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Investment market update: October 2022

Much of 2022 has been marked by investment volatility and economic uncertainty, and October was no different.

According to the International Monetary Fund (IMF), there is a rising risk of a global recession.

The organisation downgraded its global growth forecast for 2023 to 2.7%. It said financial instability was linked to shocks caused by the Covid-19 pandemic, the war in Ukraine, and climate disasters.

While uncertainty can be worrying as an investor, remember to focus on your long-term goals. If you have any questions about what the current circumstances mean for you, please get in touch.

UK

In the UK, political turmoil continued to influence the markets.

After September’s mini-Budget led to volatility, the now former chancellor Kwasi Kwarteng reversed some of the announcements, including the abolishment of the additional-rate of Income Tax.

It did little to calm the markets, and the Bank of England (BoE) was forced to step in after some pension funds were placed at risk. The BoE pledged to purchase £65 billion of government bonds that had fallen in value.

The IMF praised the BoE, saying it acted “very appropriately and quickly”.

The backlash from the mini-Budget led to now former prime minister Liz Truss sacking Kwarteng, with Jeremy Hunt taking his role. The new chancellor cancelled nearly all the mini-Budget announcements, including cuts to Corporation Tax.

Truss followed shortly after, saying she was resigning because she could not deliver the mandate on which the Conservative Party elected her – making her the shortest-serving prime minister in British history.

Rishi Sunak was appointed as the new prime minister within days after all other candidates dropped out of the race. In his first speech at Downing Street, Sunak said there were “difficult decisions to come” and the UK was facing a “profound” economic challenge.

Amid this turmoil, it’s not surprising that growth forecasts are being downgraded.

Deutsche Bank now expects GDP to fall by 0.5% in 2023 before growing by 1% in 2024 when the economy would finally return to its pre-pandemic level.

Data from the Office for National Statistics (ONS) highlights the pressure businesses are facing. Company insolvencies in England and Wales hit the highest levels since 2009 due to high energy prices, supply chain disruptions, and rising material costs. Construction firms were among the hardest hit and made up 20% of all insolvencies.

Worryingly, further ONS data suggests many businesses aren’t in a strong financial position to overcome a downturn. 40% of UK firms have either no cash reserves left or have less than three months’ worth.

Consumers are also facing challenges.

ONS figures show that once inflation is considered, average pay is falling. Excluding bonuses, pay fell by 2.9% in real terms between June and August 2022.

This is having a knock-on effect on the housing market. HMRC figures show that residential property transactions fell by 32% in September when compared to a year earlier.

EY ITEM Club warned that falling house prices are a sign of things to come. The forecasting group expects property prices to fall by 5% over the next year.

Energy supply also continues to be a significant challenge facing the UK. The war in Ukraine has led to soaring prices and disruptions in supply. The National Grid issued a warning that UK households and businesses could face planned power cuts throughout winter if it was unable to import electricity from Europe.

Europe

There was some good news from the eurozone – industrial output increased by more than expected.

Across the whole area, output increased by 1.5% in August. France and Italy led the way with increases of 2.5% and 2.3% respectively. However, Germany, which is often the economic powerhouse of the bloc, saw its output decline by 0.5%.

The eurozone also recorded a high trade deficit due to soaring energy prices. According to Eurostat, despite exports increasing by 24%, the deficit is €51 billion due to imports surging by almost 54%.

While many countries are facing inflation, Belarus announced a bold way to control it – President Alexander Lukashenko imposed an immediate ban on consumer price rises. The country has been hit by sanctions due to its support of Russia and consumer prices have increased by around 18%.

US

Like many other countries, the US is at risk of falling into a recession. Capital Economics says it’s now “more likely than not” that the economy will contract.

Inflation continued to be an issue for both businesses and consumers. The rate reached a 40-year high of 8.2% in September.

The White House also commented on the energy challenges that many other economies are facing. After the Opec+ oil cartel and its allies agreed to cut oil production by 2 million barrels a day to push up crude oil prices, the White House said it highlighted the US’s need to become less dependent on foreign producers of oil.

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.

Rising costs mean a fifth of adult children are considering moving back home. How could it affect you financially?

The “boomerang” trend isn’t new, but the soaring cost of living means that far more adult children that have been living independently are considering moving back to their childhood homes. As a parent, it’s natural to want to lend a helping hand, but you may also have concerns about what it would mean for you financially.

In the 12 months to October 2022, the rate of inflation was 11.1%. It’s a rate that’s much higher than the Bank of England’s (BoE) 2% target. For many families, rising costs have placed pressure on household budgets.

