Financial Planning, Pensions Advice, Financial Adviser Dunfermline, Fife, Edinburgh and Central Scotland

Friday 13th December 2019

Research has highlighted how being cautious with pension investment can be as damaging as taking too much risk. In some cases, a cautious approach is appropriate. But, in others, it’ll be the result of subconscious financial bias affecting the decisions we make.

Research from Cass Business School found women are more risk-averse than men. It’s a trend that could be affecting how much women have in their pensions and other investments. The research also found that young people and those that are single are more likely to be risk-averse too.

Professor David Black, co-author of the paper and Director of the Pensions Institute at Cass, said: “Women, because they are more risk-averse than men, would be more comfortable with lower-risk investments. Over a long investment horizon, such as that involved in building up a pension pot, this behaviour has been described as ‘reckless conservatism’ – women with the same salary history as men would, on average, have lower pensions as a result.

“On the other hand, men’s investment overconfidence can lead to ‘reckless adventurism’. This is not necessarily desirable at older ages close to retirement, since there is less time to recover from a severe fall in stock markets.”

What is financial bias?

Financial bias is simply a human tendency that affects our behaviour and perspective. These may be based on beliefs and experiences. In financial terms, bias may affect your ability to make decisions objectively. For instance, you may make a choice based on emotional bias rather than evidence.

Taking the above example; why are women more likely to take less risk with investments? It’s likely that bias is having an impact. Whilst the research didn’t show their personal circumstances, pre-conceived ideas will be affecting some women when they decide how much risk to take.

There are many forms of financial bias that may affect your decisions, including these three:

1. Loss aversion

This is the financial bias that the above research looked at. It’s an emotional tendency to prefer avoiding losses over making gains. Past research has indicated that the pain of losses is greater. As a result, investors may choose lower-risk options than appropriate to avoid this.

Another example of loss aversion is selling stocks to prevent further losses before you planned. Whilst doing so may protect you from further falls, it can be damaging. Selling stocks and shares effectively lock in your losses. Remember, over the long term, investments typically deliver returns.

2. Confirmation bias

Let’s say you’re looking at pension opportunities and decide one option is too high risk. But you decide to do some research anyway. Confirmation bias leads you to seek out information that supports your view. So, you’d discard the figures that suggest it could actually suit you. As a result, research simply backs up what you already believe.

Confirmation bias can lead to a one-sided financial view. It can make it difficult to objectively balance the pros and cons. Being aware of this can go some way to improving your research process, as can working with a financial planner.

3. Herd behaviour

If you’ve ever found your action mimicking those of a larger group, herd behaviour could be to blame. In some instances, it’s right to follow what others are doing. But it should align with your own reasoning, plans and wider goals. With so much noise in investment markets, it can be difficult to focus on what’s right for you.

For example, if markets start to decline, you may pull out investments if others are doing so. This is because you believe that the majority must be right. Yet, their circumstances and aspirations may be very different from yours. It’s important to build a financial plan you have the confidence to stick to.

How can financial planning help?

Working with a financial planner can help you remove some of the bias from decisions. It allows you to view your options through another’s eyes. You may have a clear idea about the best way to invest for retirement, for example. But after talking with a financial planner, you discover that taking more or less risk is appropriate.

Financial bias can also mean making snap decisions. For instance, when the value of stocks begins to fall you may consider selling. Having a long-term financial plan in place can give you the confidence to hold steady. This, in turn, can help keep you on track for your goals.

If you’d like to discuss your financial future, please get in touch. Our goal is to create a financial plan that reflects you and that you have confidence in.

Please note: 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.

Are you planning on taking a career break?

There are many reasons why you might decide to take a career break and it’s often an emotional decision. However, finances are likely to be a key part of whether it’s possible and the impact on your future. Uncertainty around the circumstances of some career breaks can make it incredibly difficult and stressful to manage finances.

Even if you don’t plan to take a career break soon, it could be on the horizon.

According to research from Aviva:

  • 19% of employees aged 45 and over in the UK expect to leave work in order to care for adult family members
  • 10% of mid-life employees expect they will have to leave work to care for children or grandchildren

Whilst career breaks for care reasons are common, many employers fail to consider the issue. It can mean there’s a significant disconnect and that working isn’t possible, even if a career break isn’t your preferred option. Just 6% of employers view caring pressures as a significant issue faced by their employees.

