Can you ever have too many cushions?

I pulled a muscle in my back recently. Determined to implement at least one of the multifarious Just-One-Things that we can all supposedly squeeze into our daily lives, I dropped to the floor in between popping to the loo and putting a wash on to do a small number of press-ups (knees on the floor, obvs – I’m not stupid). As a consequence, I’ve been making use of a cushion as I sit at my desk, and it has occurred to me that I don’t ordinarily need a cushion. Mostly, they are just there for show.

Enough cushions for all – but no more than that

I warn you now that I am going to flog this cushion thing to death in the next few paragraphs because, the more I think about it, the more apt the word cushion becomes when we are talking about emergency stashes of cash. I’m super grateful for the little cushion at my back right now – it is serving the purpose for which it was intended and very much coming into its own. Happily, if every member of my family were to succumb to the temptation to overreach themselves in the pursuit of physical betterment, we would have enough cushions for all. However, do we really need any more than that? As a guest in someone else’s house recently, I had to put some cushions on the floor because they were preventing me from sitting on the sofa. Definitely too many cushions.

Women like cushions more than men

Sadly – and this is surely an omission on the part of the Office for National Statistics – I could find no data for the gender split in cushion ownership. However, in January this year, Boring Money research* found that 19% of women in the UK aged between 25 and 44 were investors in stocks and shares versus 34% of their male counterparts. Yet when it comes to saving cash, women consistently outstrip men**. Call me bold but I’m going to stick my neck out (as far as my pulled muscle will allow) and say that women like cushions more than men (you can read that sentence any way you like!).

Beware inflation nibbling holes in the cushions

Whatever you name it, an emergency pot of cash that you can reliably get your hands on in a hurry is considered a must-have when planning your finances. We are taught at How-to-be-a-Financial-Adviser School that building a cushion to absorb financial shocks – such as the loss of earnings or an unexpected car failure – should be the first use of ‘spare’ money. The rule of thumb for earning households is that you should keep cash of between three and six months’ essential spending (think mortgage, heating and food, but not gym membership, take-away coffees or Track Days in your Porsche). Once you have that cushion stuffed – and assuming you have all your day-to-day finances in order – you can think of more long-term ways of saving spare money, such as investing, whether that’s in your pension or a Stocks & Shares ISA or other type of account. Because keeping money in cash that you are unlikely to need in the next five-to-ten years is a sure-fire way of losing value as inflation nibbles holes in it faster than it can earn interest.

What will the sofa look like without them?

This usually makes perfect sense to people and sounds great in theory. Where we can stumble is in the discipline required to stop stock-piling the cushions and make the leap to investing, Those cushions are just so darned plump and attractive. The idea of taking one or two away can be tough and, even though you know it won’t affect your level of comfort in any way, you’re scared of how the sofa will look without them.

Left alone in the box room

People also worry about what happens if the dog, cat or gerbil tears the odd cushion to shreds. Surely you should always keep more than you need for exactly this reason? Well, not necessarily. Yes, it’s good to have resources beyond the emergency cushion quota, but these are better kept as long-term investments – for example in stocks and shares where they have the potential to grow over time and keep pace with inflation. You might need to call on them now and then to replace the odd cushion that has had the stuffing knocked out of it, but the rest of the time they can be left alone in the box room that no-one uses to quietly do their thing until you need them.

Short-term money languishes on the sofa doing nothing

That said, sometimes the best way to deal with an abundance of cash savings is not to invest it but to spend it. This might be if you are retired, for example, and already have investments that you are currently drawing from for spending money – for example a drawdown pension. If you have large amounts of cash (ie a good deal more than you really need for emergencies) but are taking an income from investments, you are effectively spending your ‘hard-working, long-term money with growth potential’ whilst your short-term money languishes on the sofa. And it doesn’t matter how much cushion-plumping you do, it will never get any bigger than inflation. Using surplus cash for spending instead of (or alongside) drawing from investments can make particular sense if investment markets are having a wobble – because it means you can leave your investments to recover rather than selling them when their value is low.

Death throes on a bed of cash

A cushion-loving client told me recently that she feared she had passed on her cash-bias to her daughter who, upon buying her first house with the deposit she had been saving so hard to accumulate, then proceeded to mourn the loss of cash in her account. I know of my own fledgling adults that they struggle to adjust mentally to the loss or shrinkage of a cushion, even when it has been spent on the very thing it was there for. But if you take that mindset to its ultimate conclusion, you will be encountering your death throes on a bed of cash that has lost so much value to inflation that you might as well pop it in the coffin with you.

Changing your mind about what you own

There is a magnificent study of the mind games we play with ourselves when it comes to money in a short novel written in the 1930s called The Midnight Bell (Patrick Hamilton, the author, is the man who wrote the play Gaslight, the title of which has come into common usage to mean tricking someone into thinking that they are losing the plot). Having worked hard and saved his wages, the main character goes off track (blame women and booze – this was the thirties, after all) and starts dipping into his savings to make ends meet. Rather than feel the loss of his money, he just readjusts how he regards himself so that, where previously he was a man who had, say, eighty pounds of savings, now he is a man with seventy-five pounds of savings. And as these savings are in a bank, rather than a pile of cash under his mattress, he bolsters his reasoning with the fact that the numbers are hypothetical and he has simply ‘changed his mind’ about what he owns.

Just enough cushions plus the materials to grow more

Now, I’m not advocating that we all go out and spend our emergency cushions on women and booze, but I do think we could learn a trick from this. If you find yourself hoarding cash that is more than you are going to need in the next few years, you can try readjusting your thinking. Instead of being a woman with so many cushions that there is nowhere to sit down, you could become a woman who has just enough cushions for every bad back and pulled muscle the sofa can accommodate as well as being the proud owner of a box room of assorted fabrics and stuffings where more cushions can be made.

