Savings & Investments

5 fundamentals for successful investing during a General Election

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How could the general election impact your finances and investments?

The upcoming general election could bring significant changes to your financial planning and investment strategies.

Please get in touch with us if you have any questions or want to reassess your situation.

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Investing during the time of a General Election

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Set and prioritise your financial objectives

Your investment journey requires a clear plan, which includes understanding your unique goals and the strategies to achieve them.

Are you investing for a specific purpose? Do you aim for investment growth, income, or both? Having a well-defined plan prevents deviation and ensures your decisions align with your investment goals.

Remember, there’s no universal approach to achieving financial objectives. Your goals should reflect your individual circumstances, preferences and ambitions. By identifying and prioritising your financial objectives, you can concentrate on what’s most important in a sequence that suits you. This step also guides you in making necessary compromises.

Ensure smooth portfolio performance

Investing doesn’t necessitate a large initial sum. Drip-feeding an affordable amount each month – or gradually depleting a lump sum – can be advantageous in times of geopolitical, stock market and economic uncertainty. Known as pound cost averaging, this can offer a safeguard against value depreciation in markets that inherently have the propensity to decline and ascend.

Rather than committing a substantial amount of money at a single market point, which a price drop could potentially follow, regular investments would purchase units as the prices of the underlying assets decrease. This could lead to obtaining more units for your capital, resulting in a higher return if the market situation becomes favourable and prices start rising.

Diversify your portfolio

‘Don’t put all your eggs in one basket’ is sage advice when investing.

Diversification spreads risk across various investments and sectors, helping you navigate market volatility. Asset allocation and diversification allow
you to create an investment mix with potential for growth and a level of risk that suits your comfort zone.

In a diversified portfolio, the less correlated the assets, the better. The concept is straightforward: if you invest everything in one sector – like technology – and it plummets due to regulatory changes, your investment suffers too.

Regularly review your portfolio

Monitoring your investment portfolio ensures it aligns with your financial objectives and you’re not excessively exposed to risks. Rebalancing is an essential practice in this process. It involves adjusting the allocations of different assets within your portfolio to maintain the ‘weight’ or proportion that best matches your initial investment goal.

Market performance can cause the value of each holding in your portfolio to rise or fall over time, altering its proportion within the overall portfolio. As these proportions deviate from their original weightings, the risk profile of your portfolio changes accordingly.

High-return assets typically carry higher risk, meaning these high-risk investments may increasingly dominate your portfolio over extended periods, elevating your risk level beyond your initial plan.

Practise the art of patience

Long-term investment goals require ample patience. While prices fluctuate daily, adopting a buy-and-hold strategy is crucial. Avoid attempting to time the market or base decisions on short-term fluctuations. Market timing – predicting changes in stock prices or index values – often leads to poor decision-making.

Instead, focus on your overall investment goals and adhere to your plan. As many investors say, ‘There are only two types of people when it comes to market timing: those who can’t do it, and those who haven’t realised they can’t.’ If you’re patient enough to ignore the noise, the market will eventually recognise an asset’s underlying value.

If you’d like to know more about how the general election could impact your finances and investments, download our free election guide:

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Changes to Individual Savings Accounts in 2024 

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Why savers and investors now have a more flexible approach 

Individual Savings Accounts (ISAs) offer a versatile and tax-efficient way to save for the future, whether for yourself, your children or grandchildren. Now that we have entered the new financial year, on 6 April 2024, significant changes to ISAs have been introduced. 

Since April 6, savers and investors have had a more flexible approach to using their ISA allowance. For the first time, individuals can open multiple accounts of the same type of ISA within a single tax year, from 6 April one year to 5 April the next, provided they do not exceed the annual ISA limit. This marks a departure from previous rules, which annually restricted savers to one account per ISA type. 