Lindsey Rix, Managing Director at Aviva, said: “The practical, financial and emotional costs of caring for relatives both young and old are forcing many people in mid-life to make increasingly difficult decisions about balancing commitments. Mid-life is the fastest-growing age demographic in the UK workforce, so we can expect these pressures to grow.”

Whatever your reason for taking a career break, it’s important to consider the financial implications.

The impact on your immediate income

The first thing to do is to make sure your plans are affordable in the short term. How would a loss of income affect your lifestyle?

Take a look at your outgoings and how these might change. You may find that your overall expenditure decreases. For example, travel costs may fall if you’re no longer commuting. There may also be areas where you’re happy to cut back in order to take a career break. Understanding your regular outgoings is the foundation for creating a financially secure career break.

Then, you need to look at your income sources. How will you meet financial commitments and live the life you want? You may have a partner who will be bringing in an income, for example. Alternatively, savings or an investment portfolio may provide you with the capital needed. You should also look at whether you’d be eligible for means-tested support.

Understanding the impact on your day-to-day life means you can make an informed decision about whether a career break is right for you and whether it’s financially possible.

Looking further ahead

When planning a career break, it’s often the short term that’s focussed on. However, it’s just as important that the medium and long term are considered too.

In the medium term, it’s likely that your savings will be affected. This may be due to using savings to supplement an income or because you’re putting less away. How will the impact on savings affect medium and long-term goals you may have? Will you need to adjust your plans to reflect the impact of a career break?

Another area to pay attention to is your pension. You may decide to take a break from paying into a pension, freeing up more income for now. However, even a short break can have a significant effect on the amount you retire with. Even if you decide to continue paying into a pension, you’ll lose the benefit of employer contributions. Again, this can have a big effect over the long term.

Planning ahead can be a daunting prospect but it’s a step that can help secure your financial future.

Modelling the impact of a career break

Calculating the financial impact can be difficult. After all, you may not have a concrete plan for when you’ll go back to work. Even if you do, you may have a lot of ‘what if’ questions. This is where financial planning can help.

We’ll help you understand how taking a period out of work will affect your finances in the short, medium or long term. With this information, you’re able to put precautions in places where necessary and proceed with confidence. Our goal is to give you the financial peace of mind needed to take a career break when necessary.

Whether you’ll be providing care or simply want a break, taking control of your financial future is crucial. Contact us to discuss how your plans could have an impact.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.

Research suggests that pension savers could be disappointed in investment returns after uncovering differing expectations between individuals and institutional investors. Understanding how much your pension is expected to grow by between now and when you want to access it is essential for planning your financial future.

Schroders questioned both institutional investors and individual investors about their expectations over the next five years. It found:

  • Institutional investors expect average annual returns of 6.1% over the next five years
  • In contrast, individual investors are expecting significantly higher returns of 10.7% over the same period
  • Notably, over the last year, individual investors have increased their expectations from 9.9% to 10.7%. However, institutional investors’ forecast has remained unchanged

Among the institutional investors questioned were pension funds, insurance companies, sovereign wealth funds and foundations across the world. The gap between expectations suggests some investors have unrealistic expectations about how well their pension will do, as well as other investments.

Charles Prideaux, Head of Investment at Schroders, said: “There appears to be a worrying disconnect between what individual investors expect from their investments and the professional investors who are often the managers of their money.

“The problem is that individual investors around the world are planning their financial lives based on a certain belief. Those decisions, if not guided by the advice of a financial planner, may be wrong if based on that belief. It could be that people, as a result, are putting too little into their retirement savings plans, or it may needlessly influence their view on the amount of risk they should take.”

Are your pension expectations realistic?

When assessing your pension expectations, this first thing to do is look at the fund you’re invested in.

Pension providers usually offer several different funds with varying risk profiles. If you’ve not selected a fund, you’ll be invested in the default option. Your pension provider should offer you information on this fund, including target performance. However, it’s important to remember that targets are not guaranteed. Pension values can be volatile when you’re looking at short-term performance; it’s essential that you look at the bigger picture and how your contributions will grow over your working life.

At this point, it’s also worth reviewing whether you’re invested in the right fund option. As stated above, there are usually several risk profiles to choose from. Your risk profile should be based on many different factors, including when you plan to retire, other long-term savings, and your overall attitude to investment risk. This is an area we can help with.