I have to stop now because I’ve used the word ‘cushion’ so much that it has gone all weird on me. If you think you might benefit from a chat about making the leap to investing, please do get in touch. I’ll be on the sofa.

 

*Women’s lack of confidence widens gender investment gap, study finds (ft.com) March 2024

** The gender savings gap: Men are more likely to invest in an Isa while women opt for cash | This is Money

carole@talkingfinances.co.uk

www.talkingfinances.co.uk/blog/

Talking Finances is a trading name of Talking Finances Ltd. Talking Finances Ltd is an appointed representative of Parallel Lines The Advisor Collective Ltd, No.2 Sopwith Court, Slough Road, Datchet, Berks SL3 9AU, which is authorised and regulated by the Financial Conduct Authority. FCA Registration No. 967228

This article represents the personal opinion of Carole Haswell only and does not represent any opinion of Parallel Lines the Advisor Collective Ltd. Financial decisions should not be made on the basis of this article.

Past performance is used as a guide only. It is no guarantee of future returns.

Your investment can go down and you may not get back the full amount invested.

This blog is for general information only and does not constitute advice.

Don’t jump!

As I write, global stock markets are playing a one-sided game of snakes and ladders. And it’s not a good look. If the old adage that women save, men invest is still holding up, there could be a fair number of women rolling around in the I-told-you-so aisles right now. They might go as far as to taunt hapless investors with the odd jibe about their guaranteed 6% return over the next 12 months*. But would they be right?

What do you want?

As ever, there is no simple answer. So much depends on what you want your money for and when you want it. Let’s say you have some cash that you know you’re going to need in the next few years for a specific purchase – such as repaying a loan (snore) or taking that essential trip to Bali (yay). If you know you can tie it up in a savings deposit account for one or two years and get a guaranteed rate of return, then that’s a good bet. There is certainty and very low risk.

It looks greener on the cash-side

But what if you had a sum of money that you invested a couple of years ago in a well-spread portfolio of investments – investments that are being managed by professionals in a way that suits you – and that you still don’t need for anything specific? You could be forgiven for looking at the numbers on your statement right now and feeling somewhat let down. Not only that, but the cash-side of the fence looks a heck of a lot greener and you might be tempted to jump.

Keep sight of the long-term plan

I’ve got a couple of things to say about that. One is that this would be a bit like choosing a degree in Computer Science that you felt would set you up for an AI-dominant future but swapping courses half-way through because the Drama undergraduates are doing a module this term that looks like fun. In other words, ditching the long-term plan for a bit of short-term shenanigans. You have to know that the attractive cash rates are on the table right now for the same reasons that the investment markets are wobbling (more of that in a bit) – so, when things change, it might be tricky to hop back into the markets at the same price that you left them. In other words, the Computer Science course might have got oversubscribed while you were giving your best Desdemona on the Drama stage and, as a consequence, the tuition fees have gone up!

Cash is cash, assets are things

The other thing is that cash is just money – what you see is what you get – whereas investments are things (or, if you want to get all investment-y about it, assets). If you sell your investments now – possibly at a lower price than you paid for them – you are making those losses REAL. Think of your investments as tiny Monopoly houses (who doesn’t love those little widgets?). If you take money out of your investments, you will have fewer of those wee dwellings left in your pile. When things turn around (and, historically, markets have always recovered – we just don’t know when), there won’t be as many of them to benefit from a rise in value.

Timing the market is no small ask

Ideally, we would all know exactly when to buy our investments at the lowest values (ie when the share prices are in the doldrums and no-one else wants to invest) and sell them at the highest values. But doing this is no small ask of anyone. Stock market values can change very rapidly – often within the time between making a decision to buy or sell and actually making it happen. If you are trying to hop in and out of cash and investments successfully, you can end up losing out on sharp gains in values that happen in a matter of hours.

Why don’t we meet at 10:33?

It is very difficult to keep our emotions out of this kind of thinking. When we are faced with something like a 12-month timeframe where we know we can earn 6% on our money, we want to compare other options in a similar window of time. If our investments don’t perform as well in those exact dates, we see this unfavourably – even if we have no intention of selling those investments yet. I’m reminded of the observation that arranging to meet someone at 10:33 is no more or less precise than arranging for 10:30 – it’s just that we like to use order and systems to help us process our thinking and kid ourselves we are making informed decisions.

What do you want (again)?

In fact, the only information you need for these kinds of decisions comes back to what you want the money for and when you need it. And that brings me back to the point I nearly made earlier before I got side-tracked by Drama degrees and Monopoly houses. What is making the investment markets so miserable right now? And how does that relate to how much you can earn in a cash deposit account? And how does that, in turn, inform your decisions about what to do with your money?

The bones of the matter

There’s a bit of knee-bone-thigh-bone connectivity going on here, which can be simplified like this (and I’ve put a bit of meat on those bones after):
• Why are investment markets down? Because interest rates are high.
• Why are interest rates high? Because of inflation.
• What does inflation do to our cash? It devalues it, so we need to invest it in things that can grow when prices are going up.
Given all of that, does it make sense to sell investments when inflation is high just because you can get a better rate in cash than you used to be able to? Probably not.