Partial transfers and the British ISA 

In addition to this newfound flexibility, the rules now permit partial transfers of funds from current tax year ISAs into different types of ISAs, enhancing the ability to tailor savings strategies to personal needs. Furthermore, the government has proposed a new ‘British ISA’ featuring a separate £5,000 allowance aimed at investments in UK-based companies on the UK stock market. 

The Chancellor’s announcement of the British ISA during this year’s Spring Budget seeks to complement the existing £20,000 annual ISA allowance. This initiative is still under consultation, with a deadline set for 6 June, signalling a potential boost for domestic investment. 

Diverse spectrum of ISAs 

The ISA regime offers a variety of options to cater to different financial goals and risk appetites. Whether prioritising safety, growth or a mix of both, there’s an ISA type to match most requirements. From Cash ISAs, known for their simplicity and tax efficiency, to Stocks & Shares ISAs, which offer the potential for higher returns albeit with increased risk, choosing the right ISA depends heavily on individual circumstances. 

Cash ISAs 

Cash ISAs serve as a cornerstone for risk-averse savers, providing a straightforward, tax-efficient haven for cash savings. Cash ISA products can be easy access accounts that allow immediate withdrawals or fixed rate accounts that reward savers for committing their funds for a predefined period. Although these accounts can offer both higher and lower interest rates typically offer lower interest rates than standard savings accounts, they present a valuable tax shield, especially for those who have maximised their savings allowance or anticipate doing so. 

 The allure of Cash ISAs lies in their tax advantages. Interest earned within these accounts does not contribute to the saver’s personal savings allowance, thereby offering a tax-efficient growth environment for savings. This feature is particularly beneficial for higher rate taxpayers and those with substantial savings, making Cash ISAs an option despite potentially lower interest rates compared to non-ISA savings accounts. 

Stocks & Shares ISAs 

Stocks & Shares ISAs, sometimes referred to as ‘investment ISAs’, present an opportunity for individuals to diversify their investment portfolio across a broad spectrum, including collective investment funds, Exchange Traded Funds (ETFs), investment trusts, gilts, bonds, and stocks and shares. This form of investment carries an inherent risk since the value can fluctuate significantly; however, historically, the stock market has offered returns that surpass those of traditional savings accounts over extended periods. 

Investors can choose investment funds within a Stocks & Shares ISA, where funds are amalgamated with those of other investors and managed by a professional fund manager, diluting the risk associated with individual investments failing. 

Proceeds from Stocks & Shares ISAs are tax efficient. This encompasses both capital gains and dividends derived from the investments within the ISA. The convenience of not having to report these investments on a tax return simplifies the investment process, making Stocks & Shares ISAs an appealing starting point for newcomers to the investment world. 

Lifetime ISAs 

The Lifetime Individual Savings Account (ISA) presents a unique opportunity for individuals aged between 18 and 40, potentially benefiting your children or grandchildren. For each pound deposited into the account, the government offers an additional 25p, tax-free. With an annual contribution limit of £4,000, savers can receive a maximum bonus of £1,000 per year. 

This fund can be used to purchase a first home worth up to £450,000 or for retirement savings, functioning similarly to a pension scheme. It is important to note that funds can be freely accessed after the age of 60 to supplement retirement income. However, early withdrawals for other purposes incur a 25% penalty. 

The Lifetime ISA is available in two forms: Cash ISA and Stocks & Shares ISA. The market for Cash ISAs within this category is limited, with only a handful of providers. The £4,000 contribution towards a Lifetime ISA is counted within the broader £20,000 annual ISA allowance. 

Junior ISAs 

Turning our attention to Junior ISAs (JISA), these are designed for individuals under the age of 18. This financial year allows for an investment of up to £9,000 in either cash or stocks and shares. Access to the funds is restricted until the beneficiary turns 18, at which point full control over the account is granted. From the age of 16, they can manage the account, making it an ideal option for those looking to foster financial independence in their youth. From the start of the 2024/25 tax year, the minimum age to open a Cash ISA increased to 18. 

