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Since Pension Freedoms were introduced in 2015, retirees have had more choice when they access their pension. However, it also means you have more responsibility for generating an income later in life and it’s important to understand what your options are.

Our latest guide explains the basics you need to know, including:

• Why it’s important to have a retirement plan in place
• Your different options, such as buying an annuity or taking a flexible income
• The pros and cons of the different options available to you.

Download “Your retirement choices: how to generate an income later in life” and start planning for your retirement.

It’s never too soon to start thinking about retirement. The decisions you make when accessing your pension for the first time can have an impact on the rest of your life. Setting out a plan now can make sure you stay on track, whether the milestone is just around the corner or decades away.

Talking about homes and property values is something of a pastime in the UK. Property is probably among one of the largest assets we own, so it’s not surprising that we want the value to go up.

While property prices have soared in recent years, investing in your home could push up its value even more. Whether you like to take on projects yourself or hire a professional, our latest guide explains ten things you could do to boost the value of your home, including:

• Creating extra living space by converting the loft
• Updating your bathroom
• Showing your garden some love
• Converting a room into a home office.

Download “10 things that could increase the value of your property” and discover how to boost the value of your home.

After a year of lockdown measures, our gardens and outdoor spaces have become far more important. In fact, more than half of people say they get a good deal of pleasure from their garden. With spring arriving, now is the perfect time to invest in yours.

Our latest guide aims to help you get the most out of your garden, whether you love entertaining outdoors, want a space to relax, or even grow your own vegetables. Did you know almost four in ten people already grow some of their own food?

Gardening doesn’t just provide you with a beautiful extension to your home, it can help you remain active and improve wellbeing too. Whether you’re a beginner, or a budding Alan Titchmarsh, you should find something in the guide to help get the most out of your garden this summer and beyond.

Download 10 ways to make the most of your garden in 2021 to read more.

We hope you find some useful tips and inspiration for your garden.

Late last year, the government announced that a range of documents and consultations on future tax policies would be released after the Budget.

Dubbed “tax day”, these announcements came later than usual this year to allow for greater scrutiny after the significant number of changes Rishi Sunak announced in his Budget.

Many experts speculated that savers would see changes to pensions, Capital Gains Tax, and Inheritance Tax relief, with reforms designed to help the government increase its tax take to pay for pandemic support.

However, there’s great news for savers as most of the anticipated reforms were ignored. Here’s what “tax day” means for you.

No change to pension tax relief

One of the most hotly anticipated reforms was to pension tax relief. Many had expected the government to cut higher- and additional-rate tax relief on pensions, perhaps to the basic rate of tax or to a fixed level of 25% or 30%.

However, pension tax relief has escaped reform – at least for the time being.

This means that, if you’re a higher- or additional-rate taxpayer, you can continue to claim additional tax relief on your pension contributions through your self-assessment tax return.

The “tax day” documents also seem to ignore the issue of low-paid workers missing out on pension tax relief because of the “net pay” system.

Former pensions minister, Steve Webb, says: “In a blizzard of Treasury documents on tax, it is pretty shocking that they have failed to address a longstanding tax injustice affecting around 1.5 million lower paid workers. The Conservative manifesto promised to tackle this issue, whereby large numbers of workers miss out on tax relief through no fault of their own.”

The various consultations published only touch on pensions in a technical capacity. Rather than reforming tax relief, the Treasury has instead focused on technical updates on “scheme pays” facilities for public service schemes and the tax treatment of defined benefit (DB) superfunds.

A reduction in paperwork if you’re dealing with Inheritance Tax

As part of the government’s aim to build “a trusted, modern tax administration system”, the Treasury has adopted a series of recommendations by the Office of Tax Simplification when it comes to the reporting of Inheritance Tax.

Reporting regulations will be simplified later this year so that, from 1 January 2022, more than 90% of non-taxpaying estates each year will no longer have to complete Inheritance Tax forms for deaths when probate or confirmation is required. You’ll also be able to provide an Inheritance Tax return without a physical signature.

