Savings & Investments

What is an ISA?

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

What is a Cash ISA?

A cash ISA works mainly like a traditional savings account. You can open a cash ISA if you are a UK resident aged 16 or over and it allows you to save money and pays you interest. However, when you hold a cash ISA you do not pay any tax on interest you earn. With a bank or building society account you pay income tax on earnings exceeding £1,000.

Why open a Cash ISA?

Paying into a Cash ISA is often seen as the safest option as your savings aren’t subject to the ups and downs of the investment markets. You typically get an income and easy access to your money. However, an important factor to consider is the effect of inflation on your savings over time. With interest rates being so very low, the purchasing power of your money in real terms will decline over time.

What is a Stocks and Shares ISA?

With a Stocks and Shares ISA, your money is invested in assets such as shares, bonds, property and commodities. As the investment is tax privileged no tax is applied on capital gains you make or income such as interest and dividends you earn. You can keep everything you earn from your investment after all management charges.

You can pay into a stocks and shares ISA if you are a UK resident aged 18 or over.

What are the risks of a Stocks and Shares ISA?

Holding a Stocks and Shares ISA does present some risk since there is no guaranteed return and the value of your investment could go down. However, it also gives you the chance to earn higher returns than you could expect from cash savings.

One way to mitigate your risk is by remaining invested over the long term as this typically helps you smooth out the ups and downs of the market and gives your money time to benefit from the power of compounding.

What is a Lifetime ISA?

Paying into a lifetime ISA allows you to save for your first home or your retirement and you don’t have to pay any tax on income you receive, nor capital gains tax. With this type of ISA, you will receive a 25% uplift on any amount you put in, up to a maximum uplift of £1,000 per year. This bonus is given every month and you’ll then receive interest or potential investment growth arising.

Opting for a lifetime ISA means you’ll hold cash or investments or a combination of both.

Lifetime ISAs come with many rules, for example:

  • You must be at least 18 years of age but under 40 to start a lifetime ISA.
  • The maximum you can put in each year is £4,000.
  • You can contribute until your 50th
  • If you intend to purchase a house you must be a first-time buyer, meaning you have never owned a property in the UK, and the house you wish to buy must cost £450,000 or less.

What is a Junior ISA?

A Junior ISA allows you to give your children a head start in life. You can open a Junior ISA for your child at any time as long as they are under 18, live in the UK and don’t already have a child trust fund. The amount you can put into your child’s Junior ISA each tax year is limited to £9,000.

When looking to open a Junior ISA you can choose to pay into a Junior Cash ISA, a Junior Stocks and Shares ISA, or both, as long you don’t go over your child’s annual allowance.

As with any investment, it is wise to get professional advice to ensure your investment strategy is in line with your personal risk tolerance and that the type of investment is appropriate to meet your personal needs and objectives.

Recession-proof your Finances

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10 practical steps to ensure your money is working hard for you

In these uncertain times, it’s more important than ever to make sure your finances are in order. The Bank of England believes that a painful squeeze on our living standards, driven primarily by soaring energy prices, is set to intensify and will push the UK economy into recession later this year.[1]

Making your finances recession-proof is all about taking practical steps to ensure your money is working hard for you. It is vital to be completely honest with yourself about your financial situation.

By conducting a thorough audit of your finances and gaining a comprehensive understanding of all your incomes and outgoings, this will show you exactly where your cash is going and, most importantly, help you identify problematic spending behaviour.

Here are 10 tops to help you recession proof your finances:

1. Make a budget and stick to it

This will help you keep track of your spending and ensure that you’re not overspending.

2. Save, save, save!

Try to put away as much money as you can into a savings account so that you have a cushion in case of tough times.

3. Invest in yourself

Take the time to learn new skills or improve upon existing ones. This will make you more valuable in the job market if you need to make a job or career change.

4. Remove any unnecessary payments

Look at your bank account and remove any pain-free direct debits. Consider if you’re currently paying for things you don’t really need, for example, subscriptions.

5. Time to switch

Look at energy tariffs, home insurance, car insurance, broadband, TV package, mobile tariff – now might be a good time to switch.