ISA transfers 

The flexibility to transfer across different ISA providers and types (from cash to stocks and shares or vice versa) enhances the appeal of ISAs. However, verifying transfer policies with your chosen providers is critical, as not all permit transfers. Direct withdrawals and transfers should be avoided to maintain the funds’ tax-efficient status. Instead, the recommended approach involves initiating the transfer through the receiving provider, who will manage the process on your behalf through a straightforward form. 

ISAs and spousal inheritance 

When it comes to managing the financial aftermath of a loved one’s passing, understanding the nuances of how Individual Savings Accounts (ISAs) can be inherited is key. An ISA can be transferred to a surviving spouse while retaining its coveted tax-free status, offering a silver lining during such difficult times. 

However, it’s important to note that no further contributions can be made to the ISA once the original owner has passed away. Nevertheless, any increase in account value during the probate period remains exempt from tax. For the surviving spouse, this transfer includes an additional ISA allowance, which is calculated based on the higher of two values: the cash or investments inherited or the market value of the ISA at the time of the original holder’s death. 

Non-spousal beneficiaries 

The situation becomes markedly different when ISAs are bequeathed to beneficiaries other than the spouse. In these instances, the value of the ISA may fall within the scope of Inheritance Tax (IHT), which is levied at a rate of 40% on portions of the estate exceeding the current £325,000 (2024/25) IHT threshold. This significant tax implication underscores the importance of proactive estate planning to effectively navigate the potential fiscal impact. 

 

If you’d like to discuss your financial future with an Expert Financial Adviser, please get in touch:

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Create personalised, tailored financial plans

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Ellis Bates Directors Ben and Alan discuss how Ellis Bates incorporate the principles of Consumer Duty into every aspect of our client responsibility to offer relevant and effective products and services.

Watch our latest video to find out:

How the Ellis Bates in-house Investment Team help you create your personalised, tailored financial plans
How Ellis Bates independently select the products and services individually tailored to your financial plans
How Ellis Bates tailor the right financial products and services throughout your lifetime and its ever-changing circumstances
How Ellis Bates scan the whole of marketplace to carefully select the right products and services for you to achieve your financial plans
How the Ellis Bates in-house investment team create a suite of products and services geared specifically to your financial plans

If you’d like to discuss your financial plans, please get in touch:

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Take your ISA to the max

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ISAs are one of the most straightforward ways to achieve tax-efficient gains. Remember you can currently invest up to £20,000 this tax year in an ISA, so a couple can put £40,000 out of the reach of the taxman. And don’t forget your children or grandchildren. Parents and guardians can invest up to £9,000 in a Junior ISA.

To find out more or discuss your requirements, please contact us.

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Individual Savings Accounts (ISAs)

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What is an ISA?

Individual Savings Accounts (ISAs) aim to encourage UK residents to plan for their financial future by saving and investing in a tax efficient way.

ISAs are a type of savings plan where you can pay in lump sums and/or regular contributions. There are both advantages and disadvantages to having an ISA.

If you want to discuss ISAs and the potential benefits to your financial future, please contact us:

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Make the most of your ISAs

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Don’t Miss the ISA Deadline 5th April 2024

Any unused ISA allowance will not be rolled over into the new tax year. On 6 April when the new tax year starts, if you haven’t used all of your or your children’s ISA allowances from the previous tax year, they will be lost forever.

Here are your ISA questions answered

Q: What is an individual savings accounts or ISA?

A: An ISA is a ‘tax-efficient wrapper’.

Types of ISA include a Cash ISA and Stocks & Shares ISA. A Cash ISA is similar to a normal deposit account, except that you pay no tax on the interest you earn. Stock & Shares ISAs allow you to invest in equities, bonds or commercial property without paying personal tax on your proceeds.

Q: Can I have more than one ISA?