Apart from these admin changes, there were no other reforms to Inheritance Tax. The seven-year gift rule remains, as do the nil-rate band at £325,000 and residence nil-rate band at £175,000. The chancellor recently froze these thresholds until 2026.

Capital Gains Tax rates and exemptions remain

Ahead of “tax day” there was also plenty of speculation that the government would seek to reform Capital Gains Tax (CGT). Many expected the annual exemption to be cut, or for the rates of CGT to be aligned with Income Tax rates.

However, CGT remains untouched, and so the present annual exemption of £12,300 applies. This exemption allows you to make gains of up to £12,300 in a tax year before you pay any CGT – although do remember that the chancellor froze this exemption at the present level until 2026 in his recent Budget.

Despite a 2020 report from the Office for Tax Simplification (OTS) saying that CGT intake could be doubled to £14 billion if it was brought in line with Income Tax, CGT rates also remain unchanged:

• Basic-rate taxpayers – 10% on gains above the exemption (18% on residential property)
• Higher- and additional-rate taxpayers – 20% on gains above the exemption (28% on residential property).

Again, the absence of reform is good news if you’re thinking of disposing of an asset and making a gain as neither the exemption nor the rates of tax have changed.

Other minor reforms announced on “tax day”

Alongside a range of highly technical reforms and consultations concerning VAT and other taxes, other measures announced include:

• The government is publishing a consultation on raising standards in the tax advice market. This will seek views on the definition of tax advice and a requirement to make professional indemnity insurance compulsory for all tax advisers. The aim is to improve tax advice and providing taxpayers with better access to redress where they have received bad advice.
• The government intends to legislate later this year to extend “Making Tax Digital” (MTD) to Income Tax Self-Assessment from April 2023.
• There will be a consultation to consider how Air Passenger Duty (APD) could support regional connectivity, alongside the commitment to reach net-zero emissions by 2050. This consultation will seek views on the government’s initial position that the effective rate of APD on domestic flights should be reduced alongside a potential increase to the number of distance bands in order to align the tax more closely with the government’s environmental objectives.
• An announcement that the government will legislate to tighten tax rules for second property owners meaning they can only register for business rates if their properties are genuine holiday lets.

Get in touch

If you want to know more about what the “tax day” announcements mean for you, or want to chat to a professional about mitigating your tax liability, please get in touch.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation which is subject to change.

A year ago, Rishi Sunak delivered his first Budget just as the pandemic began to take hold. While his £30 billion package sounded significant, it’s a sum that has paled into insignificance over the last 12 months as the chancellor has spent £280 billion shoring up the UK economy.

As the chancellor acknowledged in his speech: “The damage coronavirus has done to our economy has been acute”.

So, who are the winners and losers of the 2021 Budget?

Winners

Retail, leisure, and hospitality businesses

It’s been a tough year for many sectors, and retail, leisure, and hospitality businesses have been particularly hard hit.

The chancellor announced £5 billion in government grants to businesses in these sectors. Non-essential retail businesses will receive grants of up to £6,000 per premises, while hospitality and leisure businesses will receive grants of up to £18,000.

Sunak also confirmed an extension to the temporary 100% business rates relief for hospitality, retail, and leisure until the end of June. He will then discount business rates by two-thirds, up to a value of £2 million for closed businesses, with a lower cap for those who have been able to stay open.

The chancellor also extended the temporary VAT reduction in these sectors from 20% to 5% until 30 September. There will then be an interim 12.5% VAT rate until April 2021.

Alcohol duties were frozen for the second year in a row.

Businesses with staff on furlough

In a pre-Budget statement, Sunak summed up his Budget: “We’re using the full measure of our fiscal firepower to protect the jobs and livelihoods of the British people.”

Sunak most clearly demonstrated this commitment by announcing the government will extend the furlough scheme until the end of September 2021 – longer than businesses expected.

The government will cover the wages for workers who have been put on leave due to the pandemic (up to a maximum of £2,500 a month) at the following rates:

• 80% until the end of June 2021
• 70% in July 2021
• 60% in August and September 2021

Employers will have to pay the difference to 80% – so 10% of wages in July and 20% in August and September.

