacturing sector. S&P Global’s Purchasing Managers’ Index (PMI) recorded the strongest month in two years. Both output and new orders continued to recover.

Yet, many businesses continue to face significant headwinds. Among those is UK shipbuilder Harland & Wolff, which owns the Belfast shipyard that once built the Titanic. The company entered administration in September.

Research also suggests that trade difficulties following Brexit could worsen. Aston Business School analysed the effect of the Trade and Cooperation Agreement on UK-EU trade relations, and found that trade is down by almost a quarter.

The FTSE 100 experienced ups and downs, including falling 0.6% to a three-week low on 4 September. Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: “Fresh worries about the health of the global economy have gripped markets, with the FTSE 100 far from immune.”

Europe

Eurozone inflation fell to 2.2% in the 12 months to August 2024. The news gave the European Central Bank the confidence to cut interest rates for the second time this year.

The Paris Olympics provided a short-term boost to the eurozone economy. A PMI output index increased for the first time since May in August 2024 to reach a three-month high of 51.0 – a reading above 50 indicates growth.

However, as the temporary boost of the Olympics fades, additional PMI data isn’t as positive. Indeed, HCOB’s flash PMI suggests the eurozone economy shrank for the first time in seven months in September.

The manufacturing sector in particular is struggling, with a PMI reading of 45.8 in August 2024. Dr Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, said: “Things are going downhill, and fast. The manufacturing sector has been stuck in a rut.”

As the largest economy in the EU, the conditions in Germany can affect the bloc, and statistics suggest there are risks ahead.

Indeed, the Kiel Institute for the World Economy predicts Germany’s GDP will shrink by 0.1% this year and has halved its growth forecast for 2025 to 0.5%.

Statistics body Destatis reports industrial production in Germany fell by 2.4% in July – far more severe than the 0.3% fall economists had predicted. The automotive sector suffered the largest fall (8.1%) followed by electrical equipment (7%).

German carmaker Volkswagen has spoken about the challenges it faces. The company warned that it has a “year, maybe two” to adapt to lower demand. The economic environment has led to Volkswagen considering making unprecedented closures in its home market for the first time in its history as it tries to cut costs.

US

Inflation in the US fell to its lowest level since February 2021 in August 2024 to 2.5%. In response, the Federal Reserve cut its base interest rate from 5% to 4.75%.

The inflation and interest rate announcements led to the S&P 500 – an index of the 500 largest public companies in the US – jumping 1.5% on 19 September. 

Similar to Europe, data indicates the manufacturing sector in the US is struggling. Indeed, the Institute of Supply Management reported it contracted for the fifth consecutive month in August. The news led to a dip in the markets around the world at the start of the month.

Figures from the Bureau of Economic Analysis also indicate a business threat as the trade deficit increased by $5.6 billion (£4.19 billion) in July to $103.1 billion (£77.13 billion).

American company OpenAI, the firm behind ChatGPT, announced it was in talks to raise $6.5 billion (£4.86 billion) from investors at a valuation of $150 billion (£112.21 billion) – making it one of the most valuable start-ups in the world.

Asia

Investment market volatility in Asia highlighted how factors around the world can affect markets. On 4 September, Japan’s Nikkei lost 4.2% and South Korea’s Kospi fell 3.4% after investors were spooked by fears that the US could experience a downturn when poor manufacturing data was posted.

A survey of China’s manufacturers from Caixin suggests export orders were subdued in August and fell for the first time this year as it faced external challenges.

However, China announced stimulus measures aimed at boosting the economy and stock market, as well as supporting the property sector on 24 September.

The news led to stock markets across Asia-Pacific rising – China’s CSI 300 index was up more than 4%. In fact, the announcement led to world stocks hitting a record high when the MSCI World Stocks index increased by 0.3%. 

Please note:

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

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

When you read that investment markets have fallen you might feel nervous or scared about the effect it could have on your future. Emotions like these sometimes lead to impulsive decisions that aren’t always in your best interest when you consider the long term. So, read on to discover some insightful pieces of data that could help you remain calm.

Volatility is part of investing – a huge range of factors might influence whether a stock market rises or falls. However, history shows that, over the long term, markets typically go on to deliver returns.

Recently, markets experienced volatility amid fears that the US was on track for a recession. Indeed, on 2 August 2024, US technology-focused index Nasdaq fell 10% from its peak. Just a few days later, the market rallied, and it was technology firms that led the way.

Concerns about the US economy weren’t confined to the US indices either. Markets fell in Europe and Asia too. In fact, Japan’s Nikkei index suffered its worst day since 1987 following the news. Again, it didn’t take long for the markets to bounce back.

Returns cannot be guaranteed and recoveries may be over longer periods. Yet, the above example highlights how making a knee-jerk decision due to volatility could harm your long-term wealth. If you’d responded by selling your investments when you saw markets were falling, you’d have missed out on the recovery.