The above can give you an idea of whether your expectations are realistic. However, it can still be difficult to understand what performance means for your retirement income. This is where cashflow modelling comes in.

Cashflow modelling is a tool that can help you visualise how pension performance will deliver an income in the context of your wider circumstances. By inputting a variety of information, such as current value, contributions and expected retirement date it can help you understand a range of questions, such as:

  • What would be the overall outcome if pensions underperformed by 1% on average?
  • How could switching funds affect pension value at retirement?
  • What impact would increasing contributions now have?
  • Could I afford to retire five years sooner and still live the lifestyle I want?

Cashflow modelling isn’t an exact science and it depends heavily on the information provided. But it can give you an idea of what expectations mean to your retirement plans, as well as answering ‘what if’ questions.

Looking beyond pension funds

If the above highlight that your expectations are potentially too high, it’s important to look beyond your pension fund. Assessing how investment portfolios, mutual funds and more are likely to perform, in line with your risk profile, is an essential part of planning for the future.

If you’d like to review your investment proposition and understand what it could mean for your financial future, please get in touch. We’re here to help you understand how the investment decisions you make today could have an impact in the long term and what this means for your goals.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.

When was the last time you reviewed your will? If it’s been a while or your circumstances have changed, November is the ideal time to take another look at it. This month marks Will Aid month, aiming to encourage more people to consider their financial affairs and do good for charity.

Will Aid is a partnership between the legal profession and nine UK charities:

  • Action Aid
  • Age UK
  • British Red Cross
  • Christian Aid
  • Save the Children
  • Sightsavers
  • Trócaire

Throughout November, participating solicitors waive their fee for writing a basic will. Instead, clients are encouraged to make a voluntary donation, so your money goes towards helping the above charities. The recommended donation is £100 for a single basic will and £180 for a basic pair of mirror wills. More than £1 million has been raised through Will Aid.

A will is the only way to ensure your wishes are carried out when you die. Despite this, an alarming number of people put off even writing a will. Research from Will Aid found 53% of adults have not prepared a will. Further statistics highlight that it’s not just about passing on your estate. 52% of parents with children under 18 have not assigned legal guardians for them by having a will in place.

Even if you have already written a will, it’s important to review it regularly. Here are five reasons why you may need to review your will now.

1. Your wishes have changed

Quite simply, what you want may have changed. This may be due to a variety of factors and it’s important to review your will in light of this. Your will is the only way to make sure your wishes are carried out and your estate is distributed how you want.

2. You have married or divorced

Your relationship status may have an impact on your will.

Getting married automatically revokes any existing will. Under intestacy rules, which apply if there is no valid will, your husband, wife or civil partner will usually inherit your entire estate. Whilst this may align with what you want, it isn’t always the case. If you have children from a previous relationship, for example, you may want either the entire or a portion of your estate to go to them.

Divorce doesn’t revoke your will but it does affect intestacy rules, as well as how you want your estate to be distributed. Following a divorce, it’s a good idea to review who will inherit your estate and how this aligns with your wishes.

3. You have welcomed new children or grandchildren

Children and grandchildren are often the focus of a will. When you welcome new arrivals, it’s a good reason to adjust your will to ensure they’re included. If you name children and grandchildren in your will, it is possible to make similar provisions for future family members. However, even if you have done this it’s a good idea to check everything is in order. You may also want to update your will to include stepchildren or grandchildren.

4. Your financial situation has changed

Over time, your circumstances will change. It may mean you have more or less to leave behind for your beneficiaries. As a result, how you can distribute your assets effectively may also have changed. For example, if you’ve named certain assets to go to a child, you will want to update your will to rebalance it if the value of the asset has significantly risen or fallen.

5. To reflect changes in tax regulation

Tax regulations can change, and it may mean your estate is liable for Inheritance Tax (IHT). This would mean a portion of your estate goes to the taxman rather than your loved ones. If your estate may be liable for IHT, there are often things you can do to reduce the eventual bill, some of which will rely on your will. If you’re worried about IHT, please get in touch with us.