This is a major commitment by the Treasury as the scheme costs around £5 billion each month.

Self-employed workers (including the recently self-employed)

The fourth Self-Employed Income Support Scheme (SEISS) grant for February, March, and April 2021 will cover 80% of monthly profits up to a maximum of £2,500 a month.

People who became self-employed in the 2019/20 tax year, and have filed a 2019/20 tax return, will also be eligible for the fourth and fifth grants, helping an additional 600,000 workers.

A fifth grant, covering May, June and July 2021 will also be available.

• For self-employed workers whose turnover has fallen by 30% or more, the grant will continue to pay 80% of monthly profits up to £2,500 a month.
• For self-employed workers whose turnover has fallen by less than 30%, the grant will pay 30% of monthly profits up to £2,500 a month.

Homebuyers

As expected, the chancellor announced a three-month extension to the Stamp Duty holiday. This tax break will now finish at the end of June, at a cost of about £1 billion to the Exchequer.

The Stamp Duty nil-rate band will then be increased from £125,000 to £250,000 until the end of September 2021.

Sunak also relaunched the Help-to-Buy scheme to bring back 95% mortgages, which are mainly used by first-time buyers and have been in short supply due to the pandemic.

Here, the Treasury will offer lenders a guarantee covering 95% of property value, up to £600,000. This will encourage banks and building societies to lend to first-time buyers and current homeowners.

Sunak said: “By giving lenders the option of a government guarantee on 95% mortgages, many more products will become available, helping people to achieve their dream and get on the housing ladder.”

Lenders including HSBC, Lloyds, and Halifax will offer these deals from April 2021 onwards.

People claiming Universal Credit

The government have extended the temporary £20 per week uplift in Universal Credit benefits until the end of September 2021. This will be a one-off payment of £500.

The National Living Wage will rise to £8.91 from April 2021.

Businesses looking to invest

After announcing a hike in business tax rates (see below), the chancellor announced what he called the “biggest business tax cut in modern British history”.

A new “Super Deduction” will come into force for two years. This means that, when companies invest, they can reduce their tax bill by 130% of the cost of the investment.

Sunak gave the example of a firm currently spending £10 million on equipment. At present they benefit from a £2.6 million tax reduction but, under the Super Deduction they would get a tax break worth £13 million.

The Office for Budget Responsibility say it will boost business investment by 10%.

Drivers

The chancellor cancelled the planned increase in fuel duty.

People living in the East Midlands, Liverpool, Plymouth, and other freeport locations

Goods that arrive at freeports from abroad aren’t subject to the tax charges that are normally paid to the government. The tariffs are only payable when the goods leave the freeport and are moved somewhere else in the UK.

To help regenerate deprived areas, Sunak announced the creation of eight new freeports: East Midlands Airport, Felixstowe and Harwich, Humber, Liverpool City Region, Plymouth, Solent, Thames, and Teesside.

Losers

Medium-sized and large businesses

The first step to repairing the public finances came in the form of a Corporation Tax rise which will come into force in April 2023.

From April 2023, the Corporation Tax rate will rise to 25%. Despite a significant six-point increase in the rate, the chancellor argued that the UK will still boast lower Corporation Tax rates than the likes of Germany, Japan, the US, and France.

Small businesses – those with profits less than £50,000 – will benefit from a “small profits rate” of 19%. This means 1.4 million businesses will be unaffected and pay the same rate.

There will be a taper for profits above £50,000, so the 25% Corporation Tax rate will only apply to businesses who make profits of £250,000 or more. Sunak says that just 1 in 10 companies will pay the full higher rate.

Income Tax payers

While the chancellor announced no Income Tax, VAT or National Insurance rises, the decision to freeze the Personal Allowance at £12,570 and the higher-rate tax threshold at £50,270 from 2021/22 to 2026 equates to, essentially, stealth taxes.