Share prices go down when growth gets more costly

You might ask why, then, doesn’t everyone want to pile into investments right now? In other words, why are the prices of shares going down instead of up? This is because it’s the markets’ job to place values on all of those Monopoly houses based on information that is in front of them today. Investors are looking for companies that can do well in the future – ie grow their profits and share those profits with the shareholders – but, in order to grow, companies need to borrow money. And when interest rates are high, borrowing money costs more (mortgage holders can relate) and so those companies could have less profit to share. Consequently, their share price goes down.

Sit tight and ride it out

Once borrowing costs – aka interest rates – look like they are going to come down, however, the markets will favour these companies again and share prices will go up. There are some investors who believe themselves to possess superpowers of nimble-ness and clairvoyance and will try to “time” all these ups and downs by buying and selling on speculation about where the markets might be headed. For most of us, however, the sensible thing is to sit tight and ride it out.

6% is good – but it’s all relative

But what about those juicy cash savings rates out there? Shouldn’t we be trying to take advantage of these? Well, yes, if you are keeping savings in cash because you need it soon, but if this is money for your future that you won’t be needing for five years or so, then here’s the thing. It’s true that 6% looks good compared with the zero-point-zero-nothing we became used to until recently – but that was when inflation was at a similarly low ebb in its fortunes and our money was holding its value. At its peak last year, inflation was running at over 11%**. So, if you want your cash to keep pace with that, you need a savings rate to match it. The truth is, the rate of interest on your savings is unlikely to ever fully compensate for how much more you are paying for things when inflation is high. This is especially the case if you leave your money in cash for a long time. And it is why, when someone has a longer timeframe for their money, investments are considered more appropriate: ‘things’ – or ‘assets’ – have the potential to grow at or above inflation. Cash doesn’t.

So, there you have it. Now you’re equipped for a degree in Economics – if you hurry you might make the start of the autumn term. Just don’t get side-tracked along the way.

carole@talkingfinances.co.uk
www.talkingfinances.co.uk/blog/

*Until this week, NS&I were offering 6.2% in their guaranteed growth bond if you tied your money up for 1 year.
** Office for national statistics data 12 months to October 2022 Consumer price inflation, UK – Office for National Statistics

Talking Finances is a trading name of Talking Finances Ltd. Talking Finances Ltd is an appointed representative of Parallel Lines The Advisor Collective Ltd, No.2 Sopwith Court, Slough Road, Datchet, Berks SL3 9AU, which is authorised and regulated by the Financial Conduct Authority. FCA Registration No. 967228

This article represents the personal opinion of Carole Haswell only and does not represent any opinion of Parallel Lines the Advisor Collective Ltd. Financial decisions should not be made on the basis of this article
• Past performance is used as a guide only. It is no guarantee of future returns.
• Your investment can go down and you may not get back the full amount invested.
• This blog is for general information only and does not constitute advice.

Who wants some advice?

The heart of Talking Finances with Women

It’s a glorious summer’s day and I’ve just taken a break from the computer to have my coffee outside. The warmth of the sun has made me reflective and the caffeine has spurred me to action. It’s been a while since I’ve posted and I feel the need to share a couple of recent experiences that sit at the heart of Talking Finances with Women.

The first has to do with conferences – the kind that financial advisers and planners like me get invited to from time to time. I’ve attended two in the last month and I’m going to briefly describe them for you:

  • One was about pension tax
  • The other was about imposter syndrome, personal values, self-belief, acceptance … and pension tax
  • One was led by a male speaker who addressed a room full of people of whom five were women
  • The other was led by a number of female speakers who addressed a room full of people of whom five were men.

A world that remains stubbornly male

I think you know what I’m going to say now. For the avoidance of doubt, it contains the words “no”, “prizes” and “guessing”. Events aimed specifically at women in the advice industry are rare and well received. It was an all-dayer and there were plenty of opportunities for us attendees to mingle and chat and share our experiences, thoughts and frustrations at a world that remains stubbornly male (in 2020, it was reported that just 14% of financial advisers were women)*. So, applause all round. Yes, events like that are a good thing.

And yet.

No amount of cinnamon swirls will solve the problem

I couldn’t help wondering if that same conference wouldn’t be better be aimed at the men dominating the advice world. So much of what I read and hear about the way that women are under-represented and under-served in the world of financial advice is preaching to the converted. Don’t get me wrong, I love a chinwag with a Fellow Female in Finance over a coffee and a pastry along with the best of them. But there’s no amount of cinnamon swirls that will solve the problem at its most basic level: many women who need financial advice don’t know where to go, what to expect or even whether they ‘qualify’ for asking for it in the first place (it’s not just the female advisers who suffer from imposter syndrome!). Some of this has to be down to the way that financial advice is perceived by the outside world.

‘Women save, men invest’ with local women in their seventies

Which brings me to the second experience I wanted to share. A couple of weeks ago I spent a hugely enjoyable couple of hours with a small group of local septuagenarians who had requested one of my ‘Women save, men invest’ workshops. We talked around budgeting, saving, investing, risk, tax wrappers, interest rates and inflation. But although these topics were all covered, the actual conversations ranged from widowhood to housekeeping allowances, shopping for bargains, grown-up children settling all over the world, keeping cash stashed in unlikely places and the “awful” and “confusing” adverts that we see for financial products, none of which we could actually remember or identify! On walking in at the start of the workshop, one of the attendees declared how nice it was that this was just for women because, as she put it, “you know, women understand women”.

Not brought up expecting to invest

I’m going to caveat this with an observation that this is a viewpoint that seems to grow with age. Which kind of makes sense because it is our life experiences that shape us and, the older we get, the more of these experiences we have had – many of which are unique to women. And it’s as much about the experiences we don’t have as the ones we do. If we weren’t brought up to expect to be making investment decisions in our lives or be paying for financial advice – maybe because the other women in our family weren’t doing these things either – then it can be a daunting leap.

