Amid the Crisis – What to Assess to See if Your Financial Plans Should Change
What should stay the same
Your retirement plans
If you are not retiring soon, then it’s likely that your plans for retirement shouldn’t need to change. Through the course of saving towards and enjoying your retirement you will likely experience a number of moments of financial market stress – this is normal and part of the journey.
Yet if you are approaching retirement, you should consider all the implications and assess some important factors such as:
- Do you need to draw your pension now and can you defer some until later?
- Should you stay invested?
- How much do you need to live comfortably?
- What pitfalls should you avoid when retiring?
- Is it a good idea to change your risk level preferences?
To help those nearing retirement we answer these questions here – so you can evaluate with clarity what options are open to you, and what sensible steps you can take to ensure the transition goes smoothly.
Your risk level
While it is a natural reaction to want to reduce risk during uncertain conditions, you should note that changing your risk level alters the long-term mix of assets in which you invest – and the expected characteristics of your portfolio as a result.
For example, a higher risk portfolio will typically offer the potential for higher returns, but portfolios may be exposed to the potential for greater losses. Moving to a lower level of risk may mitigate the threat of loss to some degree but you should decide if the prospect of lower returns over time is a trade-off worth making.
In this article we examine when it may be appropriate to change your risk level and the affect this could have on your investments.
What you may consider changing
You may need to review how resilient your access to cash is if your regular income or cash flows are inhibited during times of uncertainty. While it is sensible to still be saving you should ensure you are prepared if your circumstances change.
As well as having enough money to hand, this could also prove to be a good time to maximise other aspects of your finances.
Your investment strategy
The economic environment may affect how you think about investing, but most of the time how you act shouldn’t change – unless your investment strategy is not as optimised as it could be.
While market volatility is unsettling and a limp economy’s punitive effects can extend far beyond stock markets, throughout history the lesson is clear: staying invested is a much wiser approach than trying to time the market.
Trying to second guess the market is ill-advised because when investors act hastily to events they typically get it wrong – with the average investor gaining less than half the returns of the broader market over 30 years, as this article shows.
Whatever the environment, investors should also examine other factors to ensure they enhance their investment strategy. One of these is how much you pay in fees: even paying 1% more in fees each year can make a remarkable difference over time. With average investment returns of 4.40% per annum, you could be an extra £77,913 better off over 20 years by investing with Netwealth compared to investing with a traditional wealth manager.
Source: Netwealth. Example based on the forward-looking gross investment return for a medium risk portfolio of 4.40% per annum and an initial investment of £200,000. The total cost of investing for the traditional manager is 1.86%.
Forward looking models are not a reliable indicator of future performance.
Of course, many will question why they should invest at all and move from the presumed security of leaving cash in a savings account. However, the persistent impact of inflation over time shows that this thinking is a false safety net: £1,000 at the start of 1990 was only worth £488 at the end of 2019. (Source: ONS, Netwealth.)
So even when the outlook for the economy is uncertain people need to invest to mitigate against the effects of inflation. A cost-effective diversified portfolio can help you to achieve this goal.
Your tax-free allowances
During an economic downturn (as at any time) new rules may come into effect that demand a closer look at your circumstances. For example, the level where the tapered ‘annual allowance’ for pensions kicks in was raised recently, which means that many high earners could benefit.
The amount you can put into your pension each year is £40,000 gross for individuals and you can earn a certain level of income before this starts to taper off.
- Previously the ‘threshold income’ was £110,000 which covered all of your earnings (including investment income) subject to UK income tax. This is now £200,000.
- Your ‘adjusted income’ was £150,000 which covered all your taxable income + pension contributions paid by you and your employer. This is now £240,000.
What these increased levels mean is that pension savers could potentially have much more to set aside each year, as you are only affected by the taper if you earn over £200,000 annually. To see if you could benefit we analyse the various taper implications here.
It is also worth noting that how much you can save for a child in a Junior ISA doubled this year – from £4,500 to £9,000. While this is impressive on its own, when a family combines all of their ISA allowances, your funds can grow by a substantial amount. A family of four could receive almost £100,000 more in 10 years by using all of their ISA allowances compared to investing outside of a tax wrapper.
The trajectory of a crisis and often associated attributes such as market returns and inflation are outside of your influence. But amid the uncertainty there are factors you can control such as how much you pay in fees to invest, using tax wrappers effectively and reviewing how you apportion your money.
Managing your finances efficiently at the best of times can be complicated and time consuming – if you want the reassurance of an expert team by your side to help you navigate a variety of situations, please get in touch with one of our financial advisers.
Please remember that when investing your capital is at risk.