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Planning your long-term investment objectives

Selecting the most appropriate investment products and undertaking the right planning at the right time to minimise the amount of tax you pay are key to accumulating wealth over the long term. Add to this general economic factors, business conditions and political events, these are just some of the things that can cause uncertainty and volatility in the markets. Over any given time period, the economy can also go through a series of ups and downs.

Cash savings vulnerable to erosion by inflation
Some investors often think of cash as a safe haven in volatile times, or even as a source of income. But the ongoing era of ultra-low interest rates has depressed the return available on cash to near zero, leaving cash savings vulnerable to erosion by inflation over time. With interest rates expected to remain low, investors should be sure an allocation to cash does not undermine their long-term investment objectives.
However, investors who have left their cash in the bank may have missed out on the impressive performance that would have come with staying invested over the long term. Of course, there are also reasons to invest conservatively – market volatility and preserving the funds you have, just to name a couple. But, there is also a trade-off between risk and reward.

The more risk, the more reward potential
Investing is often said to be a long-term activity. Why is this, and what should you consider? Firstly, the more risk, the more reward potential; the less risk, the less reward potential. It’s ironic that minimising market risk can increase the probability of a long-term retirement income shortfall.
Even missing out on a few years of saving and growth can also make an enormous difference to your eventual returns. Compound interest is essentially interest on your interest, or, put another way, growth on your investment taking into consideration the previous growth on that same investment. Albert Einstein said, ‘Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t…pays it.’

Reinvesting the income from your investments
Reinvesting income can be another major factor in long-term returns for investors. You can make even better use of the magic of compounding if you reinvest the income from your investments to boost your portfolio value further. The difference between reinvesting – and not reinvesting – the income from your investments over the long term can be enormous. Reinvesting income from your investments enables you to buy more shares which will potentially grow in value and boost your overall returns. In simple terms, your returns also earn returns.

It’s important not to forget that volatility in financial markets is normal, and investors should be prepared upfront for the ups and downs of investing, rather than reacting emotionally when the going gets tough. Market timing can also be a dangerous habit. Pullbacks are hard to predict, and strong returns often follow the worst returns. But some investors may think they can outsmart the market, or they let emotions push them into investment decisions they later regret.

Diversify to help you achieve your desired returns
While markets can always have a bad day, week, month or even a bad year, history suggests investors are much less likely to suffer losses over longer periods. Investors need to keep a long-term perspective. The last ten years have been a volatile and tumultuous ride for investors, with natural disasters, geopolitical conflicts and a major financial crisis.

When it comes to creating an investment portfolio to help you maintain your quality of life during retirement, it’s essential that you diversify to help you achieve your desired returns while managing risk. Basically, diversification means balancing the investments you have in your portfolio among different categories, classes and industries so that in a given economic situation, they don’t all go up or go down together.

Reducing your overall investment risk over time
The term correlation is used to describe how one type of investment behaves in relation to another. If two types of investments behave similarly, they are said to be positively correlated. If they behave differently, they’re negatively correlated.

So, whether the market is bullish or bearish, maintaining a diversified portfolio is essential to any long-term investment strategy. A diversification strategy can help you achieve more consistent returns over time and reduce your overall investment risk.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

Contemplating a long-term self-employed future?

Self-employment enables you to exercise your sense of freedom in business decision-making and to choose your own business path. There are many benefits to becoming a self-employed freelancer or running your own business: the flexible hours, the option to work from home, no fixed holiday allowance, and, of course, being your own boss. But it’s vital to remember that there is no sick pay, life insurance or pension scheme benefits, unless you arrange to put these schemes in place yourself.

Seriously missing out
The Government’s compulsory pension auto-enrolment initiative introduced in 2012 now means that most people working for a company will have been automatically enrolled in a workplace pension by 2018. But, if you’re self-employed, you could be seriously missing out.
If you are currently self-employed, or you’re contemplating it, making self-employment work for you is not just about making sure your business is profitable enough to pay you a salary. You also need to think about your long-term future.

Enjoy your retirement
The State Pension alone is unlikely to provide you with enough income to enjoy the retirement you want. So, it makes sense to invest in a personal pension, with which you choose where you want your contributions to be invested from a range of funds offered by the provider.
The earlier you start, the better. It gives you more time to contribute to your savings before retirement, more time to benefit from tax relief, and more time for your savings to grow. We can assist you to take the right steps to secure your financial future whilst you focus on your business.

Freedom and control
Self-employed people tend to use a personal pension to save for their retirement. It gives the option to choose where contributions are invested and the provider usually offering a range of different funds.

These plans qualify savers for tax relief on their contributions at their highest marginal rate of Income Tax, so a £1,000 contribution will cost only £800 and £600 for basic-rate and higher-rate taxpayers respectively. They come in different forms, from simple stakeholder pensions to self-invested personal pensions (SIPPs), offering greater investment freedom and control.

