Author: Chris Thorpe

Investing in property is often seen as a savvy way to boost your long-term wealth. But, if you’re thinking about becoming a landlord, there are three taxes you need to factor into your plans to avoid an unforeseen bill. 

Property prices have steadily increased in recent decades, so it’s not surprising that people are considering property investments. Even after short-term downturns in the market, such as the one that followed the 2008 financial crisis, property prices have recovered. 

The average UK house price at the start of 2013 was almost £168,000, according to Land Registry data. A decade later, it had increased to more than £288,000. So, historically, property investors have had the opportunity to generate a sizeable return. 

Of course, as well as the property increasing in value, landlords hope to receive a regular income from tenants too. 

High inflation and stock market volatility mean more people are thinking about how they could use property to improve their long-term financial wellbeing. A report in FTAdviser suggests a quarter of savers plan to invest in property to support their retirement goals.

Before you move ahead with plans to purchase a buy-to-let property, there are lots of pros and cons you should weigh up first. Among the areas to consider are the taxes associated with buying a second property and being a landlord, including these three. 

1. Stamp Duty

When buying a second property, the first tax charge you’re likely to need to pay is Stamp Duty. 

This is a tax you pay when purchasing property or land. There is usually a 3% Stamp Duty surcharge when buying a second property, including a property you intend to use as a buy-to-let.

For 2023/24, the Stamp Duty tax rates for a second property in England and Northern Ireland are:

The government’s Stamp Duty calculator can help you understand what charge you may need to pay. 

You should note, Scotland and Wales have similar taxes when purchasing property. However, the thresholds and rates are different. 

Normally, you’ll need to pay any Stamp Duty due within 30 days from the completion of the purchase. As a result, it’s essential that you’ve calculated the bill and included it in your budget for buying a buy-to-let property. 

2. Income Tax

If you’re renting out a property, you’ll usually pay Income Tax on the profit. 

The profit you make will be added to any other income you receive, such as your salary. So, the rate of Income Tax you pay as a landlord will depend on which tax bracket you’re in. You should be mindful of property income pushing you unexpectedly into a higher tax bracket. 

There are potentially ways to reduce your Income Tax bill as a landlord. However, allowances are not as generous as they were in the past, so it’s important to calculate your expected bill when deciding if investing in property is right for you. 

You can deduct “allowable expenses” from your rental income when calculating profit. These expenses must be wholly and exclusively for the purpose of renting out the property.

You could, for example, deduct general maintenance work, like repairing a leaking roof, treating damp, or replacing existing fixtures and fittings. However, you cannot deduct improvements, such as switching laminate kitchen countertops for high-end granite ones.

It’s also no longer possible to deduct mortgage expenses from your rental income to reduce your tax bill, although you may receive a tax credit on 20% of your mortgage interest payments.

So, while there may be ways you can reduce Income Tax on the rental yield, you could still face a significant bill that you need to weigh against the profit. 

3. Capital Gains Tax

When you’re thinking about investing in property, you may not have considered when you’ll sell it or the tax charge you could face when you do. However, it’s a crucial part of understanding if buy-to-let makes financial sense for you. 

You pay Capital Gains Tax (CGT) when you make a profit when you sell certain assets, including property that isn’t your main home. The CGT rate depends on the rate of Income Tax you pay and the size of your gain. For residential property, it can be as much as 28%. 

The CGT annual exempt amount could provide you with a way to reduce the bill when you sell buy-to-let property. In 2023/24, you can make a profit of up to £6,000 before CGT is due. In 2024/25, the CGT exempt amount will halve to £3,000. 

Keep in mind that the CGT exempt amount covers gains made when you sell some other assets too. So, if you’ve sold shares for a profit during the same tax year, you’ll need to consider how this would affect your CGT exempt amount and your overall bill. 

Calculating CGT can be complex, and seeking tailored financial advice can be useful. 

Do you have questions about buy-to-let mortgages?

There are some key differences between traditional and buy-to-let mortgages. If you’re considering buying a buy-to-let property and have questions, from how much you could borrow to how much the repayments could be, 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.

Buy-to-let (pure) and commercial mortgages are not regulated by the Financial Conduct Authority.

Your property may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.

When people think about inheritances, they often view it as a lump sum. But you could leave your loved ones an inheritance that will deliver a passive income, and, in some cases, it’s an option that could improve their financial security.