6. Stay disciplined with your debt

Make sure you’re making all of your payments on time and in full. This will help you avoid costly late fees and keep your credit in good shape.

7. Pay off high interest

Prioritise any high-interest debt, such as credit card debt, freeing up more money in your budget to cover other expenses if your income decreases.

8. Have an emergency fund

This is a must in case you lose your job or have any unexpected expenses. Try to save up at least between three to six months’ worth of living expenses so that your expenditure is covered.

9. Diversify your income

Don’t put all your eggs in one basket. Having multiple streams of income can really help. If one income source starts to dwindle – or gets eliminated completely – this will provide other sources to fall back on.

10. Diversify your investments

In addition to diversifying your income, it’s also important to diversify your investments. Review your investment portfolio and make sure your investments are spread across different industries and even different types of asset classes.

Secure your financial future

Following these tips will help you secure your financial future and protect yourself from the effects of rising inflation and the cost of living crisis. If you would like to find out more or to discuss your situation, please contact us.

Source data: [1] https://www.bankofengland.co.uk/monetarypolicy-report/2022/may-2022

Economic Outlook

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With Policy changes, volatility and unpredictability the new norm it appears at times, a different approach is needed towards your finances and investment strategy.

Ellis Bates continue to emphasise the foundations for dealing with the current conditions lie in a well-diversified, global approach to assets that have long term potential to weather the immediate storms and deliver returns over the longer term.

For more information please visit our latest market insights “Growing Pains?”

Rising Inflation

Bank of England tries to rein in inflation, which has reached its highest value since 1981, almost five times the central bank’s target. (1)

Falling Value of the £

The pound has fallen to a record low against the dollar as markets react to the UK’s biggest tax cuts in 50 years. (2)

Global Stock Market Declines

It’s hard to find much good news in relation to Global Markets, with investors remaining worried about high inflation and low growth. (3)

Sources
[1] https://www.bloomberg.com/news/articles/2022-09-26/understanding-the-british-pound-s-sudden-crash-quicktake
[2] www.bbc.co.uk
[3] https://russellinvestments.com/uk/blog/inflation-recession-earnings-mwir

Diversification Within Investments

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This session looks at how the strategy of diversification among investments can be used to reduce risk when investing.

Growing Pains?

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The UK’s new Chancellor Kwasi Kwarteng unveiled “The Growth Plan 2022” which marks a step change in government policy, both financially and ideologically. The view of the new government is summarised by the assertion that “Economic growth is the government’s central mission” and to achieve this “the government must cut taxes, streamline the public sector, and liberate the private sector.”

As always, we disregard the political or social biases with our comments and focus on the reality of facts, or importantly, the facts so far. As the chancellor noted when challenged on the financial prudence of their plan, the new regime had been in place 19 days when it was issued and there will be additional measures in the future. Those doubting the priorities of the government and where these measures will be implemented, however, need only to focus on the highlighted quotes from the mini-budget and then consider the likely economic implications.

Currency markets have been in focus as sterling initially reacted negatively to the news, with fears that the higher-than-expected levels of borrowing would cause sustained higher inflation and, in turn, higher interest rates from the Bank of England which would have significant implications on the cost of government financing at a time when this already stands at historical highs.

However, part of the uncertainty may be due to lack of detail on how the stimulus package would be financed which provides additional risk in market pricing – back to the relevance of the facts so far, and the likelihood of further communications within the theme of the government’s chosen central mission. A Conservative government that has just taken a very open and public step to the right will be acutely aware of the financial markets’ need for information and aversion to uncertainty, so we must assume a pro-business regime will adopt an operating framework to match.

What next? Initially, more uncertainty, particularly as the government and Bank of England (BoE) establish an equilibrium on fiscal stimulus and monetary restraint to break the cycle of higher inflation and higher interest rates. For growth to reach the government’s stated objective of 2.5% that will need to happen sooner rather than later, and more than likely after an almost inevitable initial recessionary period. The focus on the private sector should, in theory, be positive for businesses as the government has identified them as the solution to remedying the current economic problems. However, this is clearly a significant risk at a time when government finances are already stretched, and the macroeconomic environment is as uncertain at any point since the global financial crisis in 2007-08.