A freeze drags more people into paying Income Tax and will also push 1.6 million people into the higher tax bracket by 2024, raising around £6 billion for the Exchequer.

Pension savers

In an expected move the chancellor announced he was freezing the Lifetime Allowance – the amount an individual can save into a pension before incurring tax charges. The allowance will remain at £1,073,100 until 2026.

This is another stealth tax, as it means that anyone whose pension savings are above this amount could face a levy of up to 55% on any additional lump sums or income taken from their pension pot.

Wealthier individuals and families

Just as the chancellor froze the pension Lifetime Allowance, he also announced a freeze in the Inheritance Tax (IHT) threshold and the Capital Gains Tax (CGT) annual exemption until April 2026.

The IHT threshold will remain at £325,000 with the “residence nil-rate band” at £175,000.

The annual Capital Gains Tax exemption will remain at £12,300 for five years.

As the value of assets such as house prices and investments rises over the next five years, this freeze will see more people face a CGT or IHT liability, raising additional revenue for the Exchequer.

Get in touch

If you want to chat about how the 2021 Budget affects you, please get in touch.

On Wednesday 3 March, Rishi Sunak delivered his second Budget as chancellor. The Budget outlines the state of the economy and the government’s spending plans.

The World Health Organization declared Covid-19 a pandemic on 11 March 2020, the same date as the 2020 Budget. Since then, the pandemic has led to lockdowns, restrictions, and an enormous rise in government spending.

The Office for Budget Responsibility (OBR) estimates borrowing for the current tax year will be £394 billion, the highest figure seen outside of wartime. So, it’s no surprise that Covid-19 continues to influence Sunak’s decisions.

The chancellor noted the economy has been damaged, with GDP shrinking by 10% in 2020, and that the road to recovery would be a long one. However, he added: “We will continue doing whatever it takes to support the British people and businesses through this moment of crisis.”

As usual, the Budget began with an overview of the economy.

The economic outlook

The OBR expects the economy to grow faster than previously forecast. The economy is now forecast to grow by 4% in the coming fiscal year, and then by 7.3% in 2022.

However, Sunak noted that the pandemic is still inflicting profound damage on the economy. The OBR predicts that, in five years, the economy will still be 3% smaller than it would have been otherwise.

The improved outlook also means peak unemployment is expected to fall. It’s now expected to reach 6.5%, compared to the initial forecast of 11%.

Covid-19 support measures

As expected, Covid-19 support has been extended to cover the spring and summer months.

The Coronavirus Job Retention Scheme, often known as the “furlough scheme”, will now run until the end of September. It will continue to provide 80% of wages (up to £2,500 per month) to workers unable to work due to the pandemic. From July, employers will need to pay a proportion of their wages.

Self-employment grants will also continue, with two further instalments over the coming months. The scheme has been extended to include the newly self-employed who missed out on previous grants and have now filed a tax return.

The chancellor said total Covid-19 support measures are now worth more than £400 billion.

Personal finance

The Personal Allowance – the threshold before you need to pay Income Tax – will increase from £12,500 to £12,570 as planned in the 2021/22 tax year. The threshold for higher-rate taxpayers will also rise from £50,000 to £50,270 in 2021/22.

However, both these thresholds will then be frozen until 2026. So, while you may not face an immediate tax rise, the freeze will affect income in real terms over the next few years.

The chancellor also announced that several other allowances will freeze, rather than rising in line with inflation:

• The pension Lifetime Allowance (£1,073,100)
• The Capital Gains Tax allowance (£12,300)
• The Inheritance Tax nil-rate band (£325,000) and residence nil-rate band (£175,000)

Again, these freezes could affect personal finances in the long term.

Business

The headline announcement for businesses is the rise in Corporation Tax.

From April 2023, Corporation Tax, paid on company profits, will rise from 19% to 25%. However, small businesses with profits of less than £50,000 will continue to pay the current 19% rate and there will be a taper.

Only businesses with profits of more than £250,000, around 10% of firms, will pay Corporation Tax at 25%.