Take the work of author J. R. R. Tolkien – his family still benefit from the passive income the copyright his work delivers 50 years after he passed away. 

More than 80 years after the first edition of The Hobbit was released, Tolkien’s work is still hugely popular. Every year, his works generate tens of millions of pounds in royalties. 

In fact, it’s thought Amazon paid as much as $250 million (£198 million) for the right to produce TV shows based on Tolkien’s work in 2017 – that’s 1,000 times more than Tolkien sold the movie and merchandise rights for in 1969. This money goes to the Tolkien estate. 

Once you add up royalties from the books, film adaptions, and a range of licenced products, the Tolkien estate provides the author’s descendants with a huge amount of financial freedom. 

You don’t have to pen a literary classic to leave your loved ones with assets that could provide them with a passive income. 

There are lots of options that may be right for your family. For instance, passing on dividend-paying shares could provide them with an income. Or leaving behind a buy-to-let property is another option.

If you’re worried about how your family will cope financially over the long term or manage a lump sum, an inheritance that delivers an income could put your mind at ease. However, it may not be straightforward and there are some questions to consider first. 

1. How would you pass the assets on?

If you want to leave a passive income to your family, there’s more than one way to do so. You should weigh up the pros and cons of the different options, including these three: 

• Gifting during your lifetime: You may want to pass on assets during your lifetime. This could improve your loved ones’ financial security now and mean you can see the benefits of your gift. Before gifting, assessing your own financial security is useful – could taking assets out of your estate now affect your lifestyle or security in the future? 
• Leaving assets in a will: By writing a will, you can state who you want to receive assets when you pass away. Assets would usually be given directly to the beneficiary once the probate process is complete. 
• Placing assets in a trust: If you want to place restrictions on how and when the assets can be used, a trust may provide a solution. For example, you can place assets that will deliver a passive income in the trust, but not allow the beneficiary to sell the assets. Trusts can be complex and it’s important they’re set up with your goals in mind, so legal and financial advice may be useful. 

In some cases, you may want to mix the above options and still leave a traditional inheritance. For example, your child may receive a passive income through shares you’ve placed in a trust and receive other assets when you pass away because you’ve named them in your will. 

A tailored estate plan allows you to create a solution that suits your goals.

2. What tax could be due on your estate and the income the assets generate? 

If the value of your entire estate exceeds certain thresholds, it may be liable for Inheritance Tax (IHT). With a standard rate of 40%, IHT can significantly reduce what you leave behind for loved ones, and you may want to consider which assets your family could use to pay a potential bill.

There are often steps you can take to reduce a potential IHT bill during your lifetime. If IHT is a concern, please contact us to talk about the steps you could take. 

As well as IHT, if your family receive an income from the assets, they may need to pay Income Tax on the gains. The rate of tax they pay will depend on other income they receive, such as their salary. So, understanding the tax position of your beneficiaries might be important when you’re deciding how to pass on wealth. 

In addition, if they decided to sell the assets, they may need to pay Capital Gains Tax. So, understanding how they would use the assets they inherit could help minimise a tax bill. 

3. Does inheriting a passive income make sense for your beneficiaries? 

Before you decide to leave loved ones a passive income, it may be useful to discuss your plans with your beneficiaries.

Understanding what their goals and challenges are can help you leave an inheritance that suits their needs. While a passive income may mean they are financially stable, it might not be suitable for other goals. For example, if they want to purchase a home, a lump sum inheritance could make more sense. 

Of course, you can pass on passive income assets to your loved ones without restrictions on how they use it. So, they could choose to sell the assets if they’d prefer a lump sum. 

You could also involve your family in the estate planning process. It would provide an opportunity to talk about the different options and how they might use an inheritance.

Introducing your loved ones to financial planning could mean they make informed decisions that improve their financial wellbeing in the short and long term. 

If you involve your family in the process, you don’t have to share all the details of your financial plan. You can decide which aspects of the plan and assets you discuss. 

Get in touch to talk about your estate plan and passing on a passive income 

If you want to discuss how you could support your family with a passive income, please contact us.

We can help you understand what your options are and how you could provide long-term financial support to your loved ones through an inheritance. We can also work with children, grandchildren, or other beneficiaries to ensure you’re all on the same page and they get the most out of the gift you leave them. 