National Insurance record
There’s no limit to the amount you can pay in to your pension fund each year, but there is a limit to the tax relief that can be claimed on your contributions. The current 2018/19 maximum annual allowance is £40,000, or if your salary is lower than that, it’s 100% of your salary. Any amounts over and above that don’t qualify for tax relief.

Don’t forget, you’re entitled to the State Pension in the same way that employed people are. The level of the payments you receive will depend on your National Insurance (NI) record. You can top up your contributions if you are falling behind to ensure you don’t miss out. In tax year 2018/19, the full level of State Pension is £164.35 a week.

Future income uncertainty
One concern for some self-employed workers, who may lack certainty about their future income, is tying up savings on which they may need to fall back. An option to consider is an Individual Savings Account (ISA). An ISA lets you earn interest without paying any income tax on the proceeds withdrawn.

You have an ISA allowance in the UK every tax year, which lets you save or invest money up to a certain amount without paying tax on your returns. Your ISA allowance for this tax year is £20,000. The tax year runs from 6 April to 5 April the following year. In addition, you do not have to declare either gains or income in a Stocks & Shares ISA, or interest in a Cash ISA, on your tax return.

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.

PENSIONS ARE NOT NORMALLY ACCESSIBLE UNTIL AGE 55. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY 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.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOROF FUTURE PERFORMANCE.

Pensioners ‘in the dark’ over how to protect their pots if markets tumble

Many retirees are at risk of overlooking their pension finances by falling into an avoidable trap, according to new research. A third (36%) of people keeping their pension invested through retirement could be hit harder by falling markets as they do not have a cash safety net to fall back on, research has found[1]. And even though two thirds (64%) of retirees are holding cash in reserve, fewer than one in ten (8%) would think to use it if there was a ‘significant’ drop in the stock market.

Diversification across asset classes and regions is important for pensions, which is important not just for good returns but also to manage the risks inherent in different asset classes and geographies.

Buffer of cash
Some retirees in drawdown will hold a buffer of cash which they can call on in volatile markets. By taking income from cash held inside their pension instead of their invested assets, they are not forced to sell investments at lower prices.

This can help to protect them from ‘pound-cost-ravaging’ where, as stock prices drop, retirees are forced to sell more investments to achieve the same level of income, depleting the capital of their pot quicker and reducing its future growth.

Safeguard pots
Recent volatility in the market could have left some retirees feeling unnerved, but there are steps that can be taken to safeguard their pots. It’s good to regularly check you’re not taking more income than you need and that your pension is well diversified.

If markets tumble, it pays to be more cautious by scaling back your income or turning off the taps altogether. Alternatively, limiting the level of withdrawal to the ‘natural’ income from share dividends or bonds leaves the underlying investment intact, giving it a better chance to regain lost ground when markets recover.

Shielding drawdown savings
Diversify to avoid stretching income
Diversification is essential to protecting your assets in a market crash. As ever, picking a portfolio of non-correlated investments, diversified by geographical region, asset class and sector, can help to reduce a portfolio’s overall volatility and create greater stability of returns.

Have a safety net
Building up a cash buffer can protect against falling stock markets and means you might not have to reduce their standard of living while the market corrects. Holding two years’ cash means you won’t be forced to sell when prices are falling, thereby locking in losses. Instead of cashing in funds, you can dip into cash reserves, giving their pot a chance to regain lost ground.

Turn off the taps
If you can afford to, scale back their withdrawals or place them on hold until markets have recovered. Alternatively, limit the level of withdrawal to the natural income from share dividends or bonds. This leaves the underlying investments intact, giving them a better chance to recover when markets rise.

Invest in multi-assets
Multi-assets, as the name suggest, invest in different types of assets, from equities to property. In a downturn, some asset classes may not fall by as much as others, meaning multi-asset funds can help to smooth out the effects of a market crash while offering investors greater level of protection.

Have a number of buckets
Having a medium-term investment bucket and longer-term investment bucket can help to manage the mood swings of the stock market. The cash bucket is fed by the medium bucket, which is in turn fed from the long-term bucket.

Rebalance
Rebalancing can help to maintain the overall risk of a portfolio in line with your needs. Rebalancing won’t necessarily provide a greater investment return, but it is a protection mechanism against creating undue or unanticipated risk.

Source data
[1] All figures, unless otherwise stated, are from YouGov Plc. Total sample size was 660 adults whose pension is in drawdown. Fieldwork was undertaken between 3 and 15 October 2018.

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.

PENSIONS ARE NOT NORMALLY ACCESSIBLE UNTIL AGE 55. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY 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.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.