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Protecting Investments

Investing can bring you closer to your financial goals than cash

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Should you invest your money to achieve long-term financial goals or keep the money safely in cash?

This is a common dilemma and can be a difficult decision, especially for first-time investors who are yet to experience the ups and downs of stock market investing.  Yet, history tells us that investments typically outperform cash over longer periods of time.

New research has shown that those who invested in a stocks and shares Individual Savings Account (ISA) 15 years ago could have enjoyed gains of almost double those experienced by individuals leaving money in cash over the same period.  The research from Fidelity International also pointed out a gender difference when it comes to the preference to invest or leave money in cash.  Almost half of women prefer to save in cash, which could be detrimental to achieving their long-term financial goals.

This is supported by new figures from HM Revenue & Customs (HMRC) which show more women subscribing to cash ISAs than men.  More men than women were shown to invest their ISAs than open a cash ISA.

Fidelity carried out the analysis based on using the full ISA allowance invested in an index tracker fund which aimed to track the performance of the FTSE All Share and compared this to average cash savings rates over 5, 10 and 15 years.  This analysis demonstrates the cost of cash, with the investment worth £20,174 more over 5 years, £55,541 more over 10 years and £104,217 more over 15 years.  They concluded that, by investing in the stock market, women (and men) can reach their financial goals sooner.  These financial goals might include building up a deposit for a first home, paying school fees or saving for retirement.

Earlier research from Fidelity in their Financial Power of Women report found that 43% of women were likely to save using a cash ISA in the next two years compared to the 19% who said they would invest via a stocks and shares ISA.  This finding was based on a survey of more than 1,000 men and 1,000 women, who were asked about their views on money and investing.

Maike Currie, Investment Director at Fidelity International, said:

“Many women will have long-term goals and diligently stick to these whether saving for a child’s education or putting something away for a comfortable retirement.  But while we tend to be diligent and committed savers, we often steer clear of the stock market altogether.

“Factors such as the gender pay gap, time off work to cover childcare and more women engaged in part-time work already contribute to a significant gap in women’s’ earnings versus their male counterparts.  That’s why it’s important not to put yourself at a further disadvantage by not making your money work as hard as you are.  With interest rates at record lows for almost a decade now and inflation rapidly rising, anyone holding an investment in cash will struggle to achieve a decent real return – that’s a return that keeps abreast of rising prices.

“Granted, the stock market is a riskier option than cash, but it is a well-established fact that over the long-term equities tend to outperform cash.  Women risk falling into a glaring ‘investment gap’ by leaving their money languishing in cash.  Don’t lose out over the long term and run the risk of missing out on your long term financial goals – take the plunge and get invested.”

There is of course an important role for cash in long-term financial planning.  It’s usually recommended to hold a short-term cash emergency savings fund in order to cover between three to six months essential expenditure.  Cash is also often preferable to investments where there is a short time horizon for your financial goals, such as buying a property in the next few years.

As investments can go down as well as up in value, the certainty of cash is important where a known amount of money is required in the short-term however, for longer-term financial goals, including retirement planning, the buying power of cash will typically be eroded by price inflation over time.

Investing money does involve risk and exposure to volatility, so you need to have sufficient tolerance for risk, capacity for any losses and the need to experience investment returns to achieve your financial goals.

Please get in touch if you would like to talk about the difference between saving in cash and investing your money, and how to determine a suitable allocation of cash and investments within your portfolio.

Staying safe from investment scams

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There are many ways to lose money to fraudsters.  Keeping your money safe, especially online, is challenging when fraudsters use increasingly sophisticated ways to deceive investors.

The financial services regulator, the Financial Conduct Authority (FCA), has issued a new warning over the growing threat of loan fee scams which specifically target borrowers.  According to the FCA, more than £3.5 million was lost to this form of fraud during the last year.  Reports to the FCA’s consumer helpline about loan fee fraud increased by 44% in 2017, which demonstrates how much this type of scam is growing.

Victims of loan fee fraud are often targeted online when searching for personal loans.  The fraudster tells their victim they need to pay an upfront fee to secure a loan, but ultimately the loan never materialises.  Worse yet, victims are often encouraged by the fraudsters to make multiple advance payments.  This form of scam appears to be particularly effective because the victims become increasingly desperate to access the loan they have been promised.

The FCA says that the average loan fee scam victim lost £740 last year.  This is a sizeable amount of money for anyone to lose.

Mark Steward, Executive Director of Enforcement and Market Oversight, FCA, said,

“We’re seeing an increasing number of cases of loan fee fraud reported to us.  Fraudsters target people making online loan applications and who think they’re being contacted by a legitimate loan provider, when they are not at all.

Scammers take advantage of the excitement people feel when they are offered or accepted for a loan and make the loan conditional of an upfront fee, which can increase to hundreds of pounds.  Of course, no loan ever materialises.

Before applying for a loan always check who you’re dealing with, be sceptical, make sure the loan provider is authorised by the FCA.  Check our register at fca.org.uk.”

Victims of loan fee fraud tend to be the most financially vulnerable in society, including people on lower incomes or with low credit ratings.  However, victims of investment fraud are often wealthier, more experienced investors.

A previous analysis of the victims of investment fraud, commissioned by the FCA, found that over 55s were the age group most likely to fall prey to fraudsters.  This victim profile appears to have changed slightly in more recent years, with the rise in online scams for things like binary options leading to younger investors being targeted through social media use.