Please note:

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

The Financial Conduct Authority does not regulate will writing, estate planning, or tax planning. 

After more than a decade of low interest rates, many people will be pleased to see the amount their savings are earning is starting to rise. Yet, it could mean you need to pay a tax charge. 

Interest from saving accounts may be liable for Income Tax. When the average interest rate was below 1%, you usually had to have a substantial amount held in cash accounts to face a tax charge. However, as interest rates rise, you could unexpectedly cross the tax threshold.

So, read on to find out when you need to pay tax on interest and how you could avoid a bill. 

Do you benefit from the Personal Savings Allowance?

The Personal Savings Allowance (PSA) lets you earn interest on savings without paying tax. Not everyone benefits from the PSA, and the amount varies depending on your Income Tax bracket.

For 2023/24, the PSA is:

• £1,000 a year if you’re a basic-rate taxpayer
• £500 a year if you’re a higher-rate taxpayer
• £0 if you’re an additional-rate taxpayer. 

The PSA covers any interest you earn from savings accounts, as well as corporate bonds, government bonds, and gilts. It could also include interest earned on other currencies you hold in a UK-based savings account.

If the interest you earn exceeds the PSA, or you don’t benefit from it, it’s added to your other income when calculating tax liability. So, if you’re an additional-rate taxpayer, you could pay 45% tax on the interest your savings earn. 

Usually, HMRC will make changes to your tax code to cover the tax charge on the interest you earn. For example, you may get a lower Personal Allowance if you exceeded the PSA in the previous tax year.

You don’t normally need to act to pay the tax, but you should let HMRC know if the interest you earn is no longer above the PSA so they can adjust your tax code accordingly. 

Using your ISA allowance could reduce your tax bill

If you’re not using your ISA allowance, doing so could reduce your tax bill.

In 2023/24, your annual ISA allowance is £20,000. The interest cash savings generate when they’re held in a Cash ISA are free from Income Tax. So, if you could exceed the PSA, it’s worth reviewing if you’re using your full ISA allowance and the interest rates available on Cash ISAs. 

To access the most competitive interest rates from an ISA, there may be additional requirements. For instance, some may require you to deposit a set amount each month or won’t allow you to make withdrawals for several years. Make sure you assess the terms and conditions of an account and that it suits your needs first. 

A savings account may not be the most appropriate place for your money

While interest rates are increasing, if you benefit from the PSA, you’ll typically need to have a substantial amount held in your savings account before a tax charge is due. 

According to MoneySavingExpert, as of May 2023, a top easy access account pays an interest rate of 3.71% (AER). With this interest rate:

• A basic-rate taxpayer could place £26,954 into the account before exceeding the PSA
• A higher-rate taxpayer could deposit £13,477 into the account before facing a tax charge.  

Savings accounts play an important role in many financial plans. As well as being useful for your day-to-day spending, they often make sense for your emergency fund, which you want easy access to. However, you should be mindful of keeping large sums in cash accounts, as the value may fall in real terms.

While an interest rate of 3.71% may seem good when you compare it to recent years, it’s still much lower than the rate of inflation. When the cost of goods and services rises at a faster pace than your savings are growing, the value of savings in real terms decreases. 

If you could face a tax charge because you’re holding large sums in cash, it may be worth looking at alternatives. One option, depending on your circumstances, could be to invest, which may potentially deliver returns that keep pace with inflation. However, there are still tax considerations if you decide to invest.

Creating a tailored plan could help you get the most out of your money and manage your tax liability. 

Contact us to review your financial plan

Factors outside of your control affect your financial plan, from rising interest rates to inflation. As a result, it’s important to review your plan with these circumstances in mind to ensure it’s still appropriate for reaching your long-term goals. 

If you have any questions about how rising interest rates or other factors may affect you, 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 investment 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.

Spending too much money in retirement is a common fear. Yet, some retirees struggle with the opposite challenge – they spend too little. Read on to find out why and what you can do if you’re too frugal in retirement.

Underspending once you give up work may be more common than you think. It’s easy to see why some retirees adopt this approach. As many retirees are responsible for managing their income and ensuring it lasts, there is a real danger of overspending and facing a shortfall in your later years. 

In fact, interactive investor’s The Great British Retirement Survey found 40% of retirees worry about running out of money. 