What to do if your will needs updating

If your will does need updating, you shouldn’t alter the original document. You have two options:

  • Write a new will: The first option is to start afresh. This may be the best option if you have significant changes to make to your existing will. Your new will should clearly state that it revokes all old wills. You should also destroy copies of your old will to avoid confusion.
  • Using a codicil: If just small adjustments need to be made, a codicil may be suitable. This is a separate document used to update your will and should be stored with it. A codicil will need to be signed and witnessed to be valid. There aren’t restrictions on what can be changed in a codicil, but larger changes can make organising your estate complex.

Your will should be an essential part of your financial and estate plan. If you’d like to talk about the wealth and assets you’ll leave behind for loved ones and how to distribute them, please get in touch.

Please note: The Financial Conduct Authority does not regulate Tax and Estate Planning.

Figures show a huge surge in the number of people making voluntary National Insurance contributions to top up their State Pension record. It could help you increase your retirement income but there are some things to be aware of before you proceed.

The State Pension often provides a foundation to build your retirement income on. As the State Pension provides a reliable income source, it can provide security. But, how much can you expect?

The full State Pension for 2019/20 is £168.60 per week; £8,767.20 annually. However, to receive this amount, you must have 35 years on your National Insurance record, and this is a key reason why people are making voluntary National Insurance contributions.

If you have less than 35 years on your National Insurance record, you’ll receive a portion of the full State Pension. There are many reasons why you may have a gap in your record and voluntary contributions give you a chance to fill these gaps.

If you’re worried about the amount you’ll receive from the State Pension the first thing to do is get a forecast, which you can do here.

Voluntary National Insurance contributions surge

Figures show that the number of people making voluntary National Insurance has increased.

The statistics released by HM Revenue & Customs find that £119.3 million was paid in voluntary Class 3 National Insurance contributions in 2018/19. This compares to just £12.8 million in 2016/17. That means there’s been a nine-fold increase in only two years.

Paying voluntary contributions is a way to protect short-term benefits. However, the surge coincides with changes in 2016 to allow more people to increase their State Pension. Whilst this can be useful, it isn’t always the right path for you.

Steve Webb, Director of Policy at Royal London, said: “It is great news that the message is getting out there that topping up your State Pension can be a very effective way of using your money. For those who will not otherwise get a full State Pension, the cost of voluntary National Insurance contributions will often be recovered in full within three or four years of retirement, as the rate is heavily subsidised by the government.

“But it is important to be careful which years are bought back, as in some cases paying extra National Insurance will not always increase your pension.”

5 essential questions before making voluntary contributions

After doing a State Pension forecast, if you find you may receive a reduced amount, it’s important you understand the restrictions and the impact it’ll have.

1. How many years can you contribute?

Usually, you can make voluntary contributions for the past six tax years, which end on the 5th April each year. As a result, if you have gaps in your National Insurance record going back more than six years, you may not be able to increase your State Pension.

However, in some cases, it is possible to fill in gaps from more than six years ago depending on your age, so it’s worth checking.

2. How much does it cost to fill in National Insurance gaps?

There are two rates depending on the class of National Insurance. Class 2 National Insurance contributions are used for self-employed workers. For 2019/20, the rates are:

  • £3 a week for Class 2; £156 for a year
  • £15 a week for Class 3; £780 for a year

The amount you have to pay to add a year to your National Insurance record will depend on whether you already made a contribution during that year. For example, if you made National Insurance contributions for 30 weeks, you’d only need to purchase the additional 22 to make up the year.

3. Can you make voluntary contributions if I’m already claiming the State pension?

Yes. If you started claiming your State Pension less than six years ago, you can still make voluntary contributions.

Your State Pension payments will increase as soon as your voluntary contribution is received. However, it will not be backdated. You should consider this when calculating whether it’s a step that’s worth it in your situation.

4. Would it affect means-tested benefits?

Do you currently claim means-tested benefits? Or expect to do so once you retire? Increasing your State Pension could affect your eligibility. Your State Pension is classed as income. As a result, even a small increase may affect the support you receive and could mean you’re no longer eligible at all if you cross thresholds.

5. What impact would voluntary contributions have on your State Pension?

Before you decide to top up your National Insurance contributions, make sure you understand what it’ll mean for you. When you look at the additional income that you’d receive compared to the outgoing, you may decide it’s not worth it for your situation. This is an area we can help you with.

If you’d like to discuss your State Pension and your wider retirement income, please get in touch. We’re here to help you understand how to get the most out of your finances as you approach retirement with your aspirations in mind.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.