So, if volatility is part of your experience when investing, how can you remain calm? These pieces of data could help you hold your nerve.

1. Investment risk falls over a longer time frame

It’s important to note that all investments carry some risk. There is a chance that you could receive less than the original amount you invested. However, the level of risk varies between investments, so you could invest in a way that reflects your risk profile and financial circumstances.

Usually, it’s a good idea to invest with a five-year minimum time frame. By investing for longer, you’re giving your investments a chance to recover if they fall due to short-term volatility.

Research supports this too. Using almost 100 years of data on the US stock market, Schroders found that if you invested for a month, you would have lost 40% of the time. Interestingly, when you invest for longer, your odds of losing money start to fall.

When invested for five years, the odds of losing money fall to 22%, and at 10 years it falls to 13%. The research shows there have been no 20-year periods during the time analysed where stocks lost money overall.

You can’t rule out risk entirely, but by investing for a long-term goal, you could minimise the chance of losing money.

2. Sharp drops in the market occur more often than you think

One of the reasons investors react to market movements is that sharp falls may feel like they’re unprecedented and that you should act as a result. Yet, the Schroders research suggests that sharp falls are more common than you might think.

Analysing the MSCI World Index, which captures large and mid-cap representations across 23 developed countries, the study found that 10% falls happen in more years than they don’t. Indeed, in the 52 calendar years to 2024, investors experienced a 10% fall in 30 of them.

Even significant falls of 20% may occur more than you expect – roughly every six years.

Despite these dips, markets have delivered returns over the 50 years analysed. So, holding your nerve during these sharp falls often makes sense when you take a long-term view.

3. Periods of “heightened fear” could be more lucrative

The Vix Index measures expected volatility in the US market– it’s often referred to as the market’s “fear gauge”. It can highlight when investors perceive there is a greater risk of losing money. For example, it last reached a significant peak in May 2022 in the aftermath of the invasion of Ukraine.

Schroders has assessed how your investments would fare if you sold assets during periods of “heightened fear” to hold your wealth in cash, and then shifted back to investments when the fear receded. Taking this approach when invested in the S&P 500 – an index of the 500 largest public companies in the US – would have yielded average returns of 7.4% a year between 1990 and 2024.

However, if you didn’t let fear affect your investment decisions and remained invested, you may have benefited from average annual returns of 9.9%.

So, even when it seems like investing isn’t a good idea because of the economic environment or geopolitical tensions, it could be worthwhile taking a step back to consider what’s driving your decision.

Contact us to talk about your investments

If you have questions about investing and how it could support your financial goals, please get in touch.

Please note:

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

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

Anchoring bias is a common cognitive phenomenon that could affect your day-to-day and long-term financial decisions. The good news is that there are ways you could minimise the effect of bias, including anchoring.

First, what is a financial bias? The term refers to mental shortcuts and errors you might make when processing financial information that may lead to “irrational” decisions that don’t align with your long-term plans. There are many different types of financial bias, so read on to find out more about anchoring bias and how to minimise the effect.

Anchoring bias occurs when you focus or rely too heavily on a single piece of information when making financial decisions. It’s a bias that could lead to you dismissing other relevant data or it could skew your perceptions when you’re assessing a financial opportunity.

By “anchoring” your views to certain data, you could make decisions that aren’t right for you.

Anchoring bias could affect your short- and long-term finances

Anchoring bias could affect your financial decisions in several ways.

When it comes to your day-to-day spending, it might affect how you view the price of items. Let’s say you’re searching for a new TV and you find one you want priced at £1,000. You don’t make the purchase right away, and a few weeks later you see the same TV is now £800.

If you anchored the value of the TV to the first price you’d seen, the new, lower price might seem like an excellent deal. Yet, if you did some further research, you might find it was overpriced at £1,000 and it’s cheaper elsewhere. So, if you acted impulsively and purchased the TV when you saw it was £800 it might not be the bargain you first think it is. 

Similarly, anchoring bias could affect long-term financial decisions too.

For instance, investors might purchase stock because they believe it’s a “good” price as they’ve anchored their view of it to a particular piece of information that suggests it should be higher. Alternatively, investors might hold on to assets that are no longer right for them because they believe the value will rise despite market conditions suggesting otherwise.

In short, anchoring bias could mean your investment decisions are based on an attachment to a certain piece of information, which might not reflect reality. It could lead to missed opportunities and poor decisions.

5 practical steps that could help you reduce the effect of anchoring

1. Be aware of the effect of anchoring bias

Often, the first step to reducing the effect of anchoring bias is simply to be aware of the effect it could have. Recognising that you may judge financial opportunities based on a single piece of information could give you pause enough to reconsider your initial thoughts before you act.

2. Assess the credibility of sources

There’s so much information available that it can be overwhelming. So, taking some time to assess how credible a source is could help judge whether it’s information you want to use when making financial decisions.

