Efficient Wealth Update June 2018
Interest Rates – Not Rising!
There was much speculation that interest rates would rise in May. Even with inflation falling, the consensus was still that rates would rise, but it is not to be so.
Poor weather in March and poor service sector activity in April have stopped further speculation and it looks as if interest rates will remain unchanged at 0.5% for the time being. This doesn’t rule out a rate rise later in the year, which is still under the ‘likely’ umbrella.
No increase in interest rates is good news for those with tracker mortgages, as these won’t increase as soon as was expected. However, it’s bad news for those with cash in the bank, as the returns will remain as gloomy as they have been so far this year.
Financial Basics – Need to Know!
A hot topic at the moment is the fact that many adults are not able to carry out basic financial calculations, and do not have the knowledge to understand everyday banking and financial matters. It is estimated that 49% of working-age individuals find the idea of managing their money daunting and have a numeracy level equal to that of primary school age children.
It is thought that this is at the root of the PPI scandal – extra charges that were added to loans and credit cards were missed by those who could not calculate what the overall or monthly interest rate charges should be … as well as the fact that the companies were not forthcoming with the information.
After much campaigning, the government added finance to the National Curriculum, but failed to support this with sufficient funding. Consequently, it has not been properly implemented and therefore will not be effective.
So, here are some basic terms and concepts you and your family should know:
If you have £1,000 in a savings account that pays 3% per year, in the first year you will earn £30. Assuming the £30 is left in the savings account, 3% on £1,030 will be £30.90. By the tenth year the interest would be £52.61 per year.
You are effectively earning interest on your interest.
Fees and Costs
Make sure fees and costs are as clear as they can be and do not be fooled by what sounds like a good deal. Ensure that comparisons are like for like: if product 1 has a fixed fee and product 2 a percentage fee, convert the percentage fee to a fixed fee before comparing the products.
For example, you have £100,000 to invest in a savings account. Product 1 charges a flat rate of £100 per year, therefore the cost would be £100 per year. Product 2 charges 0.25% per year, therefore this would be £250 per year. Product 2 is therefore much more expensive than product 1.
ISAs and Pensions
For a more in-depth look at the pros and cons of ISAs and pensions, check out the April edition of the Efficient Wealth Update, but, in short, if you don’t use your annual ISA allowance and annual pension allowance you are missing out on valuable tax-efficient benefits (depending on your circumstances of course!).
Don’t get caught out when fixed-term deals come to an end. Most providers automatically transfer accounts to their standard tariffs, which are normally at least three times more expensive than the best deals, in the hope that either you won’t notice, or you won’t have the time or inclination to do anything about it. This applies to energy suppliers, mobile phone tariffs, tv packages and mortgages.
Inflation must be taken into consideration when looking at your ‘real returns’. A 2% interest rate from the bank is all well and good, but if inflation is 3% per year then you are actually losing money at a rate of 1% per year – not so good.
To help teach youngsters (and the not so young for that matter) more about these concepts, last year we published ‘SMART Money: How to Create Financial Freedom’. You can download your very own, free copy here: https://charlotte1da739.clickfunnels.com/lead-magnet16851788)
Wills – Things to Consider
Wills are much more important than people think, yet 60% of the UK adult population still do not have one!
Writing a Will forces us to think about our own mortality, which is not something that most of us want to do. This is usually why the task is postponed – as well as people believing that they are not wealthy enough to warrant one in the first place.
Now is the time to stop putting off the inevitable. We will all need a Will one day, so why not bite the bullet and put one in place? It creates peace of mind for you and will likely make things considerably more straightforward for those you leave behind.
Here are some tips and considerations to keep in mind:
Get a professional to do it.
You wouldn’t perform surgery if you weren’t a surgeon, so while you may think that it is straightforward, it is best to seek out someone who really knows what they are doing. This will help to avoid any issues in the future.
Make sure you get the right type.
Surprisingly, there are different types of Will. Which is the correct one for you will depend on your circumstances, so ask the person who is putting it in place to make sure you have the right kind.
Avoid silly mistakes.
Having a professional draw up your Will can ensure that silly mistakes are avoided, which could cause complications in the future or could even make your Will invalid. Things such as spelling mistakes are annoying but not disastrous if they don’t change your intentions, but things such has not having two witnesses can completely invalidate your Will.
Make Lasting Powers of Attorney.
It is all well and good sorting out what happens when you die, but what about sorting things out while you are still alive? Lasting Powers of Attorney allow someone to act on your behalf if you do not have the physical or mental capacity to attend to your own affairs.
There are two different types – one to deal with your property and affairs and one with your health and welfare.
Keep them up to date.
There is little point in having a Will if it is not updated with your changing circumstances. Things such as marriage completely invalidate a Will, so be aware of any changes in your life that may mean your Will needs to be changed. If you store your Will with a company they sometimes offer a free rewrite, so if you need to make changes contact them first.