Thousands of retirees access their pension every year. However, it can still involve making many challenging decisions.

  • How should you access your savings?
  • What is a sustainable annual income?
  • What can you do to minimise tax?

Understanding the pitfalls to avoid when you first access your pension can help you build a retirement income that suits you. Knowing your decisions have been carefully weighed up can help you enjoy the next chapter of your life confident in your finances.

So, what should you avoid when planning how to create a retirement income?

1. Don’t blow a lump sum without considering the long-term implications

Since 2015, many pension holders have been able to take up to 25% of their pension tax-free in an initial lump sum. Whilst it can be a fantastic way to kick-start your retirement, you do need to consider the long-term impact.

Would buying that new car or planning an extended holiday be worth it if you knew it would mean being unable to achieve your goals throughout retirement? In many cases, taking a lump sum is affordable. However, it’s essential you look at how it’ll affect your retirement income for the rest of your life first.

2. Don’t hold withdrawals in cash without a plan

If you choose to access your pension flexibly, it can be tempting to make withdrawals and hold in cash. It can provide some reassurances that the money is there if you need it. However, when you consider inflation, cash decreases in value in real terms. In contrast, keeping your pension invested until you need it provides an opportunity for growth.

Of course, growth isn’t guaranteed and volatility is to be expected. It’s important that your investments match your risk profile and you consider dips in the market when you make a withdrawal.

3. Don’t access your pension as soon as possible without considering the risks

Most people holding a Defined Contribution pension will be able to access it from the age of 55. It can be incredibly tempting to dip into it at this point. But if retirement is still some way off, it may be worth holding off.

Remember, your pension is designed to provide you with an income throughout retirement. Accessing it before you give up work could leave you financially vulnerable later in life. You may find that by making a withdrawal you reduce the amount you can save tax-efficiently into a pension. Lower contributions could again have a significant impact on your retirement income.

4. Don’t forget to consider tax when making withdrawals

Many people benefit from the initial tax-free lump sum when accessing their pension mentioned above. But further withdrawals are likely to count as income and, therefore, will be liable for Income Tax.

The Personal Allowance, the amount of income you can receive without paying income tax, is £12,500. If your total income is greater than this, you will need to consider Income Tax. Keeping track of withdrawals over a tax year is important. You could inadvertently cross into a higher tax bracket if you’re not careful.

5. Don’t choose the first Annuity provider you find

An Annuity is a policy you purchase with retirement savings that then deliver a guaranteed income for the rest of your life. You don’t have to purchase an Annuity but if you do, make sure you shop around.

There are many different Annuity providers on the market, offering different rates. Even a small difference can have a large impact on your overall income and help your savings stretch further. You should also take some time to compare different Annuity products. Some, for example, will link your income to inflation in order to maintain your spending power throughout retirement.

6. Don’t be afraid to ask for help

The decisions you make about your pension at the point of retirement can affect your income for the rest of your life. It’s not surprising that it can be a daunting and complex decision. Remember to ask for help and advice if you need it.

Friends and family that have already retired can give you help from their perspective. But remember your situations and aspirations may be very different. Seeking financial advice can give you the support of a professional that will look at what your options are with you in mind. Some retirees will find that a stable income delivered through an Annuity will be best for them. Others will prefer flexibility. A financial adviser can help you understand the different routes and what they may mean for your retirement. If you have any questions about accessing your pension, please contact us.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.

Children born today have a one in four chance of celebrating their 100th birthday. It’s progress that should certainly be celebrated but one that also leads to financial questions. How do you prepare for a life that could span ten decades?

Many parents choose to put some money aside for children to give them a helping hand when they reach adulthood. Whether you’ll be making regular payments or adding money on Christmas and birthdays, you’ll want to ensure you get the most out of your deposits. But choosing how to build up a nest egg for a child can feel more complex than making decisions about your own financial future.

One question to answer first is: Should you place the money in a cash account or invest?

Why consider investing your child’s savings?

It’s natural to want to protect the money you’re putting aside for your child’s future by choosing a cash account with little debate. However, there are reasons why investing may prove to be more efficient.

Even on a competitive child current account, interest rates are low. This means once you factor in inflation, savings lose value in real terms over the long term. If you begin saving whilst your child is very young, this can have a significant impact on the spending power of the money.

