There Is No Such Thing As A “Low-Risk Investment”
Hello, all. Are we well? Yes? Smashing.
This month we’re having a look at a few really useful areas.
We’ll consider some of the pitfalls to watch out for if you’re making that wonderful move from the world of full-time employment to either part or full retirement (particularly with my take on investing too conservatively), we’ll look at what is potentially a big win for a client of the firm, and your usual dose of good news and recommendations.
Enjoy!
How I invest for my child*
*I say child, there are soon about to be two! Expected due date of the 29th of May. As mentioned in the video below, if you see me shortly after that time the usual bags under the eyes will be a lot more pronounced. Send help.
Surely we will get a better sleeper this time around. Surely. That’s how it works, right?
On that subject, there won’t be a newsletter for the month of June. A welcome respite, I hear you say.
Saving for the Little Ones
Rather than espouse the benefit of this approach or that approach, in this section I’ve simply thrown together a quick video outlining exactly what my wife and I do for our young son.
I hope it’s helpful.
Top 10 Retirement Planning Mistakes
The above is shared from the fantastic Visual Capitalist website.
Now, there’s quite a bit to take away there. The top one won’t be a surprise to any regular reader, as it’s something I’m harping on about regularly. Even in last month’s blog, for example, we considered the potential danger of holding cash over the long term and not accounting for the unseen yet all-powerful ongoing effect of inflation.
The concise version is that not accounting for inflation is surefire destruction of those savings you’ve worked so hard to build up.
Looking at the rest of the list, there are others that are in a similar vein. Number four for example, “investing too conservatively” is very much on brand.
The reason that overly conservative investing can be more harmful than helpful stems from the simple fact that we need growth in our retirement & investment assets.
It’s not a “nice to have”, it is an absolute necessity over the long term. We need the value of our savings to - at an absolute minimum - maintain pace with inflation. Otherwise, we are losing money.
It is that simple.
The more “conservatively” we invest, the less likely it is that our funds will grow as much as we need them to.
It’s odd isn’t it; what we think as a cautious and conservative approach can, in reality, be the exact opposite.
Investing “conservatively” in the traditional sense means owing a portfolio chalk-full of defensive assets like bonds and cash. That is, in my opinion and putting it mildly, “not the best way forward” in retirement.
We need investment growth, and for that we need growth assets such as equities (company shares) and the odd bit of commercial property.
Potential Win for a Client
The rules around pensions, particularly the tax-free cash element, changed on the 6th April. “The Govt changed the rules?” I hear you ask? I know, how unlike them!
Now, for most people this will mean absolutely nothing, and they’ll still get the same 25% that they thought they would. Happy days.
There are, however, a few cases where the new rules are incredibly interesting (honest).
In short, there are some changes to the way that tax-free cash (or not as the case may be – I’ll explain) is accounted for in cases where a person had an old pension(s) that was in payment prior to April 2024.
This is specifically interesting for people with defined benefit pension schemes, assuming they’ve already started to receive the income. These types of pensions are also known as final salary or career average pensions schemes, and it’s not unusual for them not to pay any tax-free cash at all.
The new rules, if no action is taken, assume that a person who started a pension prior to 6th April 2024 did receive some tax-free cash, even if they did not in reality. I’m not going to go into the minor detail and instead simply say that the standard rules assume that roughly 25% of the capitalised value of a pension was received as tax-free cash. Sorry, I know that’s not the easiest sentence in the world.
If a person didn’t receive a lump sum, and keeping this as simple as possible, you can make a claim for tax-free cash entitlement that the system assumes that you’ve had, that you actually haven’t.
You can protect your entitlement to tax-free cash, in other words, and potentially benefit from the new methodology.
Well done if you followed that. Your prize is a 3-hour seminar on the new rules, complete with a pop quiz. Don’t all rush at once, now.
What this has meant for one of the firm’s clients is potentially a big win. We could be looking at an increased tax-free cash entitlement by around £100,000 from the figure pre-April. An extra £100,000 of tax-free cash isn’t a bad win by anyone’s standard.
Delighted for the client, and – if it’s not too much like blowing my own trumpet – a great example of the benefit of ongoing financial advice.
Optimism Prism
Your monthly dose of the good stuff:
Recommendations:
Giving blood. The efficiency of the system a few weeks ago took me by surprise. I was in and out within 45 minutes, and the actual giving blood part took less than 5 minutes. Can’t argue with that. Here is your link to sign up. Cracking selection of biscuits at the end as well.
Liar’s Poker is my latest. An account of working at the infamous Solomon Brother’s during the heyday of the bond market in the 1980s. It’s pretty much what’d you expect, but still a very good listen/read. 4/5 for me.
The compliance bit
• This newsletter is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
• The value of investments may go down as well as up and you may get back less than you invest.
• The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
• A pension is a long-term investment and the value is not guaranteed. Any advice or considerations are again personal to each individual’s circumstances.