However, a new “Super Deduction” will allow companies to reduce their tax bill when they invest.

From 1 April 2021 until 31 March 2023, businesses can reduce their tax bill by 130% of the cost of investment in a bid to encourage firms to invest for growth. It’s a move that hasn’t been tried before, but the OBR predicts it could boost investment by 10%.

Other important announcements include:

• Restart grants to help businesses reopen as lockdown restrictions lift. Retail firms can apply for up to £6,000 per premises, while hospitality businesses can receive up to £18,000.
• Recovery loans will be available to provide businesses with a capital injection. The scheme will offer loans from £25,000 to £10 million until the end of the year, with the government guaranteeing 80% to encourage lenders.
• The business rate holiday for retail, leisure and hospitality firms has been extended for a further three months until the end of June. There will then be a six-month period where rates will be two-thirds of the normal charge.
• The reduced VAT rate of 5% for the hospitality industry will remain in place until the end of September. There will then be an interim 12.5% VAT rate until April 2021.

Businesses can also take advantage of the government’s drive to encourage apprenticeships and traineeships. Incentive payments for firms hiring apprentices will double to £3,000. Sunak also revealed he is launching a programme to help firms develop digital skills.

Housing

The chancellor announced two key measures for the property sector.

First, the Stamp Duty holiday will be extended by six months. Until the end of June, homebuyers purchasing a property worth up to £500,000 will not have to pay Stamp Duty. The threshold will then fall to £250,000 until the end of September. From October, the threshold will be £125,000.

Second, the government will provide mortgage guarantees to lenders offering 95% mortgages. The move aims to support first-time buyers with small deposits. These mortgage products will be available from April.

Culture

Cultural venues have been significantly affected by Covid-19. The Budget revealed a new £300 million “Culture Recovery Fund” to support arts, culture, and heritage industries.

In addition to this, a £150 million fund has been set up to help communities take ownership of pubs, theatres, and sports clubs that are at risk of closure.

Fuel and alcohol duty

Despite plans to increase fuel and alcohol duty, both have been frozen. The freeze means fuel duty will not rise for the 11th year in a row, while alcohol duty has not increased for two.

Infrastructure

A new “Infrastructure Bank” will launch this spring, with around £12 billion in initial funding and will be located in Leeds. It will invest in both public and private sector green projects across the UK.

It’s expected the bank will support at least £40 billion of total investment in infrastructure.

Questions?

Please get in touch if you have any questions about what the Budget means for you or your financial plans.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Our latest guide is in partnership with Neil Bage, founder of Be-IQ, a fintech company focused on behavioural insights. The guide gives a fascinating overview of how our behavioural biases can affect the decisions we make. It could help you better understand your own decisions and what you can do to reduce your biases.

We start with an explanation of what financial biases are and where they come from, as well as looking at ten examples that you may recognise. While bias can influence many financial decisions, from what to spend money on to your relationship with saving money, one of the most researched areas is the impact it has on investing. Our guide explores how bias can sometimes lead you to take too little or too much risk.

Finally, we list some of the steps you can take to reduce your biases when making financial decisions.

Please download Behavioural biases: How they impact your financial decisions to read more.

If you have any questions about this guide or your financial plan in general, please get in touch.

In the past, passing on wealth to loved ones usually involved leaving an inheritance. However, more parents and grandparents are choosing to give financial gifts during their lifetime. It can help family members achieve milestones, but it also needs careful consideration around how it’ll affect your financial security.

Older generations are gifting billions of pounds each year

Research shows that older family members are gifting billions of pounds each year to provide day-to-day support for loved ones.

According to Legal and General nearly half of older people provide some sort of financial support to family members. Around four in ten (39%) of young adults receive regular support that helps cover monthly outgoings. The average amount provided is £113 per month, collectively adding up to £372 million each month. This amount increased even further in 2020 as families faced financial pressures caused by the pandemic. It’s estimated that an extra £1.9 billion was gifted to younger family members in 2020.

Rising costs and stagnant wages may mean some younger family members are struggling to make ends meet. As a result, you may want to help by providing a regular gift to supplement their income.