What the “how” questions tell us

I was struck at the workshop by the number of “how” questions: “How do we do that? How can we access that? How does that work?” I recognise this in myself – a real need to understand the unknown and to go in with eyes open, which I think comes from a fear of being out of our depth, of straying into unchartered waters or of being chased by sharks (too many watery references, sorry, blame the heat!). What we want is to be able to confidently access the help we need without feeling judged or without making mistakes. What we don’t want is to be asked questions that we don’t feel are relevant or give answers that will misrepresent us or lead us in the wrong direction. And when we feel like that, very often, we do nothing.

Muddied waters

Financial advisers need to get much better at explaining exactly what we do. But where an estate agent, for example, can say that they help their clients to buy, sell or rent houses, advisers are faced with such a long list of possible things that they help their clients with that the waters get muddied (sorry, there I go again) before we’ve even started.

To do: ‘Sort out finances’

Yes, a lot of what we do involves the technical aspects of pensions, investments and tax – but it’s far from the whole story. More often than not, it will be something in a client’s life that prompts them to address the ‘Sort out finances’ item that has been languishing on their to-do list. It’s life that brings them through the door, not an in-depth knowledge of hedge funds.

So, instead of listing the solutions that an adviser can offer, I’ve gone for a list of circumstances that typically drives someone to find out if they could benefit from paying for a service that gets their finances on track and keeps them there.

  • A change in life circumstances, such as a new job, parenthood, divorce, bereavement, inheritance or blending families – how do my new circs affect my lifestyle and how I pay for it?
  • Mid-life – I’ve just realised that I won’t live forever and need to make sense of these unfathomable pension statements so I can see how long I will work for
  • Coming up for retirement – what options do these unfathomable pensions give me and how can I make sure I have enough to live on?
  • Saving for something in particular – is my money invested appropriately and in the right place given what I need it for?
  • Helping others – how can I support my children or grandchildren as they start out in life?

You’re the one doing the hiring

I know that some women worry that they don’t ‘fit’ or that they haven’t ‘got enough’ to merit paying for financial advice. If it helps, when you are looking for an adviser, think of it like a job interview – but you are the one doing the hiring. Check out their website, see if they are upfront about their fees and give them a call. If they are decent people, they will happily give you an hour or so their time to listen to where you are in life and tell you if it will be a good use of your money to pay for their service. If it turns out it’s not for you, no harm done but you may well have a better idea of your options and where to go for a more cost-effective way of sorting things out.

Keeping it real

There are many reasons why some women feel uneasy about seeking advice – which is why I believe the service should feel like something that is relevant to their life. ‘Keeping it real’ is the best way to broaden someone’s understanding of things like pensions, investing, risk and tax so that they feel comfortable with the choices in front of them. Going at the client’s pace and working out what makes them tick is key to this and that goes for anyone new to investments or pensions or what have you, not just women.

One day…

Talking Finances is unusual in that we have five advisers – and two of us are women. The breadth of experience that we collectively bring to the table definitely enhances our service to men and women alike. One day, I want to go to a conference where all of this is a given. Where the women don’t feel the need to prop each other up in a male industry and where the men who respond with empathy to all their clients regardless of who they are get recognised. Until then, I just want women to know that not all of the financial advice industry dances to a male tune.

Enjoy the sun.

carole@talkingfinances.co.uk

www.talkingfinances.co.uk/blog/

 

* Fidelity’s Unlocking the Power of Advice 2020 report cites the Financial Conduct Authority, September 2019, FOI request into the gender status of individuals registered under set controlled functions

Talking Finances is a trading name of Talking Finances Ltd. Talking Finances Ltd is an appointed representative of Parallel Lines The Advisor Collective Ltd, No.2 Sopwith Court, Slough Road, Datchet, Berks SL3 9AU, which is authorised and regulated by the Financial Conduct Authority. FCA Registration No. 967228

This article represents the personal opinion of Carole Haswell only and does not represent any opinion of Parallel Lines the Advisor Collective Ltd. Financial decisions should not be made on the basis of this article

This blog is for general information only and does not constitute advice.

That’s quite a statement!

In honour of International Women’s Day, I’d like to make a statement: “I am not a man”.

There, I’ve said it. This is not me nailing my colours to any kind of binary mast or indeed anything to do with my identity at all. It is to do with the assumptions that the world of finance has made over the years about the way my life would go.

An industry that doesn’t even try

I’m thinking in particular here about pensions – and about the statements I have received over time from various workplace pension schemes and the like. For the past I-don’t-know-how-many decades, the projections that showed me how much pension I might receive if I ever got to that elusive retirement date have made certain assumptions about what is ‘typical’. And, by and large, it has been deemed ‘typical’ for a worker to pay a little bit more into their pension each year all the way through, without a break, until retirement. Which, in my case, will be when my age matches the last two digits of the year I was born (ah, such symmetry).

Now, call me controversial if you will, but I’m going to stick my neck out here and suggest that this ‘typical’ worker just might not have the full complement of X chromosomes. These types of projection take very little account of the way that a woman might approach her career or how her earnings might behave over her lifetime. You could be forgiven for thinking that anything that deviates from a nice straight path with a gentle upwards incline is just too complicated to contemplate. And so the industry doesn’t even try.

A bit of fun, anyone?

Let’s have a bit of fun with this and imagine that we have been tasked with forming a committee of women of all ages and occupations, to design a system from scratch that will provide pension income for people in their retired years. It’s a system that is going to require money – and that will have to come from somewhere. So, we will have to make some assumptions about how to raise this money and how to distribute it. The question is, where do you start?

