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2 key reasons why you may want to update your plan during a financial review

Regular financial reviews may help keep you on track to meet your goals and give you confidence in the steps you’re taking. As well as reviewing your assets, you might also want to make changes to your plan.

Last month, you read about why you shouldn’t skip your financial reviews and how they could help you reach your goals. Now, read on to discover two reasons why you might want to make changes to your financial plan during a review. 

Updating your plan in response to short-term movements could harm your goals

While there are times when it’s appropriate to update your financial plan, you should be aware of the risks of responding to short-term movements or bias.

Stock market volatility can be nerve-wracking. If you’ve read about the value of shares falling, it can be tempting to withdraw money from the market to preserve your wealth. However, it could have a negative effect on your progress towards your long-term goals.

Historically, markets have delivered returns over the long term, and investors who weather the ups and downs have benefited in the long run. By taking money out of investments during a downturn, you turn paper losses into actual ones.

Of course, investment returns cannot be guaranteed and do carry risks. Understanding which investments align with your circumstances and objectives may help you take an appropriate level of risk.

Similarly, after speaking to a friend about how they’re investing in a certain asset that’s going to deliver “great returns”, you might want to follow suit. Behavioural biases, like following the crowd, could lead to you making unnecessary changes to your plan, which could harm the projected outcomes. 

Remember, your goals and circumstances should be at the centre of your financial plan. If changes are tempting, taking a step back to calculate what’s driving the decisions could be useful. 

So, following a financial review, why might you make changes? There are several reasons why it may be appropriate, including these two.

1. Your goals or circumstances have changed

Your financial plan should be built around your goals and circumstances. Over time, these may change, and altering your plan may ensure it continues to reflect your lifestyle.

Perhaps you want to bring forward your retirement date, so you increase pension contributions as a result to provide you with financial security? Or becoming a parent might mean taking out life insurance would provide peace of mind, or you’d like to build a nest egg for your child. 

A financial review is a chance to let your financial planner know about changes in your life.

It means they can offer advice that’s suitable for you and your aspirations. In some cases, it could mean altering your plan so that it continues to align with your life. 

2. Government changes will affect your plans

Sometimes government announcements will affect what’s suitable for you. Changes to allowances, tax hikes, and more could mean adjusting your financial plan would help you get more out of your assets. 

The recent announcement that the government will abolish the pension Lifetime Allowance is a good example.

From 2024, there’s expected to be no limit on how much you can save into your pension over your lifetime. It might mean it’s appropriate to increase your pension contributions or it could alter your retirement date. 

Keeping on top of the latest news and then understanding what it means for you can be difficult.

Your financial reviews provide an opportunity for your financial planner to explain what announcements mean for you. Tailored advice can help you identify potential risks or opportunities that may lead to changes in your long-term plan. 

Contact us to discuss your financial plan

If you have any questions about your financial plan or would like to understand how we could support you, please get in touch.

Next month, read our blog to find out why financial reviews may help you reduce impulsive financial decisions and focus on your long-term aims. 

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.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

Investment market update: July 2023

Data from economies around the world indicate business output and confidence could be slowing. Read on to find out what influenced the investment market in July 2023. 

Despite some data suggesting there could be a downturn in some areas, the International Monetary Fund (IMF) has lifted its global growth forecast for 2023. The organisation now expects the global economy to grow by 3%, up from its previous prediction of 2.8%. 

Globally, both households and businesses could face pressure as energy prices may rise in the colder months. The International Energy Agency warned that, if China’s economy rebounds this year, energy prices may spike in winter. 

UK

The pace of inflation in the UK is slowing. Yet, it remains stubbornly high and above many other economies at 7.9% in the 12 months to June 2023. The latest inflation figures prompted the Bank of England (BoE) to hike its base interest rate again – as of July 2023, it stands at 5%. 

The IMF predicts the BoE will need to keep interest rates high for longer than expected due to economic challenges.

Further rises could cause market volatility – the FTSE 100 hit its lowest closing level of 2023 ahead of the July BoE announcement at the start of the month. 

The interest rate increases have led to mortgage rates soaring. In July, the average five-year fixed-rate mortgage deal exceeded 6% for the first time since 2008. In fact, by the end of 2026, the BoE predicts that 1 million households will see their monthly mortgage repayments increase by £500.

