Inflation – what does it all mean and how can we help you combat it…

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Inflation (or deflation) is the change in the price of something from one period to the next.  For example, the price of petrol has increased over past few years.

The typical measure of inflation is simply the rate at which a specific basket of goods change from one year to the next.  There is some variation in the different goods that are included within this typical basket and it is this difference which gives us different rates of growth for the retail & consumer price index (RPI & CPI respectively).

Recent changes to legislation mean that the CPI figure has the greatest impact on benefits and pension income, although RPI does still apply to some pensions.  The figures are usually announced monthly based upon the previous 12 months and it is the most recent figure for September which has the greatest direct impact on income.

The high rate of 5.2% in September is particularly important as it dictates the amount that all state pensions and state benefits will be increased by as from next year.

Obviously this is good news for those drawing state pensions but it is not so good news for those with bank account and cash ISA savings.

The average interest rate on bank accounts is less than 0.5%pa which means that in real terms savers are losing more than 4.5% of the value of their savings this year alone.

If you are concerned about how inflation is eroding your savings or you want to look at ways to combat inflation then please get in touch.

 

How does the Greek referendum affect investments and pensions…

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Over the past few months there has been a constant stream of news stories and bulletins regarding the financial markets and the Eurozone crisis.  As this has gone on we have tried to keep clients both informed and reassured.  This article is much of the same.

The latest headline is the Greek referendum.  In order to explain this think back to only a couple of weeks ago when the financial markets were in disarray as they waited for the 17 countries using the Euro to come to a consensus and start developing a meaningful plan for the future.

Last week the full Eurozone, including the 17 Euro based economies, finally came to some agreement which involved both recapitalising their banks and writing off some of the huge debts owed.

This plan was very well received.  Whilst the plan is unlikely to be a permanent solution it demonstrates the leaders are looking to take control.  As a result markets climbed as demonstrated by the FTSE rising more than 15%.

The news that the Greeks are to hold a referendum has shook the market confidence again.  The referendum will effectively ask the Greek people whether they agree to the latest Eurozone plan.

It is a gamble from the Greek government to try and calm the civil unrest as they try to get the population to engage with the plan.  The risks are that the Greek people decide they don’t want to have many of their countries debts halved as a protest to any form of bailout and the massive cuts their government have levied so far.

Whilst there is no doubt the Greeks would be worse of if they voted no to the latest plan, there is that possibility and by leaving any referendum until January it is likely the impact will have a drawn out effect on financial markets.

That said, ultimately the Greeks will have to resolve their debt issues as will the Eurozone.  Whether the current plan is enforced in its current form it does mark a milestone in that all 17 Euro countries have agreed a way forward.  For this reason I do feel there are positive reasons to look towards the longer term.  If investors and savers keep that longer term focus they will benefit from the eventual recovery in Stockmarkets.

Matching risk with your goals

nvestors can be divided into two broad groups: income seekers and growth seekers.

Whichever you are, it is important to establish your investment goals from the outset. This helps to determine your tolerance for risk, thereby ensuring that you select the most appropriate investments for your portfolio. Risk tolerance is actually one of the most important factors. Traditionally, there is a direct relationship between the amount of risk you take and the amount of potential return you can expect.

 

For example, a 30-year-old, with no financial obligations other than rent and savings in a deposit account, might decide to invest in a pension for later in life. With this long-term investment horizon – 35 years or so – it might be appropriate to take on more risk, as any short-term ups and downs can be absorbed in favour of the potential for higher long-term gains.

However, a 30-year-old receiving an inheritance payment, with which they plan to buy a house in five years, needs to be more cautious. Over this relatively short period, they would be more vulnerable to the ups and downs of the market cycle, and would be best served by a relatively cautious approach that will not put their capital at risk. It is important to bear this relationship in mind when making investment decisions.  Perhaps consider a range of less volatile investments such as cash, UK bonds and UK equities, to build a core, to which riskier options can then be added. These riskier options can then be adjusted as market conditions change.

 

Whatever your age we can ensure that your attitude, circumstances and the investment term is taken into account when reviewing or making investments.  In almost all situations investors circumstances change over time and it is essential your investments change to meet your approaching objectives.

 

If your circumstances have recently changed or you’re anticipating a change in lifestyle in the next few years, such as retirement or moving house, then get in touch so that we can review your finances and update your portfolio if necessary.

Losing out to inflation

Low interest rates are great news for borrowers but for savers, they can have a devastating effect.  With inflation currently running far in excess of base rates, even though the value of your capital may be safe, you need to keep a close eye on the interest rates you are earning to stop, or at least limit the rate at which the buying power of your money is being eroded.