In response to high inflation, the BoE has increased its base interest rate. This has led to the cost of borrowing, from mortgages to loans, rising. This has further increased essential outgoings for some households.

There’s also speculation that the UK could fall into a recession due to economic uncertainty. So, it’s natural that many people are worried about money and financial security. Some young adults, who are often more vulnerable to financial shocks, are considering moving in with family as a result.

9% of young adults have already discussed moving home with their parents

According to Aviva, 1 in 5 adult children that have been living independently are considering moving in with their parents to cope with the rising cost of living. 9% have already discussed the possibility with their parents.

Parents are also expecting their adult children to broach the topic. 3 in 10 parents say their child has shown an interest in moving home even if they haven’t spoken about it yet.

The boomerang trend of young adults leaving their childhood home only to return later in life has been growing. According to the Office for National Statistics, 4.8 million people aged between 18 and 34 live with their parents in the UK.

59% of adults that live with their parents have moved out at least once. A fifth of the people in this group has done this more than once.

One of the main reasons is soaring property prices. Aspiring homeowners have faced challenges in saving a deposit to buy a home while paying rent. Many have returned home for a period to build up the savings they need.

As the cost of living rises, it’s likely to push more young adults to move home.

As a parent, it’s natural that you want to provide support to your children. But it’s also important to consider how it could affect your own finances.

3 practical things to do if your child moves back home

1. Calculate how it will affect your expenses

Another adult in the house could mean your expenses increase. From buying more groceries to higher energy bills, if your child is moving home, you should consider how it’ll affect your regular outgoings.

Whether you want your child to contribute to the household budget or not, understanding how your expenses could change is important.

2. Set out if you want your child to contribute to the household budget

Being clear from the outset whether you want your child to contribute to expenses can help make sure you’re all on the same page. It means both parties can create a realistic budget.

More than half of parents say their child pays rent for their bed and board, while a quarter contributes in other ways. On average, adult children pay £197 a month, according to parents.

Due to the cost of living crisis, 12% of parents have asked their children to pay more, and 35% are considering doing so. Make sure you consider how your expenses have increased and how they may change in the future.

3. Consider how you could improve your child’s long-term financial security

Your child moving home is a good opportunity for them to improve their long-term financial security. Having a conversation with them about their plans and goals could help them stay on track and identify how you may be able to help.

Around 40% of adults living at home are doing so to buy their own property. Working with your child to create a realistic plan for saving a deposit and helping them understand what they’ll need to consider could help them reach their goal.

There may be other steps that could make sense for your family too. For instance, could providing gifts during your lifetime, rather than leaving an inheritance, help your children improve their financial security? Weighing up your options, as well as considering how they could affect your plans now and in the future, is important.

Make supporting your children part of your financial plan

By making supporting your adult children, whether through providing gifts, them moving home, or supporting their education, part of your financial plan, you can balance it with other goals that you may have. Please contact us to talk about your priorities and financial plan.

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

Not all mortgage contracts are regulated by the Financial Conduct Authority. Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.

47% of retirees leave work earlier than expected, but just 31% say they could afford to

Retiring early is a dream for many. Whether you’re looking forward to putting your feet up or going on an adventure, it’s a huge milestone and it’s important to be financially prepared. Yet, research suggests that many people retiring earlier than expected don’t have their finances in order.

According to research from LV=, 47% of retirees said they retired earlier than expected. Around a quarter said they retired at least five years earlier than they had planned.

For 31%, the decision to retire early was because they could afford to do so. Worryingly, a similar proportion admitted they were not in a good financial position to retire when they did. Instead, many were pushed to retire because of circumstances outside of their control, such as:

  • Poor health or injury (25%)
  • Stress or mental health (17%)
  • Redundancy (15%)
  • Care responsibilities (6%)

Having confidence about your financial position means you can get the most out of your retirement and feel in control of the future.

Clive Bolton, managing director of protection, savings, and retirement at LV=, said: “Retiring early is a dream for millions of people and it is achievable for people who have been able to plan, save into a pension over a long period, and take financial advice to help them plan their finances.

“However, it can become a financial problem if retirement is forced upon people before they have had time to prepare.”

Taking stock financially if you’ve been forced to retire early is vital

If you’ve unexpectedly been forced into retirement, you may not have reviewed your pension or even thought about what retirement lifestyle you would like.

While it can be tempting to simply start taking the income you need from your pension or other assets, a financial review is essential.

You may find that you’re in a better position than you first thought.

If you find there is a shortfall in your pension, knowing this at the start of retirement means you can take control.

There may be steps you can take to boost your income and still secure the retirement you want. For example, could you deplete other assets to supplement your pension? In other cases, you may choose to continue to earn an income by phasing into retirement or reducing your expenses.