If your mind has gone blank here, I’m going to help you with a few starting points that might sound familiar. And I invite you to ask yourself if any of them would be ones that you might come up with yourself.

  • An individual’s entitlement to retirement income will be based on how much they earn throughout their lives – regardless of how hard they have worked
  • The amount of retirement income an individual can build up will be negatively affected by: choosing a career that doesn’t pay well (regardless of its benefits to society); taking a career break or going part time to have children (who are, incidentally, our future); downshifting a career to accommodate family life/care for family members such as elderly relatives; working in an industry that pays unequal amounts to different people for the same job…
  • The earlier in someone’s life that they take a drop in earnings (such as during an individual’s child-bearing years), the worse the financial effect on their retirement pot will be (this is because investments need time to grow)
  • While an individual is working, all the annual statements they receive about how much retirement income they are building up will assume that there will be no life events that might cause their earnings (and therefore their pension contributions) to fall – in other words, it will be assumed that their salary will grow by inflation each year until they retire
  • When working out how much an individual and/or their employer needs to put into their retirement pot, no account will be made for the possibility of an earnings-reducing life event – the responsibility to take that into account will fall to the individual

The situation as it stands

I’ll stop there – you get the idea. When we lay it out like this, it’s hard to imagine anyone thinking that such practices would result in a fair and reasonable outcome for all. Yet this is the situation as it stands. And – despite big moves in the equality landscape and quite a bit of noise about this – very little new has come from the drawing board.

Baffling pension statements

I have run a handful of online session for small groups of young women. A couple in particular stand out where the women were all in full-time work and in their mid-to late twenties – and some of them were on the brink of the kind of life events that can seriously shake a girl’s ability to provide for her future. When I mentioned the baffling pension statements that get churned out every year, not one of these women had thought about the effect that a period of reduced earnings might have on the pension illustration provided.

Shielding our daughters?

Who can blame them? This isn’t something that anyone thinks to point out at the start of a career. I’d like to compare this gap in knowledge with the way generations of women have conspired to shield their daughters and granddaughters from the true horrors of childbirth and the menopause – a sort of collective layer of protection. But, in reality, I’m not sure many people have even thought of it in this way. So entrenched is the idea that long-term finance is designed to fit what was – historically – a male pattern of working, that we have neglected to consider how pension provision is affected by the life events that still have a disproportionate impact on women’s working lives.

What can be done?

So, I’m aware that it’s all well and good to write about this sort of thing, but what in the name of Mike (who he?) can be done about it? I dare to hope that new-school economists and policy makers are all over this sort of thing, but those in charge have had other things to deal with lately and, until there’s more bandwidth for some free thinking, a good place to start might be better information for those starting out in their careers.

The recommended amount to save for retirement?

I want to make it really clear here that I believe that increased education about how pensions work would benefit everyone – not just women. A report by the Pensions and Lifetime Savings Association published in July 2018 found that over half the people asked thought that the government’s 8% minimum automatic enrolment contribution into a workplace pension is the recommended amount to save for retirement – with a third of people believing this would provide a “comfortable” retirement.

8% of not very much

It doesn’t take much mathematical prowess to work out that when contributions into a pension are expressed as a percentage of salary, a low salary means a low amount going in – after all, 8% of not very much is… not very much. Add to that the likelihood of a someone’s pay in some of the earlier years being knocked for six by part-time working or a career break, and that contribution – in real pounds and pence – gets even smaller.

Explain it to the young in plain English

On this note, I believe all of us in the financial services industry – as well as family members and employers – have a job on our hands to let our young folk know in plain English that providing for their later years is going to be, in the main, down to them. And that this requires a basic understanding that what you get out depends on what you put in. So, when someone is considering the financial consequences of starting a family, re-training or travelling the world, we need to automatically be adding “Think about your pension!” to the list of things that need to be considered. Not so that they change their mind. But so that they are informed.

Pension providers could help

I’m straying out of my pay grade here, but I think pension providers could really help with this last point. Wouldn’t it be useful if they routinely included a couple of scenarios in the pension illustrations to show the effect of a period of low-to-no earnings at different stages in a worker’s life? I hesitate to suggest anything that will complicate those statements further, but surely someone could come up with a clear way of accounting for a commonplace life event like having a child. This would cement the idea in young workers’ minds that pension planning is as necessary a task as clearing enough space in the junk room for a cot – and would have the added bonus of allowing couples to make informed decisions about which one of them might be best placed to rein in the earnings for a while to take care of small children.

Utter bamboozlement

As a woman who took a long career break and who, at the start of my working life, found any communication about my pension so unfathomable that I assumed it wasn’t meant to be read by me, I would have really welcomed some better explanations. This was all a very long time ago and yet, still, women are telling me that their pension statement remains a source of utter bamboozlement. And the fact that the retirement income shown in the illustration is based on an assumption that earnings – and therefore pension contributions – will continue to rise smoothly every year without fail – well, that is news to them too.

A few choice statements of our own

We need to be clear about this. And we need to help explain exactly how a pension works. Because, as things stand, I can’t help thinking that if my imaginary committee of women were consulted about the usefulness of a pension statement, they would come up with a few choice statements of their own!

Happy International Women’s Day.

* PLSA Hitting the Targets, Final Recommendations Summary

 

A bit more understanding

I have been mostly talking here about the pensions that you contribute to in the workplace – or a personal pension. But I do just want to add a quick word about the State pension. This provides a guaranteed income in retirement (currently a maximum of around £9,600 a year) based on:

  • The number of years worked – 35 for the maximum
  • Income being above a certain threshold.