However, underspending can be dangerous in a different way. It could mean you don’t get the most out of your retirement despite working hard to achieve financial security later in life. 

Striking a balance to sustainably use your assets in retirement is just as much about your mindset as it is about wealth.  

Switching from a saving to a spending mindset

One of the key challenges for some retirees is that they need to change how they view and use money when they enter retirement. 

For decades, you may have prioritised building your wealth. From adding to an investment portfolio to contributing to a pension, a saving mindset may have been important to reach your goals. 

However, many people start to deplete the assets they’ve built up in retirement. Even though you’ve diligently saved so you can use your assets now, it can be difficult to switch to a spending mindset. After all, you may have developed positive saving habits over the years that are difficult to break. 

You may also have heard of “rules” about using your wealth that could curb your spending.

Perhaps you’ve read that you shouldn’t withdraw more than 4% each year from your pension. While this may be a useful guide, keep in mind that what is a sustainable income for you will depend on a whole range of factors, from the age you retire to other assets you may have.

So, creating a plan that’s tailored to you can give you the confidence to enjoy your retirement while considering long-term security.   

4 reasons why financial planning could help you spend more in retirement 

While you may think of financial planning as focusing on growing your wealth, it’s about creating a plan that helps you reach life goals. For some retirees, that plan could be to increase their spending. There are several ways financial planning could help, including: 

1. Assessing how long assets need to last

One of the difficulties of knowing how much to spend in retirement is that it’s impossible to know how long your assets need to provide an income.

Considering life expectancy is a key part of a financial plan. This means you can understand what spending is sustainable for you and provide peace of mind if you’re worried about running out of money. 

2. Demonstrating how the value of your assets could change

A useful financial planning tool is cashflow forecasting. It can help you visualise how different decisions will affect the value of your assets. 

Cashflow forecasting works by inputting information and making certain assumptions, such as estimated investment returns. While the results cannot be guaranteed, it’s an effective way to see the potential outcomes of different scenarios. 

So, you could see the effect on your assets if you increased the income you take from your pension by 20% throughout retirement. Or whether you could afford to double your outgoings for three years to tick off bucket list goals, before returning to a lower income. 

If you’re frugal in retirement because you’re worried about the long-term effects, cashflow forecasting could demonstrate how your decisions will affect your finances in the short and long term. 

3. Creating a reliable income if it’s right for you

Some retirees struggle with the uncertainty of their retirement income. For example, if you use flexi-access drawdown to access your pension, investment returns could affect its value. You may worry about what would happen if the markets experienced a downturn. 

There are ways to create a reliable income and some will find this provides peace of mind.

For example, an annuity is something you can purchase, which would then deliver an income for the rest of your life. If you know the income from an annuity will cover your essential expenses, you may feel more comfortable spending other assets on things you enjoy.

What’s appropriate will depend on your circumstances and priorities. You can speak to us about ways you could create a reliable income in retirement. 

4. Giving you someone to turn to

Even with a financial plan in place, there may be times when you still need some reassurance. Perhaps you’re not sure if investment volatility will affect your income sustainability. Or you want to withdraw a lump sum to spend on a once-in-a-lifetime experience, but don’t understand how it’ll affect your finances long term.

Once you have a financial plan in place, regular reviews with your financial planner can help you keep it up to date.

Want help understanding your retirement income? Contact us

If you are retired or nearing the milestone and aren’t sure how much you can sustainably spend, please contact us. We’ll help you review your finances and goals to create a plan that reflects your needs. 

Please note:

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

The Financial Conduct Authority does not regulate cashflow planning.

When you’re making investment decisions, balancing risk is an essential part of the process. Creating a risk profile can help you understand which investments are appropriate for you. 

Last month, you read about the benefits of investing and how it could boost your wealth over the long term. While investing can be a valuable way to increase wealth, it also comes with risks. So, read on to find out more about investment risk and five of the key factors you need to consider when deciding how much risk to take. 

All investments carry some risk. You cannot guarantee returns and you may not get back the full amount you invested. 

However, the level of risk can vary greatly between different investment opportunities. So, understanding how much risk is appropriate for you is vital. Before you invest, answering these questions can help you balance potential returns and risk. 

1. What is your investment goal?

One of the first things to consider before investing is to set out why you want to invest. 