Investing provides an alternative, with returns potentially higher than interest rates. However, it’s not as simple as that. Investing does come with some risks, as there’s no guarantee how investments rise and fall. But investing is something you should consider when you’re planning for your child’s future.

If you’re unsure whether a cash account or investing is right for your goals and circumstances, please get in touch.

Should you decide to invest money earmarked for your child’s future, there are some questions that can help you pick out the right vehicle and investment opportunities.

1. How long will it be invested for?

When you start saving, it’s important to have a deadline in mind. If this deadline is below five years, it’s usually advisable that you choose a cash account. This is because investments typically experience volatility in the short term and, as a result, values can fall. This may be an issue if you’re investing for a short period of time.

However, should you have a time frame that is longer than five years, investments may provide you with a way to potentially achieve returns that outpace inflation. This is one of the factors that link to investment risk. As a general rule of thumb, the longer you’re investing for, the higher the level of risk you can take. Of course, other factors influence appropriate risk levels too.

2. What is the money intended for?

You probably have an idea of what the money will be used for. Perhaps you hope it will be used to purchase their first car or support them through further education. You may be looking even further ahead to your child purchasing their first home. What the money is intended for will have an impact on the time frame. But it will also influence how comfortable you are with taking investment risk.

It’s important to remember that if you’re saving the money in the name of the child, they may be able to take control of the account when they reach 16. Whilst you might have an idea of what you’re saving for, they could have very different goals. As a result, speaking with them about the savings and how it might be used can help align your views.

3. How comfortable are you with investment risk?

It’s also important to think about how comfortable you are with investment risks when it comes to your child’s savings. This may be very different to your views on taking investment risks for your own nest egg.

Whilst you need to feel comfortable with risk and the level of volatility you can expect investments to experience, you also need to ensure it’s a measured decision. Our bias can mean we take too much or too little risk when financial circumstances are factored in. Speaking to a financial planner can help you understand what your risk tolerance is. Getting to grips with what level of risk is appropriate can boost your confidence.

4. Do you have other savings for your child?

Do you have multiple saving accounts for your child? Or are other loved ones also building up a nest egg for their future?

Assessing what other nest eggs they will receive when they reach adulthood may mean you’re more comfortable taking investment risk. If, for example, you know grandparents are adding to a cash savings account, this may balance out the risk associated with investments. Answering this question can work in the same way as assessing your other assets when you consider your own investment portfolio.

5. How hands-on do you want to be?

Finally, do you want to select which companies the money will be invested in? Or would you prefer to take a hands-off approach? There’s no right or wrong answer here, but thinking about it can help ensure you pick the right investment vehicle for you.

If you want to take steps to improve the financial future of your child, please get in touch. Whether investing is the right option or not, we’ll work with you to create a plan that you can have confidence in.

Please note: 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.

When you first think of seeking financial advice, it might be the calculations that you focus on. The figures are an important part of understanding your financial situation and what you can achieve. However, it’s just a small part of what financial planning is about and where it adds value.

Financial Planning Week was celebrated earlier this month, aiming to encourage more people to consider the benefits of working with a financial planner. It’s the ideal time to step back and consider what you get from working with a financial planner, it should be far more than simply working out what your pension will be worth in ten years’ time.

Financial advice vs financial planning

You may think financial advice and financial planning are essentially the same thing or that the two terms can be used interchangeably. However, they’re actually two different ways of working. They both have benefits, and which is the right option for you will depend on your needs and circumstances.

Financial advice can be useful if you have a certain question you want answering. For example:

  • How can I mitigate Inheritance Tax?
  • How much will my pension be worth at the point of retirement?
  • How should I invest savings?

Financial advice can help you answer these and give you a clear picture of your financial situation now and in the future.

In contrast, financial planning takes a more holistic approach. The aim is to create a comprehensive financial plan that puts you at the centre. This means considering your long-term aspirations and any concerns you may have. This can help you align financial decisions with your lifestyle and goals.

For instance, whilst financial advice can offer you guidance on pension values and the most efficient way to withdraw money at retirement, financial planning will look at the bigger picture. During the process, for example, it may ask questions like:

  • Can you afford to retire early, would you want to if it were an option?
  • What is the right level of retirement income to achieve your goals?
  • How can retirement income be used to address other concerns, such as wanting to help family financially?