While many borrowers have been affected by interest rates increasing almost immediately, saving rates have been lagging. The Financial Conduct Authority set out expectations for “fair and competitive savings” during the month, and savers may have started to see the earnings on their savings rise as a result.

The latest release from the Office for National Statistics shows that between February and April 2023, the average wage increased by 7.2%. While growth is good news, the figure is below inflation and so wages are falling in real terms.

As well as soaring mortgage costs, food inflation has significantly affected household budgets. So, it may be of little surprise that a survey for i newspaper found 67% of consumers would back the idea of a price cap on essential goods.

Data suggests many businesses are struggling too.

According to a Purchasing Managers’ Index (PMI) UK factories shrank at their fastest pace in six months in June. Output, new orders, and employment levels all fell and could signal the challenges will continue into the medium term. 

As businesses struggle with rising costs, insolvencies are expected to rise. Figures released by the Insolvency Service show business bankruptcies were 27% higher in June when compared to the same period in 2022. 

Begbies Traynor, a business recovery and financial consultancy, believes insolvencies will rise over the next 18 months due to interest rate hikes. The firm added that “zombie” businesses have been able to continue operating due to cheap borrowing costs but will now struggle to service debts. 

While there have been ups and downs in the market throughout July, the pound hit a 15-month high after all major UK banks passed BoE stress tests. 

Europe

Inflation in the Eurozone fell to 5.5% in the 12 months to June 2023. While still above the long-term average, it’s lower than the 8.6% recorded in June 2022. 

In response, the European Central Bank increased interest rates to its highest level in more than 20 years. The deposit rate is 3.75% as of July 2023. 

PMI data indicates businesses in the Eurozone are facing similar challenges to the UK. Overall business activity fell and moved into negative territory. Factory output was also weak in June, particularly in Austria, Germany and Italy, and employment fell for the first time since January 2021. 

US

Steps taken by the Federal Reserve have successfully slowed inflation in the US. In the 12 months to June, it was 3% – a two-year low. 

According to PMI data, the US factory sector took a “sharp turn for the worse” in June. The results mirror the situation in Europe, with new orders falling. It’s increased concerns that the country could slip into a recession in the second half of the year.

While there may be worries about the US economy, official data indicates businesses are still confident about their future. American companies added half a million jobs to the economy in June and US wages increased by 4.4%. 

In company news, Twitter’s rebrand to X is estimated to have wiped billions off the company’s value.

Since Tesla owner Elon Musk took over the social media platform in October 2022, he’s made a raft of changes. In July, Musk revealed a new name and logo for the platform, which have drawn criticism. According to Fortune, changing the name has wiped out between $4 billion and $20 billion in brand value.  

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.

Why emotional decision-making could be costing you investment returns

It can be difficult not to let your emotions influence the decisions you make. When investing, emotional decision-making could be harming your portfolio’s performance and your ability to reach your goals. 

While you try to make investment decisions based on logic and facts, it can be easy for emotions, from fear to excitement, to play a role at times. And a survey of financial advisers reveals it could be costing you more than you think. 

According to a report in FTAdviser, financial advisers believe emotional decision-making costs investors at least 2% each year in foregone returns. They believe two of the biggest mistakes investors make are:

  • Being too influenced by the news (47%)
  • Taking too little risk (44%).

If you’ve been guilty of these mistakes in the past, you’re certainly not alone. The good news is that there are things you can do to reduce the effect emotions have on your investments. Read on to find out how you could tackle these two mistakes. 

1. Tuning out the news to focus on your long-term plan

Market volatility is part of investing. Unfortunately, sensational headlines about markets “soaring” or “plunging” sell. However, they often don’t show the bigger picture – that even after volatility, markets have, historically, smoothed out over the long term and delivered returns.

On top of providing a snapshot, rather than an in-depth look at markets, remember that the news isn’t tailored to you. An investment opportunity that is perfect for one person, may not be right for another. 

If you read about markets falling sharply or the latest “must invest” tip in the newspaper, it’s natural to think about what it means for your investment portfolio. Perhaps you’re scared that volatility could mean the value of your assets will fall and you won’t be able to retire when you intend? Or maybe you feel a thrill at the thought of investing in the next big technology firm? 

Tuning out the noise can be difficult, but it may reduce the chance of emotions affecting your decisions.

Working with a financial planner may help you reduce the effect the news has on your mindset. It means you have someone to turn to if you have concerns or would like to pursue an opportunity. Speaking to a professional about your options could prevent knee-jerk decisions you might regret later. 