The level of investment risk that’s appropriate for creating a base income in retirement could be very different than if you’re investing to increase your disposable income. 

How important goals are to you may also affect how much risk you want to take. For instance, if you’ve built up a nest egg to support your child through university, you may be reluctant to take a higher level of risk because you don’t want to potentially lose your savings, even if it could mean greater returns.  

2. What is your investment time frame?

Setting an investment goal is also essential for understanding how long you’ll be invested for.

As a general rule, it can be sensible to invest for a minimum of five years. Historically, markets have delivered returns over a longer time frame, but there are periods of volatility where investment values may fall. By investing over years, you have more chance of these peaks and troughs smoothing out. 

Usually, the longer you’ll be investing for, the more risk you can afford to take. However, a long time frame doesn’t automatically mean you should take a high amount of risk, and you still need to consider other factors. 

3. What other assets do you hold?

Rather than seeing potential investments in isolation, it instead be helpful to look at them as part of your wider financial plan.

By assessing other assets and the risk they pose, you can create a balance across your plan that suits you. You may need to consider how your pension is invested, what cash savings you hold, or the value of property you own. 

If you have a reliable income and assets that can provide long-term security, you may be in a position to take more investment risk. 

4. What is your capacity for loss?

As all investments carry some risk, you might want to consider what would happen if your investment fell in value. How would it affect your short- and long-term plans? 

No one wants to suffer an investment loss. Yet, knowing that you could absorb declines in value or volatility in the market is vital when assessing which opportunities are right for you. 

If investment losses could have a significant effect on your lifestyle or mean you’d face financial challenges, you may want to consider alternatives to create financial stability first. 

5. How do you feel about investment risk?

Finally, how you feel about risk is important too. Feeling comfortable with the investment you’re making and confident in your long-term plan is crucial. 

Feeling nervous about investments can lead to you making decisions that could harm your wealth. For example, if the value of your investments fell during a period of short-term volatility, would you react and withdraw your money? 

While this may seem like a way to minimise loss, volatility is part of investing and, historically, markets have delivered long-term results. Reacting is more likely to have a negative effect on your plans.

If you’re unsure about investments and risk, talking to a financial planner could put your mind at ease. Understanding how investments work and why they have selected certain investments for you can help you feel more confident, even when the market is experiencing volatility. 

Contact us to create an investment portfolio that matches your risk profile 

Balancing risk and return when investing can be difficult, but we’re here to help you. We’ll work with you to understand how to get the most out of your assets in a way that suits your risk profile and goals, including investing. We can also manage your investments on your behalf, so you can focus on what’s important to you. 

Next month, read our blog to discover how to invest and the allowances you could use to reduce a potential tax bill. 

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 investment 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.

Economies and businesses still face challenges, but statistics indicate some of the pressure, including rising inflation, is starting to ease. Read on to find out what affected investment markets in May 2023.

Remember, you should have a long-term outlook when investing. You should have an investment portfolio that reflects your goals and you feel confident in. Please contact us if you have any questions about your investments and what the current circumstances mean for you.  

UK

Official figures show the UK narrowly avoided a recession after the economy grew slightly in the last two quarters to March 2023.

While the government said the figures were positive, the UK is still bottom in the G7 for growth since the pandemic. In fact, the UK economy was still 0.5% smaller in the first quarter of 2023 than it was in the final quarter of 2019. 

However, both the Bank of England (BoE) and the International Monetary Fund (IMF) have upgraded the UK’s growth forecasts, which could be positive news for investors. 

The BoE no longer expects a contraction, but rather for the economy to be stagnant this year.

The IMF also revised its previous prediction. The organisation’s managing director Kristalina Georgieva said authorities have taken “decisive and responsible” steps. The IMF now predicts the UK economy will grow by 0.3% this year, rather than contracting by 0.4% as previously forecast.  

Inflation is still stubbornly high but in the 12 months to April 2023, it fell from 10.1% to 8.7%. Yet, the BoE has said inflation will fall slower than previously anticipated. The central bank doesn’t expect to hit its 2% inflation target until early 2025, reports suggest. 

In response to high inflation, the BoE increased its base interest rate to 4.5% – the highest it’s been since October 2008. 