As you can see, it’s about more than calculations. Instead, financial planning focuses on helping you use your assets to meet goals. There will be different points in your life where you can benefit from both financial advice and financial planning. When deciding between the two, it’s important to look at the value each can offer in terms of your needs.

The value of financial planning

Where financial planning adds value to you, will depend on your circumstance but here are some points to keep in mind:

Understanding finances in the context of personal goals: Whilst we often have goals that require money to achieve, it can be difficult to understand if you’re on the right track. You may, for instance, hope to retire five years early, but is this possible with your current pension contributions or other assets? Financial planning can help you see your financial decisions in the context of what you want to achieve. It’s a benefit that can help you proceed towards goals and set realistic expectations.

Highlight where mistakes are being made: Finances can be complicated, and we’ve all made a few mistakes along the way. Having another pair of eyes look over your finances can highlight where mistakes have been made. Perhaps your savings account isn’t offering the best returns available or your investments haven’t been reviewed to reflect life changes. Regular meetings with a financial planner can help reduce the chance of mistakes happening.

Planning for the long term: We often know we should plan financially for the long term, but it can be difficult to understand how decisions now will have an impact. If you’re employed, you’re probably paying into a pension, what kind of lifestyle will this afford you in retirement? You might see the contributions leaving your payslip each month, but understanding the full impact of these sometimes passes us by. Using tools such as cash flow modelling, financial planning can help you visualise how steps taken now will influence your financial future.

Consider the unexpected: Much like the above, we know we should plan for the unexpected. You might already have an emergency fund set to one side but it’s important to consider a range of scenarios to improve your financial resilience. A financial planner will ask questions, such as what would happen if you or your partner passed away or would your retirement income be affected if investment values fall, and help you put safeguards in place where appropriate.

Confidence: Money can often seem complex and be a worry in day-to-day life. Financial planning aims to give you the confidence to enjoy life, without worrying about finances. One milestone where this is often evident is at retirement. Retirees may be concerned that they’re spending too much, too soon or will have little to leave behind for loved ones. Financial planning can help them understand their income and what it means in the long term.

Ongoing advice: Whilst sometimes a one-off meeting with a financial adviser is enough, ongoing advice has benefits too. Your situation, priorities and financial circumstances can change dramatically over time. Ongoing advice gives you a regular opportunity to discuss concerns and how your financial plan can change to suit your lifestyle.

If you’d like to chat with one of our financial planners about your goals, please get in touch.

Banks scams are on the rise and becoming more sophisticated. Every year, thousands of people are duped into authorising payments to fraudsters that they may not be able to receive compensation for. Understanding how criminals operate could help protect your money.

According to figures from Finance UK, more than £616 million was stolen by criminals using a variety of methods in the first half of 2019 alone. Authorised push payments (APP), where customers are tricked into authorising a payment to an account controlled by a criminal, accounted for £208 million. It’s a crime that’s rising due to data breaches that compromise personal data, allowing fraudsters to gain the trust of their victims.

Other types of fraud reported include unauthorised card used, remote banking, cheque fraud and sophisticated digital skimming, where card data is stolen.

The good news is that the finance industry is often preventing fraud from taking place. During the first half of 2019, it stopped £820 million of unauthorised payments; the equivalent to £2 in every £3 of attempted fraud being stopped. This accounts for £4.5 million each day. However, that’s of little consolation if you’re among those that have lost your savings. Remaining vigilant against fraud is critical for protecting your money.

Katy Worobec, Managing Director of Economic Crime at UK Finance, said: “A new voluntary code was introduced in May that has significantly improved consumer protections from authorised push payment fraud, with signatory firms committed to reimbursing victims providing they have met certain standards.

“However, criminals are continuing to exploit vulnerabilities outside the financial sector to obtain customers’ data that is then used to commit fraud.”

What is APP and when can you receive compensation?

The first step to reducing the risk of being affected by APP is to understand what it is.

It usually starts with fraudsters gaining access to your personal information. This may be through hacking into an email account or purchasing stolen data. With this information, they’ll attempt to present themselves as a company you recognise, such as your bank or an online business you purchase from.