A: You can have as many ISAs as you like, as long as you meet the eligibility criteria for each type. However, you can only pay into one of each type of ISA in a single tax year (e.g. one Cash, one Lifetime, one Stocks and Shares, one Innovative Finance) and you can’t pay in more than your annual ISA allowance overall which is £20,000 for the current tax year across all your ISAs this tax year. However, bear in mind that you have the flexibility to split your tax-efficient allowance across as many ISAs and ISA types as you wish. For example, you may invest £10,000 in a Stocks & Shares ISA and the remaining £10,000 in a Cash ISA. This is a useful option for those who want to use their investment for different purposes and over varying periods of time.

Q: When will I be able to access the money I save in an ISA?

A: Some ISAs may tie your money up for a period of time. However, others are flexible. If you’re after flexibility, variable rate Cash ISAs don’t tend to have a minimum commitment. This means you can keep your money in one of these ISAs for as long – or as short – a time as you like. This type of ISA also allows you to take some of the money out of the ISA and put it back in without affecting its tax-efficient status.

An ISA is a tax-efficient way to invest because your money is shielded from Income Tax, tax on dividends and Capital Gains Tax’ On the other hand, fixed-rate Cash ISAs will typically require you to tie your money up for a set amount of time. If you decide to cut the term short, you usually have to pay a penalty. But ISAs that tie your money up for longer do tend to have higher interest rates.

Stocks & Shares ISAs don’t usually have a minimum commitment, which means you can take your money out at any point. As with all investing, it’s recommended that you invest your money for at least five years or more. Staying invested for longer allows your investment to grow and to better weather any market volatility.

Q: Could I take advantage of Lifetime ISA?

A: You’re able to open a Lifetime ISA if you’re aged between 18 and 39. You can use a Lifetime ISA to buy your first home or save for later life. You can put in up to £4,000 each year until you’re 50. The Government will add a 25% bonus to your savings, up to a maximum of £1,000 per year.

Q: What is an innovative ISA?

A: An Innovative Finance ISA allows individuals to use some or all of their annual ISA allowance to lend funds through the Peer to Peer lending market. Peer to Peer lending allows individuals and companies to borrow money directly from lenders. Your capital and interest may be at risk in an Innovative Finance ISA and your investment is not covered under the Financial Services Compensation Scheme.

Q: What is a junior ISA?

A:This is a savings and investment vehicle for children up to the age of 18. It is a tax-efficient way to save or invest as it is free from any Income Tax, tax on dividends and Capital Gains Tax on the proceeds. The Junior ISA subscription limit is currently £9,000 for the tax year 2023/24.

Q: Is tax payable on ISA dividend income?

A: No tax is payable on dividend income. You don’t pay tax on any dividends paid inside your ISA.

Q: Is Capital Gains Tax payable on my ISA investment gains?

A:You don’t have to pay any CGT on profits.

Q: I already have ISAs with several different providers. Can I consolidate them?

A: Yes you can, and you won’t lose the tax-efficient ‘wrapper’ status. Many previously attractive savings accounts may cease to have a good rate of interest, and naturally some Stocks & Shares ISAs don’t perform as well as investors would have hoped. Consolidating your ISAs may also substantially reduce your paperwork. We’ll be happy to talk you through your options.

Q: Can I transfer my existing ISA?

A:Yes, you can transfer an existing ISA from one provider to another at any time as long as the product terms and conditions allow it. If you want to transfer money you’ve invested in an ISA during the current tax year, you must transfer all of it. For money you invested in previous years, you can choose to transfer all or part of your savings.

Q: What happens to my ISA if I die prematurely?

A: The rules on ISA death benefits allow for an extra ISA allowance to the deceased’s spouse or registered civil partner.

Time to take your ISA to the max?

ISAs are one of the most straightforward ways to achieve tax-efficient gains. Remember you can currently invest up to £20,000 this tax year in an ISA, so a couple can put £40,000 out of the reach of the taxman. And don’t forget your children or grandchildren. Parents and guardians can invest up to £9,000 in a Junior ISA.

