Here we look at some terms that often crop up in financial reports and explain what they mean.
Gross Domestic Product (GDP) is a way of measuring the health of a country’s economy and represents the total value of everything produced by the companies, including those that are foreign-owned, and the citizens of the country. It is used as a broad measurement of a nation’s overall economic activity, as well as a gauge of a country’s standard of living. It can be compared year on year, or with other countries, to chart progress.
This is debt issued by national governments, in short, an IOU that can be traded in the financial markets. If governments are looking to raise money, they often do so by selling bonds. In the UK, government bonds are referred to as ‘gilt-edged securities’ or often just ‘gilts’. They are considered low risk.
GUARANTEED INCOME BONDS (National Savings & Investments)
These produce a guaranteed income from a fixed-term investment – typically three to five years. The income can be paid monthly or annually. These are generally considered low-risk investments, but penalties may apply for early withdrawal.
There’s growing evidence that pensioners are treating their pension pots more like bank accounts. In the second quarter of this year, savers withdrew £2.3bn, according to data produced by HM Revenue and Customs, an increase of 35% on the first quarter.
The money withdrawn represented full or partial withdrawals, flexible drawdown or the purchase of a flexible annuity, with more younger people accessing their pensions, often before state pension age.
HOW CHASHFLOW PLANNING CAN HELP
Planning your likely cashflow can help you identify how much you can sustainably withdraw from your pension, without jeopardising your future financial security and wellbeing.
Cashflow planning is a key part of establishing a retirement plan and entails taking an in-depth look at your finances. It takes into consideration income, outgoings, assets and liabilities, and helps you plan effectively both for current needs and future requirements, like care in old age. It can also help you take decisions like whether you should downsize at retirement, or how much you can afford to give to family members during your lifetime.
Life is full of twists and turns, some of them good, others not so good. Protection policies are one of the best ways of ensuring your family is provided for financially, if unexpected and unwelcome events should happen. Policies can pay out lump-sums or provide an income to ease the financial burden at a difficult time.
It seems that the message that it’s important to have the right type of protection policy in place is being listened to. Recent data from financial software company IRESS, shows a positive trend in the sale of protection products in the first six months of Life term insurance and Income Protection saw the largest year on year increase in new business, up 35.1% in the first half of 2018 compared with the first half of 20176.
Insurers believe that this rise is due, in part, to greater health consciousness and a better understanding of the part that protection policies can play in keeping a roof over a family’s head and ensuring that household bills can still be paid if death or illness were to strike.
If you’d like advice on choosing the right insurance cover, do get in touch.
Before the financial crisis in 2008, many borrowers opted for an interest-only mortgage. This was a cheaper option for them, as they only paid interest each month. Borrowers were expected to have adequate plans in place to repay the capital at the end of the mortgage term, as was the original intention with endowment mortgages. Lending wasn’t as tightly controlled at that time, and it subsequently became clear to the government and the regulators that some of these loans were at risk, as borrowers didn’t actually have sufficient resources to repay the capital when it became due.
CHANGES IN AFFORDABILITY CRITERIA
Lenders have become increasingly aware that some people with interest-only mortgages that are due to mature over the next few years are likely to face difficulties. They are engaging with them and providing information on alternatives such as repayment or lifetime mortgages (a form of equity release) in order to avoid the risk of borrowers defaulting and having to sell their property in order to repay the loan.
In 2014, the Financial Conduct Authority’s Mortgage Market Review introduced new criteria on lending risk and mortgage affordability. As borrowers were now subjected to more rigorous checks, interest-only mortgages became much rarer.
More lenders returning to the market Several mortgage lenders are now offering interest-only mortgages, taking the view that there is nothing wrong with the concept, as long as the borrower can show that their application is backed up by clear plans to repay the capital. Borrowers who are likely to be granted this type of mortgage are older, with larger deposits and higher incomes, with assets available to repay the loan.
If you would like to know more about interest-only mortgages, or are considering your repayment options on an existing interest-only mortgage, get in touch.
As a mortgage is secured against your home or property, it could be repossessed if you do not keep up mortgage repayments.
Think carefully before securing other debts against your home. Equity released from your home will be secured against it. Your home may be repossessed if you do not keep up repayments.
Buy-to-let landlords could be said to be facing hard times. They are set to find their income tax relief on mortgage interest restricted to 20% by 2020, and have been hit by higher Stamp Duty (and equivalent taxes in Wales and Scotland), combined with the recent rise in interest rates.
Buy-to-let mortgage completions fell by more than 11% year on year to June5, as the new tax rules continued to bite. Many landlords are considering re-mortgaging rather than taking out loans for new property purchases.
More landlords are setting up as limited companies; 18% of private rentals in England are now owned by limited companies.
NEW LICENSING REQUIREMENTS
With many councils now introducing licensing schemes for private landlords, (over 70 have already gone down that route) more landlords will be required to hold a licence from the local authority where the property is located. In addition, the criteria for Houses in Multiple Occupation (HMOs) will be broadened from October this year. Any property occupied by five or more people from two or more households will be considered an HMO. This brings additional fire, gas and safety obligations.