Nowhere is this more apparent than with Cash ISAs. In a recent survey for watchdog, Consumer Focus, over 80% of Cash ISA holders were found to be earning less than just 0.5% a year on their savings. In most cases, the attractive introductory rates which lured savers in had come to an end and been replaced by very low “standard” rates. In some cases this change had even gone unnoticed.

Whilst it is true that, whatever the conditions in the market, most people should hold at least some money in an easy access, readily available deposit account, simply to make sure they can cover unforeseen emergencies and short term needs, any saver with longer term plans should be alarmed by findings like this.  At the very least, you should do a review of the market and see if you can find an account paying more.

In response to the findings, Consumer Focus suggested that: “…customers who have not switched their [ISA] savings may be losing one to two per cent in interest. In total this could amount to as much as £1.5 billion to £3.0 billion per year…” With those potential gains at stake, it is certainly worth shopping around.

In our opinion with inflation close to 5%pa there will certainly be some bank account savers who have lost 10% on their Cash ISAs, in real terms, over the past few years.  It is essential everyone reviews their deposit holdings to ensure they maintain their real value.

More exams on the way…

We are pleased to see everyone in the office studying hard, as we all strive to improve our technical knowledge.

The latest exams are focussed predominately on investments.  Concentrating on the more technical aspects of investment portfolio management, the current studies are designed to help improve everyone’s knowledge of the vast array of investment options we have at hand in order to help reduce risk within our client’s investment portfolios.

I am sure everyone will join us in wishing Jenny, Faye and Jon good luck with their various studies.

Financial Markets remain calm after yesterday’s gains.

After a very turbulent week financial markets bounced back yesterday as illustrated by the gain of around 4% by the FTSE 100.  More encouraging is today’s calm as the same markets have held onto those gains.

The reason behind both this week’s gains and the previous weeks turbulence lies with the politicians as they struggle to deal with the Eurozone debt mountain.

Procrastination by politicians on all sides of the Atlantic has led to the crisis being deferred for a few weeks at a time.  Inevitably this has led to the worldwide financial markets losing confidence in both politicians and Eurozone finance leaders.  The worry is those same politicians and leaders haven’t grasped both the enormity and complexity  of the situation and that they are unable to come up with a credible long term plan to deal with the debt.

In light of this, and last week’s falls in the stock markets, the Eurozone leaders sent out reassurances that they are now putting together some long term plans.  This news alone was enough to lift markets.

As a sign that they are looking to the long term European Commission President Jose Manuel Barrosa today announced a new transactional tax on banks and the ultimate introduction of ‘Eurobonds’.

It is good news that the EC is looking ahead and starting to put together long term plans.  That said, the Bank Tax needs to be adopted worldwide in order for it to work.  In its current state the UK would veto any such taxation policy.

The Bank Tax as outlined would devastate the UK as around 80% of the tax raised would be taken from UK banks.  Ultimately this would cause all our banks to move overseas to cheaper locations.

In summary the bounce in markets is welcome news.  Whilst I am sure there will be further drops in financial markets in the weeks ahead it is good to see the political leaders looking beyond any temporary shoring up of the system.  I feel confident that financial markets will respond favourably as long term plans are put into place.

We are going green…

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Like several of our clients we have decided to embrace the latest technology to help reduce our carbon footprint.

As part of this we are looking forward to the installation of Solar panels at the office this week. At the same time we are continuing our policy of upgrading and replacing the office lighting with low energy LED lights.

Whilst both of these technologies should reduce our carbon footprint, the long term goal is to be self-funding, and ultimately profit generating although only the future will tell.

Rise in State Pension age to happen sooner than planned… Ids2

Iain Duncan Smith, in his role as Work & Pensions Secretary, has confirmed the State Pension Age will have to increase sooner than currently planned.

The previous government brought in the changes to the state pension age and as it stands at the moment the retirement age for both Men and Women increases to age 66 in 2020, age 67 in 2036 and age 68 in 2046.

Quoting the increasing life expectancies and the increasing retired population, which will be further inflated by the ‘baby boom’ generation, Mr Duncan Smith stated that the age 67 increase will have to be brought forward by 10 years.

By implication we can assume the state pension age will be age 66 from 2020, age 67 from 2026 and age 68 from 2036.

That said these dates have yet to be confirmed and there is some hope for Women impacted by the retirement age increase to age 66.  The government has stated it will look at transitional arrangements for Women who have been affected by both the equalisation of state pensions to age 65 in 2018 and the further increase to age 66 two years later.