To find out more or discuss your requirements, please contact us.

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EB Retirement Income Strategies (EBRIS)

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EB Retirement Income Strategies (EBRIS)

In 2023, in response to client demand, we developed our EB Retirement Income Strategies (EBRIS). EBRIS is a combination of our Income and Growth portfolios:

Income Portfolios Growth Portfolios

Every fund focuses on a yield return.

A ‘slow and steady’ approach, usually with lower volatility.

Often more mature businesses than high growth options.

Return some profits immediately through dividends.

Mix of near- and long-term rewards with income and some capital growth.

 More focus on capital appreciation in 5-10 years or more.

Businesses that can grow quicker by retaining profits.

Less emphasis on near-term rewards than long-term potential.

Will naturally hold more volatile investments.

No constraint on mandate of funds, other than overall return of the portfolio.

Returns can come from anywhere.

Our default EBRIS approach is an equal (i.e. 50/50) split between the Income and Growth portfolios. Depending on your individual circumstances and preferences, together we can personalise elements of the strategy – for example:

  • A greater allocation to one portfolio (e.g. Income or Growth) over the other.
  • Replacing the Growth allocation with our Socially Responsible Investing (SRI), Passive or Multi-Asset portfolio.
  • Investing in EBRIS alongside one of our Product Panel solutions.

Why the Standardised Approach?

Research shows that many individuals have not saved sufficiently for their retirement, so they are becoming increasingly reliant on stock market returns to maintain their lifestyle after they finish working. However, volatility in the markets post-COVID has raised concern over expectations of market returns in the years ahead. This leaves investors vulnerable to market shocks.

In these conditions, single solutions can present a heightened risk to investors, due to the possibility of a single solution focusing on a particular investment style.

EBRIS allocates investments across different asset Investment, investment styles, geographic regions, industries/sectors, fund houses and individual companies, among other categories, which helps to mitigate risk. At the same time, we believe that the combination of Income and Growth assets will give a higher probability of meeting your income requirements over the course of retirement, and avoid running out of savings (based on a 4% income requirement).

That said, there will be clear situations where a different mix of strategies, or even a single strategy, will be appropriate for you because of your unique circumstances. If you want to find out more about what would be the best solution for you, then please get in touch with your Financial Advisor.

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What is an Annuity?

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An annuity is a financial product whereby an individual provides an upfront capital amount in exchange for regular income payments for a specified period of time.

The rate of income that an individual is paid (the annuity rate) depends on various factors including their age and state of health, the capital amount, the length of the term, and current market rates as measured by the 10-year gilt yield (i.e. a UK government bond that matures in 10 years’ time).

The Purchasing Power of 10-Year Gilts and Annuities

Consider the purchasing power of a 10-year gilt: if you wanted to hold one of the most secure types of investment possible, what return could you have expected over time?

In 2008, before the global financial crisis, the yield on a 10-year gilt was 5.45%. You could receive an income of £5,450 a year on a £100,000 investment, so in terms of making a retirement decision and income planning, this was a relatively straightforward position to be in.

As interest rates were cut in the years that followed to stimulate the economy, so too did bond yields fall. By 2021, the 10-year gilt yield had moved down to 0.54%. An investment of £100,000 now provided about £500 a year of income – a fall of 91% compared with 2008 levels.

Thus, if you wanted to generate a secure income of about £5,000 a year, you now needed £1,009,259!

In recent years, the Bank of England has been raising interest rates to bring persistently high inflation under control. In response, 10-year gilt yields have also risen, to over 4% for 2023 – and almost back to 2008 levels. Thus, if you want to generate a secure of £5,450 a year today, you now only need £133,252.

Year

 Yield Income on £100,000 Difference in income vs previous Difference in income vs 2008

Amount needed to secure £5,450 “risk-free”
2008 5.45% £5,450 £100,000
2012 2.07% £2,070 -62% -62% £263,285
2016 1.66% £1,660 -20% -69% £328,313
2021 0.54% £544 -67% -91% £1,009,259
2023 4.09% £4,090 +657% -25% £133,252

Annuities have therefore become a viable retirement strategy once again, and are becoming a popular option for investors who want a dependable rate of return.