Amid high inflation, energy firms are being accused of profiteering. BP reported bumper profits of $5 billion (£4.05 billion) and outstripped forecasts in the first three months of the year. Shell also posted first-quarter profits of $9.6 billion (£7.7 billion). The profits have led to fresh calls for a tougher windfall tax on energy giants. 

According to S&P Global’s Purchasing Managers’ Index (PMI), business outlook is improving but some areas are still in contraction. The UK’s service sector posted its strongest growth in a year. However, the manufacturing industry is still in decline, although the pace of contraction is falling. 

Reforms to the London Stock Exchange could mean greater risks for investors in British companies, the Financial Conduct Authority (FCA) has warned.

The regulator has plans to abolish stricter “premium” class London stock market listings. This would make it easier for company founders to retain control of their business in a bid to stop the decline of the London stock market, which has struggled to attract new companies over the last decade.

However, the FCA acknowledged that helping the UK economy would lead to higher risks for investors due to fewer checks on listed companies. 

Europe

Inflation increased in the eurozone in April to 7%, figures from Eurostat revealed. The rise paved the way for the European Central Bank to make its seventh consecutive interest rate hike – it increased the base rate by 25 basis points. 

Despite the rising cost of living, the European Commission (EC) said the eurozone economy “continues to show resilience in a challenging global context”, as fears of a recession start to ease. 

The EC now expects member countries to grow, on average, by 1% in 2023, and by 1.7% in 2024.

Similar to the UK, PMI data indicates factories are struggling. Across the eurozone, factory output declined for the 10th consecutive month. However, the readings also suggest that the rising cost of raw materials, driven up by inflation, is starting to ease which could be good news for businesses. 

Germany, the bloc’s largest economy, in particular, is facing challenges. Industrial orders fell by 10.7% month-on-month in March. The figures were significantly more than the 2.2% fall expected and the biggest slump since April 2020 when the pandemic led to businesses halting operations. 

US

Headline figures paint an optimistic picture of the US.

Inflation fell slightly in April to 4.9% and the US unemployment rate fell to 3.4%, suggesting businesses are feeling confident enough to make new hires. 

However, a survey from the National Federation of Independent Businesses suggests small businesses are worried about the economic outlook and worker shortages. 

There are also growing concerns about banks failing in the US. The crisis started with Silicon Valley Bank collapsing in March. At the start of May, trading in the shares of two regional banks was temporarily suspended after dramatic drops. 

Central banks maintain the current situation is not similar to the 2008 financial crisis, and, with the exception of Swiss bank Credit Suisse, the crisis hasn’t affected European banks. 

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 investment 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.

You may have heard about digital currencies in the news. And now, the Bank of England (BoE) is exploring the possibility of introducing a digital pound. Read on to find out what it means and why a digital currency could come to the UK.

How we use money has changed enormously over the last few decades. 

It wasn’t too long ago that most transactions involved cash. Now, using your card, paying for goods online, or tapping your phone at a checkout are common. 

According to UK Finance, 57% of all payments in the UK were made using cards in 2021. The Covid-19 pandemic, when many businesses encouraged contactless payments, and an increased limit of £100 mean use of contactless has soared. In 2015, just 3% of payments were contactless, but by 2021 this had increased to 32%. 

In contrast, cash was used in just 15% of all payments in 2021 after an annual decline of 1.7%. 

So, what’s next for money in the UK? By the end of the decade, you could be using a digital pound to pay for goods and services. 

What does the digital pound mean?

The digital pound has been referred to as “digital sterling” or “Britcoin” in the press. It would be a type of central bank digital currency (CBDC) issued by the BoE.

While it’d be a new type of money, it would be linked to sterling and its value would be stable. 10 digital pounds would have the same value as a £10 note. 

CBDCs are often confused with cryptocurrency, but they are not the same. A cryptocurrency is issued privately and the value is often volatile. In comparison, the digital pound would be issued by the BoE and backed by the government, so the value would be far more stable. 

The currency would be held in a digital pound wallet, which you could use to pay for services by tapping your smartphone, like you do with contactless payments, or entering details online. You would also be able to transfer money to another person, a business, or between your own accounts. 

The BoE added it recognises how important cash is to many people – the digital pound wouldn’t replace the coins and notes in your wallet. 

The Bank of England says the digital pound is needed to fulfil its mission

Answering why a digital pound is needed, the BoE says: “There are new forms of money on the horizon. Some of these could pose risks to the UK’s financial stability.”

