Guide: Behavioural biases, and how they affect your financial decisions

Guide: Behavioural biases, and how they affect your financial decisions

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.

Investment market update: January 2021

Investment market update: January 2021

As we start 2021, there are reasons to be optimistic and some of this is showing in market movements. However, there are still obstacles which could have an impact on investments in the coming months.

The International Monetary Fund has upgraded its global outlook for this year by 0.3%, taking expected growth for 2021 to 5.5%. While only a marginal uptick, it does suggest that there are reasons to be positive.

UK

The UK has started rolling out its Covid-19 vaccination programme, with plans to vaccinate all adults by autumn 2021. However, headwinds are still affecting businesses as we start the year with a third national lockdown.

Chancellor Rishi Sunak unveiled additional Covid-19 support for businesses at the start of the month. Amounting to £4.6 billion, it includes one-off top-up grants for retail, hospitality and leisure businesses worth up to £9,000 per property.

Despite ongoing support, UK GDP fell 2.6% in November 2020, breaking a six-month run of growth and unemployment that reached a four-year high of 5% in the three months to November.

The annual Budget will be held in March and further support is expected to be announced then.

Retail has been one of the most affected sectors during the Covid-19 pandemic. However, the figures from January highlight how it’s a tale with two sides.

While some firms have posted strong Christmas sales, including Asos, Tesco and Lidl, others have struggled to balance the books. Retail sales between November and December increased by just 0.3% according to the Office for National Statistics. This is far below forecasts of 1.2% at a time that was pivotal for many retail businesses. Primark, which has no online store to buffer the impact of closing physical shops, faces a £1 billion sales hit due to the third lockdown.

Debenhams and the Arcadia Group were two high-profile retail collapses at the end of 2020. Online fashion store Boohoo is now set to snap up Debenhams for £55 million, while Asos is in talks to acquire some of the Arcadia brands, including Topshop.

Another sector struggling is travel. It’ll come as no surprise that passengers at Heathrow for 2020 were down 73%. As the vaccine programme continues, it’s hoped that holiday bookings will rise.

A Brexit deal was finally reached in 2020 with just days to go before the deadline. But business concerns are still present. The CBI Industrial Trends survey found concerns over supply distribution are at the highest level in over 45 years. Nearly half of the 291 firms questioned said they are worried that access to materials or components will affect output in the coming months.

Europe

There are some positive signs from Europe, despite the eurozone contraction in December being worse than thought. The final eurozone PMI composite output index was 49.1, placing it in negative territory.

Among the positive news is the manufacturing sector strengthening. Manufacturing in the Euro area reached its highest level since May 2018, with a reading of 55.2, placing it firmly in the growth range.

There was also a surprise jobless rate fall. Unemployment in November across the EU was 8.3%, compared to 8.4% in October. However, unemployment among young people (under 25) highlights how this demographic is being affected by the pandemic; some 18.4% of young people were unemployed.

While the German economy shrank by 5% in 2020, industrial production is now strong, with output increasing by 0.9% in November. It fuels hopes that the economy could avoid a double-dip recession. With Germany often seen as the stalwart of the EU, it’s a good signal for the wider area too.

US

In January, Joe Biden was inaugurated as the 46th president of the United States. However, he’s set to face some significant challenges in the coming months.

Figures show that 140,000 jobs were lost in December, ending seven months of job growth. Unemployment is now at 6.7% as Covid-19 infections rise. The IHS Markit PMI shows private sector growth is also weakening. While, at 54.8, it’s still in growth territory, suppressed customer demand is having an impact.

This is reflected in business confidence too. The National Federation of Independent Businesses’ index reports business optimism at 95.9 in December. This compares to 101.4 in November and the long-term average of 98. It’s the lowest reading since May. The downturn is linked to concerns about sales outlooks and business conditions as the pandemic continues.

Asia

China’s economy grew faster than expected in the final quarter of 2020, making it the only major economy to expand last year. Figures released by China’s National Bureau of Statistics show GDP was up 6.5% in the last three months of 2020 following growth of 4.9% in the third quarter.

Remember to keep your long-term financial plan in mind when making investment decisions. Keep an eye on our blog for the latest market updates and more financial news.

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.

 

Is the work-from-home revolution a good thing?

Is the work-from-home revolution a good thing?

When the pandemic struck last year, thousands of workers began working from home for the first time. It’s changed the world of work and this situation could be here to stay.