Creating an investment strategy that’s tailored to your goals and circumstances with a financial planner may also give you the confidence to dismiss the news.

At times, your portfolio may dip but understanding why investments have been selected and how it fits into your overall plan could put your mind at ease.

2. Balancing how much investment risk you should take

It’s common to hear that investors are worried about taking too much risk. After all, too much risk could mean you’re more likely to lose your money, and it could affect your progress towards your life goals. Yet, nervous investors can take too little risk.

While you may feel comfortable taking less risk as your money is “safer”, you could miss out on potential growth. Taking too little risk for your circumstances may mean falling short of your goals, even though you had an opportunity to achieve them. 

Setting out a risk profile is an essential part of understanding which investments are right for you. 

It can be difficult to understand how much risk is appropriate. A financial planner could help you here. By considering a range of areas, from what assets you hold to your investment goals, we can create a risk profile that suits you.

By understanding risk and what’s appropriate for your circumstances, you could reduce the effect emotions like fear have on your decisions. You may feel confident enough to take greater investment risk if it’s right for you and find yourself in a better position to reach your goals. 

Want to review your investments? Contact us

Tailored investment advice may help you reduce the effect emotions have on your decisions so you can focus on what’s right for your circumstances.

Whether you want to start investing or would like a portfolio review, please contact us. We can work with you to create an investment strategy that you have confidence in and provide ongoing support so you have someone to turn to if you have any questions or concerns. 

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.

Here’s what mortgage lenders consider when carrying out affordability tests

Applying for a mortgage can be stressful. You might worry a lender will reject your application and the effect it could have on your plans. A better understanding of what lenders are considering when making a decision may be useful and could reduce anxiety. 

Even if you’ve been through the mortgage process before, rising interest rates could mean you feel more nervous about your application. 

Some homeowners are finding that, despite being up to date with their mortgage payments, they can’t switch to a more affordable mortgage. Dubbed “mortgage prisoners”, higher interest rates mean they no longer pass affordability tests. 

Lenders use affordability tests to measure risk 

Affordability tests are an important part of the mortgage application process.

The Bank of England (BoE) first introduced stringent affordability tests in 2014 to reduce the chance of buyers taking on levels of debt they couldn’t pay back. They followed the 2008 financial crisis, which is partly attributed to unaffordable mortgages. 

However, in 2022, the BoE reviewed the mortgage market and relaxed the rules. Yet, mortgage lenders are likely to still carry out their own affordability tests when you apply.

Lenders use them to measure how much risk you pose – how likely are you to default on your mortgage? Could you cope with a financial shock? The result could affect whether they approve your application and the terms you’re offered. 

The 3 crucial areas mortgage lenders review during affordability tests

Each lender will have their own criteria when they’re reviewing mortgage applications, and they may look for specific factors when carrying out affordability tests. However, there are three key areas they may consider. 

1. Your income and employment stability

As lenders want to understand if you can afford mortgage repayments, your income is an essential part of your mortgage application. As well as how much you earn, they will also want to understand your employment status. For example, are you employed or self-employed?

Financially stable borrowers are less likely to miss mortgage repayments. So, they may also consider whether your job is stable – if you’ve remained with the same employer for a few years, it could weigh in your favour. In contrast, switching jobs just before you apply for a mortgage could be a mark against you. 

2. Your household expenses each month

How much income you earn doesn’t help lenders understand your financial position without context. So, they’ll also look at your regular household expenses, and how these may change.

It could highlight potential pressure on your budget and show if mortgage repayments would be affordable. 

While discretionary spending often isn’t looked at closely by lenders, there are red flags you should be aware of. For instance, if you’re regularly using your overdraft before payday, or you’ve spent money gambling recently, mortgage providers could take a negative view of your application. 

3. Your ability to weather financial shocks

The unexpected can happen, and lenders want reassurance that you could still make repayments if you faced a shock. They may consider how your finances would hold up if you had to take several months off work, or other similar scenarios.

The recent interest rate rises are a good example of mortgage holders facing a financial change they may not have foreseen.

Since the end of 2021, the BoE has increased interest rates. It’s led to soaring mortgage repayments for some homeowners, and many more could face increased bills when their current deal ends. According to the Independent, 1 million households could see their monthly mortgage repayments increase by £500 by 2026.

As part of their stress tests, lenders may consider if you could weather further increases to the interest rate.