To their credit, UK governments have actually factored in the ‘cost’ of someone taking time out of the paid labour market to bring up a family. If you have a child under 12 and you register for Child Benefit (even if you’re not entitled to it) you are still building up ‘years’ towards your state pension – the same as if you had been paying National Insurance.

carole@talkingfinances.co.uk

www.talkingfinances.co.uk/blog/

 

 

Talking Finances is a trading name of Talking Finances Ltd. Talking Finances Ltd is an appointed representative of Parallel Lines The Advisor Collective Ltd, No.2 Sopwith Court, Slough Road, Datchet, Berks SL3 9AU, which is authorised and regulated by the Financial Conduct Authority. FCA Registration No. 967228

This article represents the personal opinion of Carole Haswell only and does not represent any opinion of Parallel Lines the Advisor Collective Ltd. Financial decisions should not be made on the basis of this article

  • All content is based on my understanding of current legislation, which is subject to change.
  • This blog is for general information only and does not constitute advice.

This year’s Resolution 

This year’s Resolution is to do better at hiding my irritation when people want to know what my New Year’s Resolution is. I’ve never seen the point of setting yourself up for failure and don’t understand why people think January is the only month when it is worth trying something new. But thanks for asking anyway 😄

Welcome back to January

And in that curmudgeonly spirit, I will also not be offering my top ten things you should do in 2023 to achieve financial fitness. I’m not knocking those who do or those who appreciate such tips. But I want to recognise that the people who are responsible for making Christmas happen (naming no genders) have just completed the Mother (oh, there it is) of all marathons and will be welcoming January with all its dullness and back-to-normal-ness like a long-standing friend for whom no special efforts are required. Wholesale changes and new, exhausting routines are not on the to-do list. In fact, to-do lists are not even on the to-do list. Back to work? Pah! Piece of cake!

 

A morsel of financial therapy

But I am going to offer one small bit of New Year’s helpfulness. It’s not something you need to do, as much as something you need to think. Predictably, it does have to do with investments, pensions, ISAs and all that malarkey but, if it helps to increase the New Year appeal, you can think of it like a tiny morsel of financial therapy.

 

Disconnecting the accounts from the investments

Essentially, I am encouraging you all to choose 2023 as the year when you truly understand the relationship between investments and the accounts that they sit within. It’s not earth-shattering and I admit it’s hard to get excited about because there’s no immediate reward attached. But I do believe that learning to disconnect these concepts is important in getting us connected to the parts of our finance that we have some level of control over.

 

Like emotions and the body

I may be going too far here but, if you like the therapy angle, you can think of the investments like our emotions: they go up and down for reasons we don’t always fully understand. The accounts on the other hand – the pensions and ISAs – are the body in which the investments are housed. The two are separate from one another, even though it can feel like they are a single entity.

 

It’s not the account that performs

As financial advisers, we hear people say things like “My work pension is rubbish” or “My ISA has done well” or “Is it worth investing in an ISA?”. It might sound pedantic, but it’s really worth getting your head around the fact that it is not the pension or the ISA that performs, but the investments within them. And this is where you come in. For there is usually a level of choice about the investments – one that you can exercise either on your own or on the advice of a professional. Remember, the decision about the investments is separate from the decision about the account.

 

Accounts known as tax wrappers

I’ve included one of my ‘A bit more understanding’ sections at the end of this post where I describe different types of accounts that can hold investments. Choosing the right accounts – known in financial circles as tax wrappers – comes down to what you need that money for, when you will need it and what your overall tax situation is. It is a separate decision to choose which investments go into the tax wrapper. This decision also comes down to what you need that money for and when you will need it but, in addition, how much risk or growth opportunity you are seeking.

 

In a nutshell, the investments are the performing parts – they determine how much money you have on any given day. The accounts are the admin part – they determine how much tax you do or don’t pay on the money that is invested and how and when you can get your money out.

 

An important difference to grasp

So why do I think it is important that you grasp this difference? Let’s say you walk into your High Street bank and ask about opening an investment ISA. (I know, I know, who does that? Okay, let’s say you stay in your pyjamas and pick up a handy device on which you do your online banking. Same difference). The likelihood is that you will be offered something that feels very much like it is all packaged up in one neat bundle of investments inside an account. That’s because a bank will offer you investments from its own limited range and – for your convenience – offer it as a single product. If those investments do well, you might not make the distinction between the investments and the Stocks & Shares ISA that they sit within. In fact, in that scenario, you could be very much forgiven for saying that you think ‘ISAs are a good investment’ – because your money has gone up. And, of course, the reverse is true if your money goes down.

 

Influencing your future decisions

It follows then that you might be influenced in the future about whether or not to use an ISA by the past performance of those particular investments. But, in fact, the amount of money gained or lost had nothing at all to do with the fact that the investments sat within an ISA. In itself, an ISA account is simply one which shields the gains inside from tax and limits the amount you can put in each year.

 

Levels of investment choice in ISAs…

Different providers of ISAs – e.g. banks, building societies, online platforms – will offer different levels of choice around which investments go inside. In other words, you can choose to open an ISA account that provides a ready-made bundle of investments (like from a bank), or you can choose one that allows you to pick the investments yourself from a huge and dizzying array of shares, funds or portfolios. It’s not the account that performs – all the ISA does is make the tax rules. It’s the investments.