A variety of annuities are available, and additional features can be incorporated into annuity contracts based on your individual needs and circumstances. Should you wish to find out more information or discuss how an annuity would work for you, please get in touch with your Financial Advisor.

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Income in Retirement

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Put simply, an individual’s life can be split into two phases: the accumulation phase, and the decumulation phase.

Accumulation Phase Decumulation Phase
Most retirement planning advice focuses on the accumulation phase – that is, how large a pension pot will need to be; and, to achieve that size of pot, how much you will need to regularly save and in which assets you must invest those savings. During this phase, you start to rely on their savings to finance all or part of their living costs. Within this, there are two main objectives:

Ensure you enjoy the best quality of life possible.

Ensure you do not outlive your savings!

There are many uncertainties that can complicate your and your Adviser’s decisions when planning a long-term investment strategy.

  • Longevity Risk – you live longer than anticipated, so you could run out of money.
  • Inflation Risk – your money does not stretch as far as it used to.
  • Market Volatility – the value of your investments and the income generated by them can fall as well as rise, meaning you have less in your pension fund when you retire.
  • Withdrawal Strategy / Pound Cost Averaging – if withdrawals are made when markets are falling or low, more of the assets need to be sold to cover the withdrawal. This impacts the ability of the remaining portfolio to generate returns for the future.
  • Healthcare Costs – as people age, they are more likely to need healthcare, which can be costly.
  • Government Policy – changes in government policy can affect the spending power of your savings, the attractiveness of pension products, among other things.
  • Personal Circumstances – risks specific to your individual circumstances.

Many individuals will retire with a number of different assets and savings vehicles such as a pension, ISA, cash accounts and property. Each type is subject to different risk/return profiles, as well as different tax treatments with regard to income, capital gains and inheritance tax.

While some people may find that the income provided by external sources is sufficient to cover their day-to-day expenditure in retirement, others may want or need to draw on their EB portfolio – some may draw down the capital, while others may rely solely upon the income generated by the investments (the ‘natural income’) and seek to leave the capital intact.

Whichever approach is taken, a strategy that is suitable for you today may not be suitable in the years to come, due to factors such as inflation.

This is demonstrated in Figure 4 and Figure 5. These charts assume:

  • an initial portfolio value of £1 million
  • a withdrawal of 5% of the original invested amount (i.e. £50,000) a year
  • the amount withdrawn increases by inflation each year (0% in Figure 4, and 2% in Figure 5), and
  • the balance remaining invested in stock/bond markets to generate capital growth and income (i.e. a total return), growing at a steady rate of 4% a year.

No Inflation: How long will a client’s portfolio last?

Withdrawing 5%, inflation 0%, investment growth 4%

2% Inflation: How long will a client’s portfolio last?

Withdrawing 5%, inflation 2%, investment growth 4%

Sustainable Withdrawal Rates

A general rule of thumb is you can withdraw up to 4% a year if you do not wish to run out of money during your lifetime. This is based on average life expectancy, and accounts for 25 years of returns even without any growth in markets – in reality, the long-term average for portfolios is greater than this, and we would expect above-zero returns in most years over the long term.

That said, there may be circumstances when someone can withdraw more each year (say, 8% – for example, they have a short life expectancy, as shown in Figure 6) or less (say, 2% – for example, they wish to keep the capital value of their remaining portfolio intact).

Increased Withdrawal Rate: How long will a client’s portfolio last?

Withdrawing 8%, inflation 2%, investment growth 4%

Find out more

Whatever your investment experience, our teams are here to help and support you on your investment and retirement journey. Find out more about investing with Ellis Bates Financial Advisers, or alternatively please get in touch by filling out the form below.

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