Many parents and grandparents are also providing a lump sum gift to help younger generations reach milestones. As house prices have increased, it’s become common for first-time buyers to rely on the Bank of Mum and Dad. According to Legal & General, one in two house purchases among under-35s are made with the support of family. It’s expected that older generations will lend £2.1 billion to support homeownership plans in 2021 alone.

On average, the Bank of Mum and Dad provides £19,000, with 71% of first-time buyers saying they would not have been likely to buy without financial support. In most cases, this support is a gift – just 30% are expected to pay some of it back.

Why lifetime giving could be valuable

1. It could help loved ones tackle challenges they’re facing now

The appeal of giving during your life is that it can help loved ones overcome the challenges they face now and set them up for greater financial security in the future.

Giving a house deposit is a good example of this. A lump-sum gift during your lifetime can mean children or grandchildren can get on the property ladder. It could help reduce monthly outgoings if they’re currently paying rent and mean they’re mortgage-free sooner in life. Helping pay for educational costs can also make sense and help loved ones achieve career aspirations.

Giving during your lifetime also means you get to see the benefits your wealth brings to loved ones.

2. It could reduce Inheritance Tax liability

If Inheritance Tax (IHT) is a concern, gifting during your lifetime can also form part of the solution.

If the value of your estate, which includes all your assets, is over £325,000, IHT may be due. An additional allowance can increase this threshold to £500,000 if you leave your main home to children or grandchildren, so it’s important to think about who you’d like to inherit assets when considering IHT. In some cases, gifting to reduce the value of your estate can make sense from a tax perspective.

However, it’s important to keep in mind that not all gifts will be considered outside of your estate for Inheritance Tax purposes immediately. Some may still be included for up to seven years after they are given. If IHT is one of the reasons you want to gift during your lifetime, it’s important to understand allowances and rules. Please get in touch to discuss your options.

Drawbacks to consider before gifting

1. It could affect your financial security later in life

Before you gift money, it important to understand how it could affect your plans. Taking a lump sum out of your pension to act as a deposit for a child’s house, for example, could mean you’re not able to achieve goals in your later years. Before deciding to provide gifts, you should take some time to assess the impact it will have. This step means you can lend support while safe in the knowledge that your plans are still on track.

You should also assess the impact if something unexpected were to happen. Even the best-laid plans can be affected by unforeseen circumstances. For example, would you still be able to afford the type of care you’d prefer if it were needed after gifting? Or would your pension now be able to stretch for another ten years if you lived longer than expected? Answering these questions can be difficult, but we’re here to help.

2. It could affect the inheritance you leave behind

It’s also important that you keep in mind how gifting now could affect the inheritance you leave to loved ones. In some cases, gifting now could have a significant impact on your assets later in life. Deciding what your priorities are before gifting can help ensure that the decisions you make reflect your goals.

If gifting now will affect the inheritance you leave, you should consider speaking to your beneficiaries. They may be expecting an inheritance to help them achieve goals later in life, such as providing a more comfortable retirement. Knowing what they can expect can help loved ones create a financial plan that suits them.

Balancing family support and your plans

When you want to lend financial support to loved ones but aren’t sure how it’d affect your plans in the long term, it can be difficult to know what to do. Financial planning can give you confidence in the decisions you make. Using cashflow planning, we’ll help you see how making regular or one-off gifts will affect your security, including if something unexpected happens. It can mean you’re able to support the people important to you while knowing your own plans are secure.

Please contact us if you’re thinking about financially supporting your family and would like to understand the long-term implications.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Levels and bases of, and relief from, taxation are subject to change.

The Financial Conduct Authority does not regulate estate and tax planning.

The current tax year will end on 5 April 2021, a date when many allowances and tax breaks will reset. In some cases, it will be your last chance to use them. Making use of appropriate allowances can help you get the most out of your money.