 

…and in pensions

There’s a similar story with pensions. I have heard people say they are mistrustful of the pension being offered by their employers because a previous pension they held had investments inside that performed badly. Whereas, in fact, the things that make a pension a pension have only to do with the rules around tax and the level of contributions. It is the investments inside that determine the value and – just as with ISAs – there is generally some level of choice about these, even with a pension provided at work (unless you are a public sector worker, where the pension schemes are different).

 

One-small-thing

If you’re still with me and have well and truly got the message that an account like an ISA or a pension is a separate entity from the investments inside – congratulations! You have achieved a ‘one-small-thing’ already this year. If at any point during 2023 you feel the need to make investments for the long term, remember to ask yourself two distinct questions:

 

  1. What sort of account will be right for me (think tax and how you want to access the money)?
  2. What sort of investments will be right for me (think risk and how long you want to stay invested for)?

 

And on that note I will leave you to enjoy January in peace. You know where to find me if you need me (very definitely not in the gym).

 

carole@talkingfinances.co.uk

www.talkingfinances.co.uk/blog/

 

A bit more understanding

 

Types of account/tax wrappers

Different types of account have their own rules about how the investments within them are taxed. And how you, as the owner, are taxed on any money you put in or take out.

Pension: Broadly speaking, you get tax relief on the contributions you make into a pension and these contributions are invested on your behalf (contributions are currently limited to £40,000 a year – or less if you are a very high earner). You can take 25% of the pension at the other end tax free. The other 75% is taxed as normal income. You can start taking money out of your pension at age 55 (due to rise to 57 in 2028).

ISAs: A wide range of savings and investment products can be held in an ISA wrapper free of tax (income or capital gains). The total current annual amount you can put into ISAs is £20,000. This means that if you use the £20,000 limit in a cash ISA, you can’t put any into a Stocks and Shares ISA – or any other kind – in the same tax year. You cannot hold an ISA in joint names.

  • Cash ISA – A tax-free deposit account. This might be instant access or fixed term, variable or fixed rate.
  • Stocks & Shares ISA (S&S ISA) – Within this, you might have some individual shares and/or one or more funds that you have picked yourself or that an adviser has picked for you.
  • Lifetime ISA – A savings account for adults under 40 who can pay in up to £4,000 a year and receive a 25% bonus from the government of up to £1,000 a year until the age of 50. The money can’t be accessed without high penalties until age 60 unless it is for a deposit on a first-time home.
  • Innovative Finance ISA – Savers can lend money directly to borrowers and earn interest and capital gains on the loan tax-free up to the £20,000 a year limit.
  • Junior ISA (JISA) – This has the same tax advantages as an adult ISA but a lower annual limit on the amount that can be paid in (£9,000 in 2022/23). The child must be under 18 and living in the UK and NOT have a child trust fund to be able to open a JISA. There are two types – cash and stocks & shares. The annual limit applies to the total put into both types. Worth noting that the money belongs to the child, not the adult who opens or manages the account.

General Investment Account (GIA): If you have more money to invest than the £20,000 a year that can go into ISAs, you might put it into a GIA. This is not a tax wrapper, so it has none of the limits or tax benefits. It is simply an account where you can hold investments. You could hold exactly the same investments in a GIA as in a pension or an ISA – only the tax treatment would be different – and the charges would probably be a bit lower.

Onshore bond: This is a life assurance product (not to be confused with a fixed-rate bond offered by a building society, which is just a deposit account that ties up your money for an agreed time). The investor pays a lump sum ‘premium’, which is invested in their chosen type of fund. You would get your investment out in one of three ways:

  • Your estate receives a specified amount on your death (this amount would relate to the value of the investments);
  • You receive the value of the investments at the end of a stated period (maturity); or
  • You could withdraw some or all of your money (full or part surrender) before the end of the term.

All of these options are subject to some specific tax rules for investments in onshore bonds.

Offshore bond: This is similar to an onshore bond but is offered by subsidiaries of UK life assurance companies operating in places like Luxembourg, the Channel Islands or the Isle of Man. The main difference between offshore and onshore bonds is that, in an offshore bond, the chosen investment fund itself pays little or no tax on gains made within the fund. However, the investor still pays full tax on any gains made on their premium on withdrawal. As with onshore bonds, there are specific tax rules for investments in offshore bonds that would make them suitable only under certain circumstances.

 

Talking Finances is a trading name of Talking Finances Ltd. Talking Finances Ltd is an appointed representative of Parallel Lines The Advisor Collective Ltd, No.2 Sopwith Court, Slough Road, Datchet, Berks SL3 9AU, which is authorised and regulated by the Financial Conduct Authority. FCA Registration No. 967228

This article represents the personal opinion of Carole Haswell only and does not represent any opinion of Parallel Lines the Advisor Collective Ltd. Financial decisions should not be made on the basis of this article

  • Past performance is used as a guide only. It is no guarantee of future returns.
  • Your investment can go down and you may not get back the full amount invested.
  • All content is based on my understanding of current legislation, which is subject to change.
  • This blog is for general information only and does not constitute advice.

Investing: it’s not always about winning

An international fashion model, a Norfolk farmer and an investment manager walk into a bar, right…. Hang on. That’s not quite right. What actually happened was that this unlikely trio sat around a table in front of a camera and talked about biodiversity and biodynamic farming in an engaging and accessible way.

 

It’s no joke

If you’re wondering what the punchline is, this is not a joke. It was in fact a webinar I listened to last week that got me thinking on a number of different levels. And once I’d calmed down enough to agree with Husband that perhaps we ought to wait until Daughter number 2 has had a chance to go to uni and come back again before we sell the family silver to buy a pumpkin farm in deepest Essex, I realised how much is changing in the world of sustainable investing.