Understanding your lender’s criteria could improve your chances of securing a mortgage

If you’re worried you may not pass affordability tests, remember, lenders set their own criteria. Not being accepted by one provider doesn’t necessarily mean you can’t access a mortgage.

A mortgage broker could help you understand which lenders may be right for you. It may improve your chances of securing a mortgage, and might even help you access a more competitive interest rate. 

If you have questions or would like our guidance when applying for a mortgage, 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.

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

A decade after introducing auto-enrolment, the government confirms plans to extend it

Since the government introduced pension auto-enrolment in 2012, millions more workers have started saving for their retirement. Now, the government has confirmed plans to extend auto-enrolment to encourage a savings boost. The changes could have implications for both employees and business owners.

In a publication, the government has revealed key announcements following a review of auto-enrolment that started in 2017. The reforms are forecast to increase pension contributions by £2 billion a year.

3 key auto-enrolment changes to be aware of 

1. The minimum age of auto-enrolment will fall from 22 to 18

Young workers could start saving into a pension much sooner. The government intends to lower the minimum auto-enrolment age from 22 to 18.

For employees, this could be a positive step. Saving for retirement from the outset of their careers could help establish positive money habits among workers. In addition, compound growth means early contributions have the potential to grow significantly. 

For business owners, it could mean their outgoings will increase as they’ll also need to make pension contributions on behalf of eligible workers. 

2. The lower earnings limit will be removed

At the moment, workers must earn at least £6,240 to be eligible for auto-enrolment. The government plans to remove this lower earnings limit, so workers will receive contributions from the first pound they earn.   

This will boost pension contributions among those that are already paying into a pension. It will also mean low-income workers that haven’t previously benefited from a pension, such as those who work part-time while caring for children or older relatives, will automatically start paying into a pension and receive employer contributions too.

While more people saving for retirement is a positive step, there are concerns it could lead to an increase in the number of employees opting out.

Speaking to FTAdviser, Tom Selby, head of retirement policy at AJ Bell, said: “Ratcheting up contributions during a cost of living crisis could be the straw that breaks the camel’s back for some savers, who might decide they simply cannot afford to put money to one side for retirement.”

From an employer’s perspective, this change could, again, increase the amount they are contributing to employees’ pensions. 

3. There could be a maximum limit on pension pots

As most employees are entitled to a pension through their employer, frequent job hopping could lead to individuals holding numerous small pensions. This may make it difficult to manage pensions effectively and understand if you’re on track to reach your retirement goals. 

In its report, the government sets out initial plans to help savers manage multiple pots. Among the proposals is a maximum limit on the number of pensions a person can have. The report also suggests a central clearing house to make it simpler to consolidate pensions. 

3 omissions from the auto-enrolment expansion

1. There is no timescale for the proposed changes

While reports suggest the government plans to implement the changes by the mid-2020s, the official document doesn’t set out a timescale. So, while young and low-income workers are set to benefit from auto-enrolment, it could be several years before they start contributing to pensions. 

2. The minimum pension contribution will not be increased 

Research suggests that minimum contribution levels are not enough to afford a comfortable lifestyle in retirement. A recent Scottish Widows report indicates a third of Brits could struggle in retirement because they’re not putting enough away during their working life.

Under the current rules, the minimum contribution is 8% of qualifying earnings, made up of 5% from employees and 3% from employers. 

There have been calls for the government to increase the minimum pension contribution level to help close the gap.

3. Auto-enrolment won’t be extended to cover self-employed workers 

Some organisations have called on the government to extend auto-enrolment to encourage self-employed workers to save for their retirement. However, support for the self-employed has been overlooked in the latest report. 

Research from the Institute for Fiscal Studies suggests the number of self-employed workers paying into a pension has fallen over the last decade.

It also found self-employed workers that pay into a pension rarely change the amount they contribute. The analysis suggested a form of auto-escalation, such as a direct debit that increases in line with inflation, could help self-employed workers save more for their retirement. 

Take control of your pension and retirement 

While the change to auto-enrolment could mean more people are on track for a financially secure retirement, there are still challenges. If you want to reach your retirement goals, engaging with your pension sooner, rather than later, could allow you to identify the steps you need to take.

Please contact us to discuss your retirement aspirations and how we could help you create a tailored financial plan. 

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.  

Advice on auto-enrolment pensions is not regulated by the Financial Conduct Authority.

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