Our guide explains seven key allowances you should consider to ensure you’re ready for the 2021/22 tax year. This includes:

1. Marriage allowance
2. Pension Annual Allowance
3. ISA allowance
4. Gifting allowance
5. Gifts from your income
6. Capital Gains Tax
7. Dividend allowance

Click here to download your copy of the guide.

Keeping on top of allowances and how to use them can be challenging. But creating a financial plan that helps you get the most out of your money can put your mind at ease. Please get in touch to discuss how you can make the most of allowances in the current tax year and put a plan in place for 2021/22.

Amid the Covid-19 uncertainty, figures suggest people are turning to cash rather than investing. But it could mean they’re missing out on potential, long-term returns. So, if you’re weighing up cash vs investing, which option is right for you?

In the first six months of 2020, UK households placed £77 billion in cash accounts, according to research from Janus Henderson Investment Trusts. In total, it takes cash reserves in the UK to £1.5 trillion. Saving more is certainly a positive habit. However, by choosing cash over investments, the same research estimates that households have missed out on £38 billion in returns, instead they’ve received just £5.7 billion in interest.

Why cash isn’t always a ‘safe’ option

There are many reasons why households have chosen to place their savings in a cash account. However, concerns over stock market volatility and feeling they need to keep their money ‘safe’ in the current climate are likely to have played a role for many.

While cash savings aren’t affected by investment risk, they don’t always make financial sense. Interest rates are at a historic low. This means, once you calculate inflation, cash savings are likely losing value in real terms. If you’re saving for a long-term goal, inflation can have a real impact on your savings.

The Bank of England’s inflation calculator highlights how inflation can erode cash value in the long term.

Let’s say you saved £10,000 in 1980. During the last four decades, inflation has averaged at 3.8% annually. This means that for your savings to have the same spending power as they did in 1980, they would need to have grown to £43,204.40. When interest rates were more competitive this may have been possible. But with many saving accounts offering rates far below the pace of inflation, your savings could effectively be losing money.

That’s not to say cash accounts shouldn’t be used. If you have short-term saving goals, they are often an appropriate option. Readily accessible accounts are also important for other reasons, such as an emergency fund.

However, the Janus Henderson Investment Trusts research indicates that some households are relying too heavily on cash accounts. To create an emergency fund of three months of income for households, this would amount to around £370 billion across the UK. Yet, there is almost an extra £1.2 trillion in cash accounts.

Could investing be right for you?

3 questions to ask when weighing up cash vs investing

1. Do you have an emergency fund?

Before you start investing, it’s important to create financial security. Setting up an emergency fund can create a buffer should anything unexpected happen.

Ideally, you should have three- to six- months of expenditure in a cash account. This means the money is readily accessible should you need it. It’s a step that can improve your ability to face financial shocks. It also means that should investments experience short-term volatility, you have other reserves that can be used rather than making withdrawals when values have fallen.

2. What are your goal timeframes?

Your goals and when you want to achieve them are incredibly important when balancing cash vs investing.

For short-term goals, cash accounts are usually more appropriate. This is because volatility is part of investing. With a short-term timeframe, you’re more likely to be affected by dips in the markets as you have less time to benefit from a recovery.

In contrast, investing for long-term timeframes (a minimum of five years) could be right for you. Longer timeframes provide an opportunity for the peaks and troughs of market movements to smooth out. While you’ll still experience volatility, there’s less risk that it will have a significant impact on your goals. This can mean if you’re saving for retirement or other aspirations that are still some way off, investing can potentially deliver higher returns than you’d see if you used cash accounts.

3. What is your tolerance for risk?

Finally, all investments come with some level of risk. You need to take this into account when deciding between cash and investing.

Your risk tolerance will need to take many factors into account. This includes what your goal is, but it should also weigh up other aspects, such as other assets that you hold, capacity for loss, and overall attitude to risk. By understanding these factors, you can not only decide whether investing is an appropriate option for you, but which investments you should select. These should reflect your situation but also need to consider things like diversifying.

If you have money and you’re not sure what to do with it or how to invest, we can help as your financial planner. Please contact us to discuss your goals and how we can help you achieve them.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.