 

A lack of showing off

The host of the webinar in question was actually the investment manager, whose special thing is building well-spread-out portfolios of funds that focus on sustainable investing. And who happens to be a woman. I don’t know if her gender is relevant, but I will say that, although the audience was financial advisers and their clients, she didn’t once use the occasion of the webinar to “sell” her services. In fact, I don’t think investing was mentioned at all. The subject matter was the soil. The way we grow things and the way we use things. There were a couple of references to companies who are doing good things in this ‘field’ (there’s the joke!) but by and large this was a discussion about the fundamentals of sustainable living. No spreadsheets. No PowerPoints. No graphs. And no showing off.

 

Turning over the stones…

I found this approach refreshing. So much of the debate about sustainable investing has, to date, focused on the investing part of that two-word phrase. On the performance versus that of mainstream investments. On the costs. On the names and labels that are being given to them – along with the allegations of greenwashing and, new-jargon-alert: socialwashing. There is a fear that, by going against the historically accepted norms of investing, a ‘sustainable’ investor might be being foolish in some way. That they have forgotten to turn over a stone under which lurks a glaringly good reason why they should in fact be investing in companies that pollute the atmosphere, exploit their workers or overpay their Fat Cats.

 

…to check for values

If you are an investor who believes in backing sustainability, you do still need to turn over those stones. But I think what you are checking for is whether you can trust that the managers of these funds have the same values as you and that they will keep those values central to their investment decisions.

From labels to lawn mono-cultures

On this point – and hot off the press – the financial regulator has just published some long-awaited rules about how investment funds who claim to invest sustainably will have to label themselves going forward. And what they will have to do to prove that they deserve the label they give themselves. This will go some way towards helping build consumer trust in these types of investments. But to my mind, knowing that the investment specialist cares enough to devote an hour to talking to two passionate individuals about the dangers of toxic fabric dyes, unplanted fields and lawn mono-cultures says a lot more about how they will look after your money than a series of charts projecting risk-adjusted annualised returns.

 

Offering what the world of the future needs

Don’t get me wrong, those returns are of course important. But for the experts in this area, there is a sense that a long-term investment portfolio that is focused on sensibly-run companies that either contribute to a sustainable future or – at least – do no harm, will produce acceptable returns almost as a by-product over the long term. The idea is that these companies are doing the right things to ensure they will be around in the future. And that they will be offering what the world of the future needs.

 

Sustainable resolves have been well and truly tested

It’s worth pointing out here that people who have been investing in these sorts of funds or portfolios during 2022 have had their resolve well and truly tested by some fairly severe underperformance (in other words, their investment values have fallen by much more than the values of non-sustainable investments). Not being invested in oil and gas has been a bitter pill to swallow this year as the prices of these companies have benefitted from short-term spikes in profit. Other sustainable investments that offer longer-term growth have also suffered as the price at which they can borrow money to grow their businesses has gone up.

 

Different returns from the mainstream…

But that’s the point of this kind of investing – you have to know that the returns will look different from those in the mainstream. Remember 2020? When we thought that was the end of international travel and plastic-lined shopping delivery trays? Sustainable-focused investors were doing high kicks in their kitchen-cum-office-cum-classroom while the fossil-fuel backers were crying into their disposable tissues and drowning their sorrows in social isolation.

 

…is neither right nor wrong

Different returns doesn’t mean wrong. And it doesn’t mean right. You invest in this way because it is what you believe in. Because it is as important to you to know that your values are reflected in your investments as it is to know that your financial needs are going to be met.

 

No bias towards the mainstream

I’ve talked in the past about my thoughts on why women seem to be showing more of an interest in sustainable investing than men. For now, I have tended to put it down to the fact that more women than men are not currently investors, and so are coming at this without any bias towards the mainstream. Then there’s the fact that sustainable investing comes with relatable, real-world stories, which stick so much more readily in the mind of a newbie investor than performance data and returns chatter.

 

Wider considerations than the numbers

I still think these are probable explanations but I’m reminded of a quote from one of the attendees of my ‘Women save, men invest’ workshops which went along the lines of “the men are focused solely on whether the numbers have gone up or down whereas I just want to know that there’s enough money in the account to pay the term’s ballet fees”. I think it’s fair to say that if you view investing as something at which you need to be ‘the winner’ then you are less likely to be concerned about where your growth has come from. But if investing is about making your money work in a way that you are comfortable with and that allows you to get to where you want to be, then you will have wider considerations than the mere numbers.

 

You want to reap what you sow

Most of us are not investment professionals and have to put our trust in those who are. When you are only interested in the numbers, it’s an easy gig for the managers in charge of your money to show you graphs and charts and pretty lines going up (or down). When it comes to sustainable investing, however, there is more to prove.  Yes, the new labelling system will help, but we also need to see more of these wider discussions that remind us that, although investing is an unpredictable business, when it comes to representing your values, you want to reap what you sow.

 

carole@talkingfinances.co.uk

www.talkingfinances.co.uk/blog/

Talking Finances is a trading name of Talking Finances Ltd. Talking Finances Ltd is an appointed representative of Parallel Lines The Advisor Collective Ltd, No.2 Sopwith Court, Slough Road, Datchet, Berks SL3 9AU, which is authorised and regulated by the Financial Conduct Authority. FCA Registration No. 967228

  • This article represents the personal opinion of Carole Haswell only and does not represent any opinion of Parallel Lines the Advisor Collective Ltd. Financial decisions should not be made on the basis of this article
  • Past performance is used as a guide only. It is no guarantee of future returns.
  • Your investment can go up and down and you may not get back the full amount invested.