It adds: “The money we issue as the UK’s central bank is the anchor of confidence in our monetary system. This type of money supports the UK’s monetary and financial stability. Today, banknotes are the only type of money we provide for the public to use. Having a digital pound could help us to keep providing this anchor for the UK.”

As more payments become digital, the digital pound could also help keep “uniformity”. This is where you can exchange one type of money for another. For instance, you can withdraw money from your bank account as cash at an ATM. 

The digital pound could be in use by the end of the decade 

The introduction of the digital pound is still at least several years away, but it could be in use by the end of the decade. The BoE is currently reviewing the technology and policy requirements for its introduction. 

Other countries are further along in the process of introducing a CBDC. 

In October 2020, the Bahamas launched the first nationwide CBDC, known as the “Sand Dollar”. So far, four CBDCs have been launched in 11 countries. Sweden is also in the testing phase of launching its “e-krona”, and China is expected to start using the “digital yuan” later this year.  

From a consumer perspective, the digital pound would mean you have more choice and transactions may be faster, if not immediate. 

A House of Commons report suggests the technology may also open up a range of innovations that could benefit consumers and businesses, including: 

• “Programmable money” that enables transactions to occur according to certain conditions, rules or events
• Automatic payment of taxes at the point of sale
• Allowing the government to make direct transfers to individuals
• Automatic payment of dividends directly to shareholders
• Electricity meters paying suppliers directly, based on power usage
• Making “micropayments” at much lower costs, allowing further innovations, such as paying a few pence rather than a subscription to read an online newspaper article. 

Of course, there are challenges too. The report noted the possible risk of cyberattacks and breaches in data privacy, as electronic payment systems are less anonymous. It also stated concerns that unreliable internet connectivity might affect accessibility.

While some way off, the digital pound could revolutionise how we use money in the coming years. 

Please note:

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

When you think about investing, it’s probably the actions you take that come to mind. That could be researching a fund or actively investing in a company by purchasing shares. However, the steps you don’t take are just as important for your portfolio to be successful.

That may sound strange, but not acting on impulses or short-term market movement is a crucial part of investing. And it can be more difficult than you think. 

Reacting to market movements could harm your long-term returns 

Investing should be logical. Yet, emotions and bias play a huge role in how investors feel and act towards their portfolios.

Think about when you read a headline that states the economy is on track for recession, or markets are plummeting. It’s natural to worry about what that means for your investments, and it can lead you to feel that you need to respond in some way by making changes to your portfolio.

Yet, long-term trends show that creating an investment portfolio that suits your long-term goals and then sticking with it often makes sense for the average investor. So, recognising when not to act is essential when you’re investing for long-term growth. 

Research from Schroders demonstrates how emotional investing could harm outcomes.

If you invested £1,000 in the FTSE 250 at the start of 1986 for 35 years, you’d have received returns of 11.4% a year on average. 

However, if you responded to news or other information and disinvested, returns could be lower. Investors that missed out on just the 10 best days of the FTSE 250 during that period would have annual returns of 9.5%. Miss out on the best 30 days over the 35 years and returns fall to 7%. 

During those 35 years, there were periods of volatility. Investors that held their nerve and didn’t act may have benefited in the long run. 

That’s why when it comes to investing, deciding not to act can be a positive action in itself. 

4 useful ways you can curb impulsive actions when investing 

1. Take your time when making a decision 

One of the simplest ways to prevent action that could harm your long-term wealth is to take your time.

Sensationalist headlines can make it seem like you need to be quick to get the most out of investments. However, making snap decisions is more likely to lead to outcomes that aren’t right for you because you haven’t had time to think through the consequences.

Don’t feel pressured to make speedy decisions when it comes to investing – give yourself the time to weigh up the pros and cons. 

2. Focus on the long-term results 

Everyone would love to choose an investment that delivers an immediate return, but you need to take a long-term approach to investing.

Historically, markets have delivered real terms growth over long time frames. So, next time you read about markets falling or experiencing volatility, remember to focus on the bigger picture. The value of your investments could fall in the short term, yet history suggests if you hold tight, markets bounce back.

Of course, investment returns cannot be guaranteed and it’s important that your portfolio reflects your risk profile.