Suspected investment scams can be reported to the FCA atwww.fca.org.uk/scamsmart. The most important rule of thumb when staying safe from fraud is this; if it seems too good to be true, then it usually is.

Always seek a second opinion before parting with your money.  Only ever deal with authorised and regulated financial advisers, and check first on the FCA financial services register at www.fca.org.uk/firms/financial-services-registerto make sure you are dealing with a legitimate adviser.

 

Protecting Pension Pots

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Three years on from the introduction of pension freedoms, how is the retirement income sector serving consumers?

The Financial Conduct Authority (FCA) has launched a new consultation designed to protect consumers, improve engagement and promote competition in the retirement income market.  This consultation has been published alongside their final report, part of the FCA’s Retirement Outcomes Review, which is a detailed look at how the sector has been working for consumers since the introduction of pension freedoms in April 2015.

The headline findings of the report show that these pension freedoms were welcomed by consumers, but some are at risk of financial harm.  It’s this risk of consumer detriment the consultation is seeking to address.

This review is especially important because the amount of money in defined contribution pension pots is expected to rise significantly in the coming years.  With retirees increasingly likely to have pension wealth held within defined contribution rather than defined benefit (final salary) pension schemes, it’s important the retirement income sector serves them better.

One interesting finding in the report, which is something we don’t often expect to hear from the financial services regulator, is that some investors using income drawdown in retirement could receive 37% more retirement income each year if they invested their pension pots in a mix of investment assets, rather than holding the money in cash.  The FCA reported that 60% of consumers who do not take advice about their income drawdown for retirement income were not sure or only had a broad idea of where their money was invested.  They found that a third of consumers were wholly invested in cash, with around half of these people likely to be losing out on income in retirement, due to their cash strategy.  Cash is a good short-term home for money, but retirement can be a very long-term investment. Over longer periods of time, the buying power of cash is typically eroded by price inflation, with invested assets standing a better chance of delivering inflation-beating returns.

Within the consultation, the FCA is aiming to help consumers at key stages of their retirement income journey.  It also looks to provide better support to investors once they have accessed their pension pot, especially if that access is a flexible format such as income drawdown.

The FCA wants to improve the clarity and timings of communications before people make decisions about what to do with their pension pot.  It also looks at simplifying the options people face and the ongoing communications they receive.

One proposal is for ‘wake up’ packs to be sent to pension pot owners on their 50thbirthday and then every five years until the pension pot has been fully accessed.  These new style information packs will need to include a single page summary, sometimes referred to as a ‘pensions passport’. Pension providers will need to include specific retirement risk warnings within the packs too.  According to the FCA, this new communications regime will be designed to address the lack of consumer engagement, helping consumers better engage with the risks and choices they face, prompting them to access the support and guidance needed to make better choices when it comes to retirement income.

Another proposal within the consultation is to create so-called ‘investment pathways’ for investors who are entering drawdown.  These would consist of a more structured set of investment options, designed to help investors engage with the decisions they are making.  Investment pathways would also aim to consider their retirement objectives and ultimately end up in a more appropriate investment solution.

For investors who enter income drawdown arrangements without the benefit of professional advice, the availability of a set of investment pathways could go some ways towards better investing outcomes.  Value for money was an important part of the report, with the FCA proposing

firms include a one-year charge figure, shown in pounds and pence. This price disclosure would be made in a key features illustration.

The report shows a big variation in charges between different retirement income plans.  These charges can range from 0.4% to 1.6% a year, and comparing them isn’t always that simple, with complex and opaque charging structures from some pension providers.  The FCA has warned that failing to introduce investment pathways with appropriate charge levels could result in a cap on drawdown charges.  However, this charge cap is not being proposed within this consultation.

Christopher Woolard, Executive Director of Strategy and Competition at the FCA said:

“We know that the choices introduced by the pension freedoms have been popular with many consumers.  However, they’re now required to make more complicated decisions than ever before. Many people need more support when making choices.

“The measures we have outlined today will help them think about that earlier, create investment pathways to help them with their choices and make costs and charges easier to understand.

“This is an important market that is still relatively new and is continuing to evolve.  This is not the end of the work we are doing and we will continue to keep the market under review as it develops.”

It will be interesting to see what happens next and how the retirement income market continues to evolve.  Some of the proposals made by the FCA in their consultation are being consulted on as proposed new rules.  Other regulatory interventions, including the investment pathways approach, will be subject to further work to consider the detail of implementation.

Commenting on the report, Steve Webb, Director of Policy at Royal London said:

“This is a welcome package of measures from the FCA. The report shows that consumers who do not take financial advice are at risk of losing out, with 94% not shopping around at retirement.

“The biggest risk is not consumers running down their pension pot too quickly – for which the FCA says ‘it has not seen much evidence’ – but savers locking their money into low-return cash investments for decades. Making sure savers do not sleepwalk into cash investments is an important step, as well as simplifying choices for savers at retirement.”

“These recommendations are a proportionate and balanced package which preserve the spirit of pension freedoms whilst trying to make those freedoms work better, especially for customers who do not take financial advice.”

If you have any questions about your retirement income options, please do get in touch and we will be happy to answer them for you.