A BAN ON LETTING FEES
In 2019, the proposed ban on residential letting fees for tenants is expected to come into force (Scotland introduced a ban in 2012). Whilst tenants will still be expected to pay rent, security deposits and holding deposits, default charges and fees to vary or terminate their lease, no other fees will be allowed. This could see letting agents passing on costs for reference checks or application processing to landlords.
There are also proposals being discussed to introduce compulsory three-year contracts for residential lets in England. These would include a break clause which would allow tenants to end their agreement earlier if they wish to.
5UK Finance, Aug 2018
With investing, the old saying ‘don’t put all your eggs in one basket’ rings true. To improve the potential for long-term gains and spread risk, the best advice is to diversify your investment across a range of companies, asset classes and geographical regions. This helps to minimise the impact a poor performing economic region or company may have on your overall portfolio.
When it comes to choosing asset classes there are the ‘traditional’ asset classes – cash, equities or shares and bonds – together with commercial property and commodities.
The advantage of cash is its liquidity. Money held in cash accounts can be accessed easily and resent a low risk for the investor.
Bonds or fixed-interest investments. These are investments that provide a fixed, regular income over a set period of time in the form of interest. Some are government-backed.
STOCKS OR EQUITIES
Equities are shares of ownership issued by publicly-traded companies that are bought and sold on stock exchanges. You can potentially profit from shares through a rise in the price or by receiving dividends from them. Of course, you also risk losing your money too if the stock performs poorly.
Investing in property can be as simple as owning your own home. However when it comes to portfolio investments, typically property investments are made in commercial property. This includes warehouses, offices, industrial estates and shopping centres, often owned through pooled investment funds.
OTHER ASSET CLASSES
This category covers investments that don’t fall into the main asset classes shown above, and can include commodities such as oil or gold, foreign currency, or even art and antiques. These are generally high risk because their value depends on conditions within a specific market.
The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.
According to recent research2, the amount needed to fund a comfortable retirement, when someone opts to stop work at 65 and decides to buy a single-life annuity with inflation protection, has now reached £260,000. The report points out that for those who don’t make it onto the housing ladder and so will need to pay rent during their retirement years, the figure will be even higher at £445,000. In arriving at these figures, the research assumed average earnings of £27,000 a year, and a full state pension of just over £8,500.
SAVING FOR RETIREMENT
The sooner you start your pension plan, the longer your money will have in which to grow. Even in today’s climate of low interest rates, compound interest and reinvested share dividends can play an important part in investment growth.
One of the most attractive features of pension saving is the tax relief. If you make contributions to a pension, or if your employer deducts your payments from your salary, you automatically get 20% tax relief as an additional deposit into your pension pot. If you are a higher-rate taxpayer you can claim an extra 20%, while those paying additional-rate tax can claim back an extra 25%. When you retire, you can usually take 25% of your savings as a tax-free lump sum.
If you save into a workplace pension, your employer should match some or all of your contributions, providing a welcome boost to your pension.
GETTING THE RIGHT ADVICE
So, if you’re self-employed, an employee, work part-time, run your own business or have accumulated pension pots with past employers, we can offer you the advice you need to make sure you have the right pension plan in place. After all, we’d all like our retirement to be an enjoyable and fulfilling stage of life, not a time spent worrying about money.
2Royal London, 2018
Having a mortgage is a huge responsibility, especially when you consider the amount of money you will have to repay over the coming years. However, as we all know, life can have its ups and downs.
That’s why financial experts always recommend that if you have a mortgage, you should also have some insurance protection in place that would provide an income or pay out a lump sum in the event of an illness, accident or death.
According to a recent survey amongst mortgage holders, 42% don’t have a life insurance policy in place, 71% have no critical illness cover, and 81% don’t have any income protection in place2.
Inertia plays a part in these findings: 20% of full-time working people questioned for the survey recognised that they would benefit from having insurance protection in place, but hadn’t got around to arranging it.
We will be able to recommend a policy that’s cost-effective and provides the right type and level of cover for your circumstances. If you’d like some advice, get in touch.
2Royal London, State of the Protection Nation, 2018
As a mortgage is secured against your home or property, it could be repossessed if you do not keep up mortgage repayments
The government estimate that there are 4.2m leasehold residential properties (one-third houses and two-thirds flats) in England, and around half of these are on leases with less than 80 years remaining. Ground rents average £370 per year.
Last year, the-then Communities Secretary, Sajid Javid asked the Law Commission to look at ways of making buying out a leasehold to gain the freehold easier, faster and cheaper. This was in response to a rising tide of public concern about the high prices some homeowners were being charged and the rates at which some ground rents could escalate.
One of the proposals that it has put forward is to introduce a simple formula that would mean eligible leaseholders would pay just ten times their current ground rent, or 10% of the value of the property, to convert their property from leasehold to freehold. It also proposes removing the current requirement that leaseholders must own the lease on their property for a minimum of two years before they can buy their freehold.
The consultation on this complex area of property law is ongoing, and any new rules are unlikely to come into force before next year.
Economic Review October 2018