3. Try to ignore the noise

One of the reasons investors make impulsive decisions is that there’s often a lot of noise about what you should be doing. Whether you read the newspaper that informs you of an impending market crash or speak to a colleague about an investment opportunity you “must” get involved in, it can be difficult not to act. Try to tune out this noise. 

Having confidence in your long-term investment strategy can make it easier. If you know your portfolio reflects your aspirations and circumstances, dismissing calls to action is less challenging. 

4. Speak to us

As financial planners, we can help you manage your investment and wider financial plan.

We’ll take the time to understand what you want to achieve, so your investment portfolio and strategy are built with this in mind. The peace of mind that comes from working with a professional could mean you feel more comfortable taking an inactive approach to investing for the long term. 

If you’re worried you should be doing something, we’re also here to answer questions and offer guidance. Simply having someone that has your best interest in mind to talk to could prevent hasty decisions that you may regret later. 

Please contact us to 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 investment 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.

Over the last 18 months, interest rates have increased and the rate your savings could earn has slowly been rising. However, with some experts predicting they will begin to fall towards the end of the year, should you lock in an interest rate now?

Double-digit inflation figures have led to the Bank of England increasing interest rates 

The Bank of England (BoE) has gradually increased its base interest rate since the end of 2021. In November 2021, the base rate was just 0.1%. This meant the cost of borrowing was low, but savers suffered.

After a series of increases, the base rate stood at 4.5% as of May 2023. For savers, this is good news as it provides an opportunity for their savings to work harder. 

The steps taken by the BoE are in response to high levels of inflation. The after-effects of the Covid-19 pandemic and the ongoing war in Ukraine mean the cost of goods and services have increased well above the BoE’s 2% inflation target. In fact, for much of 2022 and the start of 2023, the figure has been in double digits. 

As a way to try and slow the pace of inflation, the BoE started to increase its base rate. Other central banks around the world, including the EU and US, have taken similar steps. 

While the inflation rate has remained stubbornly high at the start of 2023, the BoE expects it to “fall quickly” overall this year. It stated there are a few reasons for this, including:

• Wholesale energy prices have fallen a lot
• An expected sharp fall in the price of imported goods
• The cost of living crisis means households will spend less.

So, as inflation stabilises and starts to fall, what does that mean for interest rates and your savings? 

The UN financial agency predicts interest rates will return to pre-pandemic levels 

The International Monetary Fund (IMF), a financial agency of the UN, expects interest rates to start to fall once inflation is tackled. 

According to the organisation, since the mid-1980s, real interest rates across advanced economies have been steadily declining. The graph below shows that while interest rates did sharply decline during the pandemic, it was part of a wider trend. Instead, the current rising rate we are experiencing could be a blip. 

Source: International Monetary Fund 

So, while you may think of low interest rates as unusual, especially when you consider the higher rates you may have experienced in the 1970s and 1980s, they could be the “new normal”. 

In fact, the IMF projects the UK’s natural interest rate will remain below 0.5% over the coming decades. 

Even economies that are emerging and rapidly developing with a higher natural interest rate are expected to follow the same trend. The IMF projects China and India will experience a steady decline in interest rates and will fall below 1% during the 2030s. 

You may be able to lock in an interest rate, but it isn’t always the right decision 

With the IMF’s predictions in mind, it could make sense to lock in the interest rate on your savings now. 

Choosing an account that guarantees an interest rate for a defined period could be attractive. However, these types of accounts may require you to deposit a certain amount each month or mean you can’t access your savings during this period. So, it’s important to understand the terms first. 

You should also keep in mind that the predictions aren’t a guarantee. A huge range of factors affect interest rates, so they could also remain where they are or even rise further. In these circumstances, locking in an interest rate could mean you miss out.

What’s most important when deciding whether to lock in an interest rate, or, indeed, when you’re making other financial decisions, is your goals. 

Set out what you want to achieve with your savings first.

Your goals play a pivotal role in deciding where to place your savings. You may even find that saving isn’t the right option for you – perhaps investing would be suitable if you’re saving with a 10-year goal in mind. Alternatively, reducing debt could be a more effective way to improve your long-term finances.

Call us to talk about your saving goals 

There’s no one-size-fits-all solution when considering how to get the most out of money. Contact us to talk about your goals and concerns. We will talk through your different options and help you understand what could be right for you.  

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 investment 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.