At our client webinars we have emphasised the likelihood of heightened volatility for a number of years and the implications for financial markets over the short, medium and long term. The short-term risks for UK-based investments have certainly increased with the announcements on Friday and what may be perceived as bold in some quarters has equally been dismissed as reckless in others. While clearly our portfolios are not immune to the prevailing negative market environment, we continue to emphasise the foundations for dealing with the current conditions lie in a well-diversified, global approach to assets that have long-term potential to weather the immediate storms and deliver returns over the longer term. Risks are clearly elevated at the moment and the government will need to provide more clarity on how the stimulus will be accounted for to soothe the nerves of investors.

Market volatility webinar feedback

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Ellis Bates Q&A Webinar

Market Volatility & Your Investments

As world events continue to affect the investment markets, we recently held an open Q&A session for all Ellis Bates clients to ask their questions to our in-house Investment Team.

Headed by our Director of Investment Alan Cram, questions included the ‘Ukraine’ impact on Russian funds, the changing role of China within the markets, re-assessing attitude to risk with the current market volatility and how to spread investments over the short, medium and long term.

Clients welcomed the opportunity to gain a better understanding of the ups and downs of the markets and how this affected their investment portfolios and ongoing investment decisions.

Ellis Bates are here to enhance people’s lives by delivering peace of mind, enabling financial freedom and helping clients achieve their goals.

If you would like more information about our financial advice and investment services simply book a chat.

Investing with Ellis Bates

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Since 1980 our experience has helped our clients to keep and grow their money, as well as make sensible decisions for your future. Whether you are new to investments or want to re-evaluate your portfolio, we can help you. One crucial area of discussion relates to your comprehension of risk, which is supported by an initial questionnaire and assessment.

Adviser and client sat discussing the current volatile market

How to manage risk in a volatile market

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With the current volatile market we are seeing for the first time in many years, now may be the time to review your investment goals and timescales.

Whether you’re investing with a goal in mind, or simply saving for retirement, it’s important to understand risk, particularly in todays volatile market. Specifically, you should understand your own attitude to risk. If you understand the risks associated with investing and you know how much risk you are comfortable taking, you can make informed decisions and improve your chances of achieving your goals.

Risk is the possibility of losing some or all of your original investment. Often, higher-risk investments offer the chance of greater returns, but there’s also more chance of losing money. Risk means different things to different people.

How you feel about it depends on your individual circumstances and even your personality. Your investment goals and timescales will also influence how much risk you’re willing to take. What you come out with is your ‘risk profile’.

You can invest directly in investments, like shares, but a more popular way to invest in them is indirectly through an investment fund. This is where your money is pooled with other investors and spread across a variety of different investments, helping to reduce risk.

Different types of investment

None of us likes to take risks with our savings, but the reality is there’s no such thing as a ‘no-risk’ investment. You’re always taking on some risk when you invest, but the amount varies between different types of investment.

As a general rule, the more risk you’re prepared to take, the greater returns or losses you could stand to make. Risk varies among the different types of investments. There are many different ways to access investment funds, such as through Individual Savings Accounts (ISAs) and workplace pensions.

Losing value in real terms

Money you place in secure deposits (such as savings accounts) risks losing value in real terms (buying power) over time. This is because the interest rate paid won’t always keep up with rising prices (inflation).

On the other hand, index-linked investments that follow the rate of inflation don’t always follow market interest rates. This means that if inflation falls, you could earn less in interest than you expected.

Inflation and interest rates over time

Stock market investments might beat inflation and interest rates over time, but you run the risk that prices might be low at the time you need to sell. This could result in a poor return or, if prices are lower than when you bought, losing money. With the current volatile market and unprecedented levels of inflation, these considerations are now more important than ever.

You can’t escape risk completely, but you can manage it by investing for the long term in a range of different things, which is called ‘diversification’. You can also look at paying money into your investments regularly, rather than all in one go. This can help smooth out the highs and lows and cut the risk of making big losses.