At the time of writing, 2.5 million TSB customers are unable to access their bank accounts. Those who have been able to access them have been met with wrong account balances, wage payments missing from accounts and direct debits bouncing. In addition, the bank’s own internal systems have also been affected, meaning that it has not been possible for customers to resolve the issues even by visiting a branch.
The problems were caused by a system upgrade, and similar upgrades across the financial sector have brought similar problems – most recently with Aviva.
TSB customers have started to take drastic action and have approached switching sites to move their accounts to rival establishments. Whether or not they will be successful is yet to be seen but it is safe to say that trust has been damaged, maybe irreparably.
As demand for increasingly high-tech IT grows, the pressure on providers to keep systems up-to-date grows with it. Therefore, regular updating and upgrading will become more frequent, which may mean potentially more problems in the future.
Hopefully, those customers affected will get compensation for their inconvenience, and the systems will be up and running soon with no money going ‘missing’ in the process!
It took weeks of negotiations for a populist coalition to take shape in Italy after the recent elections ended in deadlock, but now the president has controversially vetoed that Italy is back to square one – an interim government (not yet in office) before fresh elections. These political developments have rocked Italy’s stocks and bonds, as well as rippling outwards into the wider European market. We may not yet have seen the end of this adjustment and increased market volatility is likely to persist. The uneasy position of the Italian market within Europe as a whole has been widely recognised for a while now, especially after their banks were the biggest failures of the ECB’s stress testing a couple of years ago. We may look back on the current turmoil as a great buying opportunity but, for now, it is difficult to choose the best time to catch the proverbial ‘falling knife’. As it stands, we are not heavily exposed to the Italian market, and the ECB’s ongoing policy of QE lends a measure of protection to the small amount of exposure we do have. Together with our DIMs, we will be keeping an eye on the situation as it develops and will make further changes to the portfolio if we feel that the situation deteriorates and causes unacceptable risk levels.
Notes on Brexit
The focus for all Brexit watchers over the last month has been the remarkable outcome of the Withdrawal Bill passing through the House of Lords. In all, 316 amendments were tabled for consideration and, across the multiple readings of the Bill, a staggering 201 amendments were made.
The main changes include: ensuring that EU laws around employment rights, equality, consumer standards, health and safety standards, and environmental standards can be amended, repealed or revoked only by primary legislation; ministers can make regulations to correct deficiencies in retained EU law and consequential regulations only when it is ‘necessary’ rather than ‘appropriate’; Parliament should have a meaningful vote on the outcome of the negotiations; a fixed ‘exit day’ was removed from the Bill; a provision was made for the continuation of North–South cooperation and the prevention of new border arrangements in Northern Ireland; and a ten-year sunset clause has been included in the delegated power to make consequential provisions after the Withdrawal (meaning further changes to laws cannot be made over an unspecified amount of time).
We now enter into a House-to-House ping-pong, where each considers the amendments or objections made by the other, until all is agreed or there is a deadlock; if a deadlock is reached then the Bill will fail. We continue to watch the action as it unfolds.
Book of the Month
This month’s book recommendation is ‘Sleep: The Myth of 8 Hours, the Power of Naps… and the New Plan to Recharge Your Body and Mind’ by Nick Littlehales. Bearing in mind we roughly spend 1/3 of our life asleep, it makes sense to understand it a little better. Some of us sleep well, others not. Some can cope with little and others not. Some of us are ‘Ambers’’ and some ‘PM’ers’.
Littlehales, the former sleep coach for Sir Alex Ferguson’s Manchester United, Arsenal, Real Madrid, the British Cycling Team under Dave Brailsford, and many more, does an excellent job of helping you understand more about your sleep. He also dispels lots of the myths and shows you how you can manage those times when you have less time to sleep, and how you can ensure we all get the sleep we need. See my Mini Blog to see how it has already helped me.
Charlie’s Mini Blog
When I was lucky enough to beat the online crowds and get tickets for Caryl and I to see Ed Sheeran at Wembley on Friday night, I was rather pleased with myself. That is, until they announced the date of one of my 2 main triathlons for this year: The Dambuster, which was going to be the day after.
Driving back from Wembley meant we wouldn’t get home until 2am, so needing to be up before 5 the next morning to go and compete in a triathlon was not the ideal prep for trying to set a PB. In the lead up to this, I was by coincidence reading Nick Littlehales’ book ‘Sleep’ and so I decided to employ his tactics. In the book he talks about the importance of 90-minute sleep cycles, of power naps and sleep strategies to help you
So, I planned a power nap the day before and the day after. I made sure I awoke at the end of a 90-minute cycle, and I stuck rigidly to the pre-sleep routine. Not only did I feel great competing, I did set a new PB of 2 hours 37 minutes (for 1.5km swim, 42km bike and 10km run); I was also there to see my daughter perform in Peterborough in the afternoon and attend an Old Oakhamian drinks event in the evening.
It just goes to show, with careful planning you can achieve so much more. The same applies to your money, which is why financial planning helps you create a better future!