What’s important is that you understand your financial position and have confidence that you’ll be secure for the rest of your life.

5 practical steps to take if you want to retire early

1. Set a retirement date

While you don’t need to set a retirement date in stone now, having a goal makes sense. It can help ensure you remain on track and that your plans are realistic.

The date you want to retire is also important for calculating how much you need to save. So, setting a retirement date is worthwhile.

2. Think about your dream retirement lifestyle

Again, you don’t need to decide exactly what your retirement will look like now, but thinking about how you’d like to spend your time can help you understand your income needs.

It’s becoming more common for workers to choose a phased retirement. It can help some retirees strike the balance they want by still working in some way, such as working part-time, starting a business, or becoming self-employed. So, it’s something you may want to consider.

In addition, how will you spend your days in retirement? Or are there any one-off experiences you need to include in your retirement budget?

A clear picture of the type of retirement that will make your life fulfilling can help mean you’re on track to deliver the income needed to turn it into a reality.

3. Understand how much you need to save

One of the challenges of retirement planning is that most people will need to use assets to create an income for decades. By setting out lifestyle expectations, you can start to understand how much you’ll need to save for retirement. You should also consider:

  • Life expectancy
  • Inflation
  • Expected investment performance
  • Unexpected events

This can help you have a goal in mind for your pension’s value and other assets you plan to use for retirement. With a target, you can create an effective plan to start building up the assets you’ll need to achieve financial security when you give up work.

4. Prioritise paying off debt

While you can retire with debt remaining, paying off as much as possible before you retire could provide you with greater financial freedom.

If you have debt, whether credit cards or a mortgage, a long-term plan to pay this off before you reach your retirement date can be useful. Increasing the minimum repayments could also mean you pay less interest overall – leaving you more money to add to your retirement savings.

5. Start working with a financial planner now

If you want to retire early, it’s never too soon to start planning. If you’re ready to start working with a financial planner, whether you want to review if you’re in a position to retire now or it’s a goal that’s still decades away, please contact us.

We’ll help you understand your finances and the steps you need to take to retire early and still be confident about your future.

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

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts. 

Not all mortgage contracts are regulated by the Financial Conduct Authority. Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.

State Pension triple lock: Pensioners set to benefit from a 10.1% rise

The State Pension is set to increase by a record amount under the triple lock due to high levels of inflation. If you’re claiming your State Pension, read on to find out what it means for your income.

While there had been speculation that the triple lock would be suspended this year, the Conservative Party under Liz Truss committed to maintaining it. However, new prime minister Rishi Sunak hasn’t commented on the triple lock yet.

For pensioners, it’s an important way to maintain spending power as the cost of living rises.

The State Pension increase will be based on September’s inflation rate

The State Pension triple lock guarantees that it will increase each tax year.

As the cost of living generally rises gradually, this can help pensioners to maintain their standards of living throughout retirement. The Bank of England (BoE) has a target to keep inflation around 2%. While this may seem small, it can have a significant effect on how far your income will stretch during retirement.

Let’s say you retired in 2011 and needed an income of £35,000 to achieve the retirement lifestyle you wanted. According to the BoE, your income would need to have increased to more than £41,700 in 2021 to deliver the same lifestyle as average inflation was 1.8% a year.

Over a retirement that could span several more decades, the effect of inflation can really reduce your spending power.

The current high inflation environment – the rate was 10.1% in the 12 months to September 2022 – means that pensioners’ income may be stretched more than they expect.

As a result, knowing that your State Pension will increase each tax year can provide some peace of mind. While the State Pension often isn’t enough to reach lifestyle goals alone, it does provide an important foundation for many people.

So, what is the triple lock? It means that the State Pension will increase by one of three measures, whichever is higher. These measures are:

  • Average wage increase
  • Rate of inflation
  • 2.5%

The inflation rate was the highest measure at 10.1%, and pensioners are set to receive the largest rise in income since the triple lock was introduced.

The full State Pension will increase by £972 a year in April 2023

Pensioners that receive the full State Pension will see the income it provides rise from £185.15 a week to £203.85. The annual income it will deliver will be £10,600 in 2023/24 – an extra £972 a year.

Under current rules, you must have at least 35 years on your National Insurance record to be entitled to the full State Pension.

If you have between 10 and 35 years, you will be entitled to a proportion of the full amount. If you don’t receive the full State Pension, the amount your income will increase for the 2023/24 tax year will be lower.

State Pension rules have changed over the years, including significant reforms in 2016, and they can be complex. If you have any questions about what you’re entitled to and how the triple lock will affect your income, please contact us.