It’s not just the credibility of the source you may want to weigh up either. For example, reviewing when the information was released could be just as important – basing an investment decision on the price of a stock a year ago could mean you’re overlooking more valuable, recent figures.

3. Carry out further research

In addition to reviewing key pieces of information you already have access to, carrying out further research is often useful.

Let’s say you’re making a large purchase for your home, you’ll often shop around to see which retailer is offering the best deal. Taking the same approach for other financial decisions could also help you make better decisions for you.

4. Focus on your long-term plans

Focusing on your long-term plans or budget could reduce the chance of you acting on impulse because you’ve seen what seems like an excellent opportunity at first glance.

Whether a retailer has cut the price of that TV when compared to your anchor or the latest technology company’s shares are falling, take a step back and ask if it fits into your plans – is this potential opportunity right for you and how would it affect your finances?

5. Work with a financial planner

Sometimes an outside perspective could help you see where financial bias, including anchoring bias, could be clouding your judgement. As a financial planner, we’re here to work with you to create a long-term plan that considers your aspirations. Having a plan that’s been tailored to you could help you reduce the influence of bias and make better financial decisions for you.

Please contact us to talk to one of our team or arrange a meeting. 

Please note:

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

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

More than 70% of Brits think Inheritance Tax (IHT) is unfair, according to a poll carried out by Tax Policy Associates in 2023. You might consider how other countries handle taxing assets when you pass away to be “fairer”, read on to find out more.

Over the last few months, you’ve read about how IHT works in the UK and some of the steps you may take to reduce a potential bill.

In the UK, IHT is a type of tax that’s levied on the estate of someone who has passed away if the total value exceeds certain thresholds. The portion of estates above the threshold may be liable for IHT at a standard rate of 40% in 2024/25.

Many countries have some form of IHT. Indeed, according to euronews, 19 countries in the EU levy some form of tax on inheritances, gifts, or estates.

So, how does the UK differ in the way that it taxes estates? Read on to discover how other countries tax assets after you’ve passed away.

Several countries have no form of Inheritance Tax

While many countries do levy a tax when passing on assets, there are a few that don’t have any form of IHT. For example, Austria abolished IHT in 2008, and Norway followed suit in 2014.

In the UK, modern IHT tax dates back to 1894 when an estate duty was introduced. However, there were different types of IHT going much further back. While there have been calls to abolish IHT in the UK, it’s not a step Conservative or Labour governments have taken so far.

The threshold for paying Inheritance Tax varies significantly between countries

Among countries that have IHT, the majority of estates fall under tax thresholds and aren’t liable.

As a result, taxes on estates typically make up a small proportion of total tax revenues. In fact, the Financial Times reports only four of the 38 countries that are part of the Organisation for Economic Co-operation and Development (OECD) derive more than 1% of their total tax revenue from inheritances, estates, or gifts – Belgium, France, Japan, and South Korea.

The threshold for paying IHT varies significantly. In the UK, in 2024/25, the nil-rate band is £325,000. If the value of your estate is above this figure, IHT might be due.

In contrast, a Belgium citizen might need to consider an IHT bill if the value of their estate is more than just €12,500 (£10,505) depending on the region they live and who their beneficiaries are.

On the other end of the scale, in the US, federal estate tax is only required if the value of the estate exceeds $13.61 million (£10.25 million), and only six states levy additional IHT.

Many countries tax the recipient rather than the estate

The UK is an outlier in how it taxes the assets of the deceased. The UK is one of a small number of countries that tax the estate and consider the total value, not how the assets will be distributed. Denmark and the US also take a similar approach.

In many other countries, rather than taxing the estate, the recipient is taxed. So, an IHT bill would consider the gains each recipient has made and their personal circumstances.

In a 2023 report, the Institute for Fiscal Studies stated that taxing recipients and considering their wealth would be “the most appropriate way of taxing inheritances”, if IHT aims to reduce the effect of inherited wealth on inequalities. It notes this would allow a “transfer of £500,000 to a millionaire to be taxed differently from a transfer of £500,000 from the same estate to someone who is poor”.

The majority of countries favour a progressive Inheritance Tax rate

Again, the UK is an outlier by having a flat rate of IHT. In 2024/25, the portion of your estate that is liable for IHT would be taxed at a standard rate of 40% in most cases.

In contrast, many other countries favour a progressive tax – where the tax rate is increased for estates that have a higher value. For example, in Denmark the IHT rate is between 15% and 25%, and in Belgium, it could range from 3% to as high as 80%. 

Many other taxes in the UK are progressive. For instance, you may pay a higher rate of Income Tax on the proportion of your income that exceeds the higher- or additional-rate thresholds. So, making IHT progressive could align it with other taxes.

Contact us to talk about Inheritance Tax

If you’d like to talk about your estate’s potential IHT liability and the steps you could take to reduce the potential bill, please contact us.

Please note:

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

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate Inheritance Tax planning.