The fraudster will ask victims to transfer money into an account. Whilst this would normally set alarm bells ringing, they often carefully pick their time, so it doesn’t appear out of the blue. For example, you may have organised some building work on your property through email communication. If fraudsters are able to see this, they’ll contact you at a time you’d be expecting to receive an invoice. As payments are often now made in real-time, criminals are able to quickly transfer money, making it difficult to track.

In the past, it has been incredibly difficult for victims of APP fraud to recover their money. However, a voluntary code now offers some protection. The Contingent Reimbursement Model Code launched in May. So far, eight payment service providers have adopted the code, including Barclays, HSBC, Lloyds Banking Group and RBS.

Banking with a provider that has signed the code doesn’t mean you’re guaranteed to get your money bank. They can still choose not to reimburse you in some circumstances. For example, if it’s deemed you made a payment without a ‘reasonable basis’ for believing you were paying for genuine goods and services or if you ignore warnings when updating payee information.

7 ways to reduce the risk of APP

Even with the finance industry stopping two-thirds of fraudulent activity, APP could still leave you financially struggling if you’re affected. Keeping these seven reminders in mind when you’re approached to make a payment can reduce the risk of fraudsters catching you out.

  1. Don’t give out any personal details to unverified people
  2. Use a strong password for accounts with personal details, such as your email address or online shopping accounts
  3. Remember a genuine bank or organisation will never contact you out of the blue to ask for your PIN or password in full
  4. Don’t click on links within emails or texts if you’re unsure of the origin
  5. Be cautious of unsolicited contact; genuine firms will understand if you have security concerns
  6. If in doubt, hang up the phone and try to contact the individual or company directly using a known email address or phone number
  7. Don’t be rushed into making a payment if you feel unsure about the communication, take the time to verify the payment

If you believe you’ve been a victim of APP, the first step should be to contact your bank or building society. They may be able to halt the payment and freeze your account to prevent more losses. You can also report the problem to Action Fraud.

Einstein once reportedly referred to compound interest as the ‘eighth wonder of the world’, stating: “He who understands it, earns it, he who doesn’t, pays it”. So, just what is compound interest and when do you benefit from it?

Whilst financial jargon can often seem complex, compound interest is actually simple and easy to take advantage of. The term refers to the principle that when you save money you can earn interest on not only your initial contributions but on the interest itself. So, if you leave your money in a savings account for an extended period of time, the amount of interest earned can grow significantly. As a result, the rate that your savings grow gets faster.

Let’s say you deposit £1,000 into a savings account that pays 10% interest a year. In that first year, you’d earn £100 in interest. However, if you leave both your initial saving and interest, the following year, you’d receive £110 in interest. The more frequently interest payments are made, the greater the effects of compounding.

The same principle can be beneficial when you’re investing too. Investing returns delivered means they can go on to potentially deliver returns themselves.

Why is compounding so important?

Compounding means that even if you don’t add to savings and investments, they can continue to grow. Over a long period of time, this can lead to a substantial financial boost as interest or returns accumulate. This can be highlighted by looking at how pension contributions accumulate over different time periods.

Past research has demonstrated how saving into a pension for 10 years at the beginning of your working life could result in a bigger pot than saving for four decades. The study assumed annual pension contributions of £2,500 and investment growth of 7% a year:

  • Someone that starts saving at the age of 21 and then stops at 30 would have a pension fund worth £553,000 by the age of 70 if no further contributions were made and gains were reinvested. This is after contributions of £25,000 grow by a factor of 22 over the long term.
  • In contrast, someone saving from 30 until retiring at 70 would have a pension of £534,000. By saving later in life, under this scenario, people contribute £100,000 to their pension but it grows by a little more than fivefold.

Another way to visualise the effects of compound interest is to think about how long it would take to double your money if savings were benefitting from 10% interest. If you answer quickly, your response might be ‘ten years’. But with compound interest having an effect, it takes just seven years.

When does compound interest matter to you?

As compound interest has the greatest effect over the long term, the impacts will be most felt on the financial areas where you’re looking to the future. This may include:

  • Long-term saving accounts
  • Pensions
  • Investment portfolios
  • Savings for children or grandchildren

It can be difficult to calculate the full impact of compound interest, particularly when investing, but there are calculators available online. Simply knowing that leaving interest and returns untouched can boost your savings can help you take advantage of compounding.

Understanding compound interest can help you get the most out of savings. For a comprehensive financial review, please get in touch with us.

Please note: 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.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.

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