When you invest, you’re exposed to different types of risk

Capital risk

Your investments can go down in value, and you may not get back what you invested. Investing in the stock market is normally through shares (equities), either directly or via a fund. The stock market will fluctuate in value every day, sometimes by large amounts. You could lose some or all of your money depending on the company or companies you have bought. Other assets such as property and bonds can also fall in value.

Inflation risk

The purchasing power of your savings declines. Even if your investment increases in value, you may not be making money in ‘real’ terms if the things that you want to buy with the money have increased in price faster than your investment. Cash deposits with low returns may expose you to inflation risk.

Credit risk

Credit risk is the risk of not achieving a financial reward due to a borrower’s failure to repay a loan or otherwise meet a contractual obligation. Credit risk is closely tied to the potential return of an investment, with the most notable being that the yields on bonds correlate strongly to their perceived credit risk.

Liquidity risk

You are unable to access your money when you want to. Liquidity can be a real risk if you hold assets such as property directly, and also in the ‘bond’ market, where the pool of people who want to buy and sell bonds can ‘dry up’.

Currency risk

You lose money due to fluctuating exchange rates.

Interest rate risk

Changes to interest rates affect your returns on savings and investments. Even with a fixed rate, the interest rates in the market may fall below or rise above the fixed rate, affecting your returns relative to rates available elsewhere. Interest rate risk is a particular risk for bondholders.

For more information on considering risk, download our brochure.

Invest your way out of inflation

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invest your way out of inflationWhy now is the time to make sure you protect your wealth.

The word ‘inflation’ had barely featured in the market’s vocabulary in the last three decades until it suddenly started to come back with a vengeance in 2021. As higher inflation looks set to persist in 2022, finding ways to generate a return on investments greater than inflation will be a key investment theme – otherwise your wealth falls in real terms.

Spending spree

There are two basic reasons why inflation has been increasing: supply and demand.

Starting with the latter, consumers have been on a spending spree after having spent a large proportion of time during 2020 and 2021 at home bingeing on Netflix.

The main reason for the current rise is due to the global price of energy. This has meant higher energy and transport bills for businesses, many of whom pass on the extra costs to their customers. Supply problems and higher shipping costs are also continuing to have an impact on businesses.

Healthy economy

Central banks kept saying that inflation was ‘transitory’, but this now seems to have been replaced by the word ‘persistent’. The result is that inflation will remain high on the economic agenda in 2022.

Inflation is a measure of how much prices have gone up over time. It’s the rate at which cash becomes less valuable – £1 this year will get you further than £1 next year. It tends to be a good sign in a healthy economy, but too much of it can be hard to reel in and control.

Boe forecast

The Bank of England (BoE)[1] expects inflation to reach over 7% by spring 2022 and then start to come down after that. That’s because most of the causes of the current high rate of inflation won’t last. It’s unlikely that the prices of energy and imported goods will continue to rise as rapidly as they have done recently. And this means that inflation will eventually decline.

The BoE forecasts the rate to be much closer to their 2% target in two years’ time. But even though the rate of inflation will slow down, the prices of some things may stay at a high level compared with the past.

Purchasing power

Beating inflation means earning higher returns from an investment than the inflation rate in the economy. If your return on investment is less than the inflation rate, this could basically nullify the returns you have earned. Due to various reasons, the purchasing power of money decreases significantly every year.

Investing with inflation in mind is essential for protecting your current and future wealth and involves choosing assets that naturally keep pace with rising prices. These mostly include either real, tangible assets, or investments that pay a variable rate and appreciate or increase over time.

Looking for a better chance of beating inflation over the long term?

If you’ve already got an emergency fund, or have excess cash in the bank, it may be time to consider investing some of it to protect your wealth from inflation. Investing some of your money may give you a better chance of beating inflation over the long term. To discuss your options, please contact us.

For more information on considering risk, download our brochure.

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. Past performance is not a reliable indicator of future performance.

Source data: [1] https://www.bankofengland.co.uk/knowledgebank/will-inflation-in-the-uk-keep-rising