Do you need to update your retirement plan as inflation rises?

The triple lock means the State Pension you receive will increase next year. However, as it’s likely to be just a portion of your income in retirement, it’s a good idea to reassess how your expenses and income needs may have changed.

Inflation may mean that your regular expenses have increased over the last year. Your disposable income that helps you reach retirement goals may also not stretch as far. 

In some cases, you may want to take a higher income from your pension or other assets, like your savings and investments. It’s important you consider the long-term effects of taking a higher income now – could it mean that you run out of money in the future?

Taking the time to review the effect of inflation on your retirement plan can help balance short- and long-term needs.

Contact us to talk about your finances in retirement

Whether you have questions about how rising inflation will affect your pension or other parts of your retirement plan, we’re here to help. Please contact us to discuss what you want to get out of retirement and how to achieve it.

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

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

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

The UK could face a “retirement savings crisis” as workers aren’t putting enough away

Figures suggest that many households aren’t saving enough to be financially secure in retirement. Calculating what income you’d need to reach retirement goals before the milestone could mean you’re in a better position to reach them.

According to a report in PensionAge, only 43% of baby boomer households below the age of 65 are on track to secure a “moderate” income. The Pensions and Lifetime Savings Association define this as £20,800 for a single retiree and £30,600 for a couple.

On top of this, the rising cost of living is likely to mean more people will struggle to meet retirement goals. If retirees hadn’t considered inflation, including periods of high inflation, when calculating their income needs, they could find they have an income gap.

It’s often stated that baby boomers are in a better position financially for retirement. During their careers, defined benefit (DB) pensions, which provide a guaranteed income and are often generous, were more common.

However, this isn’t the case for all baby boomers, who missed out on the introduction of auto-enrolment, which led to a rise in the number of defined contribution (DC) pensions. As a result, many are relying on the State Pension and their savings.

These financial challenges are further compounded for retirees that didn’t get on the property ladder or are still paying a mortgage.

The retirement income gap could widen, even though more people than ever are saving through a pension.

Research from the People’s Pension suggests that 63% of individuals aren’t saving enough to meet their target. This rises to 68% of Generation X workers, who were born between 1965 and 1980, and 76% of millennials, who were born between 1981 and 1996.

The findings suggest that retirement could fall short of expectations for more than half of workers.

Phil Brown, director of policy at B&CE, the People’s Pension’s provider, said: “Once Generation X starts to retire in large numbers, the UK could face a retirement savings crisis, with people unable to carry on with anything like their current standard of living.”

Are you saving enough for your retirement?

Even if retirement is years away, calculating if you’re on track is a worthwhile task. It can help give you confidence and, if you identify a gap, you’re in a better position to close it.

To understand if you’re on the right track for retirement, you need to bring together how much income you’ll need and how much you are saving now.

What income will you need in retirement?

A vital first step is understanding how much income you will need to reach your goals.

Many retirees find that their day-to-day expenses fall – you may have paid off your mortgage or no longer need to spend money commuting. However, discretionary spending may increase, whether you want to indulge in hobbies or hope to visit some bucket list destinations.

While things can change, setting out a retirement budget now can provide a useful guideline when you’re trying to understand if you’re saving enough.

The current levels of high inflation have highlighted why it’s important to think about how your income needs may change over the years.

Usually, the cost of living gradually rises. So, an income that afforded a comfortable lifestyle at the start of retirement may not stretch as far in 20 years. It’s important to think about how inflation will affect your income.

As well as the cost of living, you should consider how unexpected events could affect income needs too.

How will your pension contributions create an income?

It can be difficult to understand how the pension contributions you’re making regularly will translate into a retirement income.

If you have a DB pension, it will provide a guaranteed income in retirement. The income is usually based on your salary and how many years you’ve been a member of the scheme. Your pension scheme can provide the details that will help you calculate your income in retirement.

If you have a DC pension, it can be a little more complicated. Your pension contributions, along with tax relief and employer contributions, are added to a pot and usually invested. As a result, investment performance is likely to affect your retirement savings. When you retire, you will be responsible for using your pension to create a sustainable income.

Often complicating calculations is that you’re likely to have multiple pensions and other assets, such as savings or property, that you intend to use for retirement.

Bringing together your different assets now to understand how they could deliver an income could help you identify potential gaps.

Contact us to talk about your retirement plans

Assessing your retirement savings is an important step to reaching your goals. If you’d like to work with us to understand how your pension contributions and other assets will provide an income later in life, please contact us.

We can provide some reassurance that you’re on track or create a long-term plan if you are not saving enough.

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

A pension is a long-term investment. 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.

Levels and bases of, and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor.

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