According to data from the Office for National Statistics, around a quarter of workers are currently working exclusively from home. Many more are mixing work from home with heading to the office. While the shift is in response to the Covid-19 pandemic, businesses globally have announced their intention to make it permanent. Workers at the likes of Adobe, Facebook, and Yahoo may never set foot in the traditional office again. Others, including Nationwide Insurance, have revealed they plan to maintain a blended model in the long term.

Research from Deloitte predicts that homeworking will quintuple by 2025. The prediction was made after 98% of financial directors from Britain’s largest companies said they expect the rise in home working to continue in the coming years.

Working from home could become the norm within some industries, but is that a positive thing?

Employees enjoy the benefits of working from home

Working from home comes with many benefits. From having more free time without the commute to saving money by eating at home, employees are often enjoying the benefits it brings. Some even argue that without the office distractions, they’re far more productive than they are in a traditional place of work.

Research reported in Forbes suggests that while there are challenges to working from home, employees are keen to adopt it long term:

  • Eight in ten employees said they agree they enjoy working from home
  • 60% said they felt less stressed when working from home
  • 66% thought they were more productive.

Employee engagement with their workplace hasn’t declined significantly either. In a survey that questioned more than 500,000 workers, employees scored 79% on an engagement index when in the office. While you may think being physically away from management, colleagues and the office would have a negative impact, it only declined marginally to 77%. The findings suggest that it is possible to maintain company culture and a sense of team spirit even when getting together in the office isn’t possible.

From a business point of view, working from home could provide opportunities to cut costs by getting rid of costly city centre offices or downsizing.

Young workers could be left behind

One of the challenges of remote working is creating a team atmosphere and passing on knowledge and skills effectively.

If the trend for exclusively home working continued, it could harm the development of young workers. A quarter (24%) of young workers agreed that working from home made them feel less connected when questioned as part of an Aviva survey. Even those that are enjoying working from home could find that it harms their professional development, with far fewer opportunities to connect with more experienced colleagues or engage with other stakeholders.

Introverted personalities were also found to be negatively affected by the move to home working. A third (36%) said they were concerned they weren’t having enough face-to-face contact with colleagues. They were also more likely to be concerned about their firms’ being an enjoyable place to work in the future and worry about job security.

Debbie Bullock, wellbeing lead at Aviva, commented: “A third of employee wellbeing and satisfaction levels are determined by personality types. Personality is fixed but resilience can be developed in employees, and managers are in a great position to ensure their colleagues have the right skills and confidence to grow in their careers during this continued uncertainty.

“A little insight, the right conversations and skill-building can go a long way to help identify when people may need more support.”

Striking the right balance

While homeworking provides plenty of opportunities, businesses and teams must be mindful of the downsides too. Making efforts to ensure that teams stay connected and communicate effectively, as well as facilitating professional development opportunities, are crucial for not only employee wellbeing but for business success. Firms that plan to truly embrace working from home will need to find processes that suit them and their employees to strike the right balance.

Why you should review your financial protection when taking out a mortgage

Why you should review your financial protection when taking out a mortgage

Financial protection is often something you’re prompted to think about when buying your first home. It’s an important step to take as you make a large financial commitment. However, it’s just as important to regularly review the level of protection you have. When taking out a new mortgage product, whether it’s your first mortgage, you’re moving home or simply remortgaging, it’s the ideal time to reconsider your financial protection.

A mortgage is one of the largest financial commitments many of us will make, often spanning several decades. Financial protection can help ensure you’re able to meet repayments, even if something unexpected means your income is reduced or stops. Ensuring you have the right level of protection in place for your mortgage and lifestyle can provide peace of mind.

Here are three key reasons why you should review protection when taking out a mortgage.

1. Your outgoings may have changed

Financial protection products are designed to give you peace of mind that you’ll be able to pay for essentials if something unexpected happens. As a result, it’s important to know what your outgoings are to ensure adequate protection. Over time, your outgoings may increase or decrease. If, for example, you’re moving to a larger home that means taking out a larger mortgage, you may find previous protection product no longer provides suitable cover. For first-time buyers, the addition of a mortgage to their regular outgoings may mean they need to consider financial protection for the first time.

2. Your long-term financial commitments may no longer be the same

Over time as your financial commitments change, your protection products should change to reflect this. In some cases, this will mean increasing your level of cover. However, when focusing on mortgages, it can mean decreasing cover too. As you pay off your mortgage, you may find you can reduce your life insurance policy while still benefiting from peace of mind, for example, reducing the premiums you pay too.

3. Your priories may evolve too

Over time, your priorities and concerns are likely to change too. If you’ve welcomed children since taking out a policy or want to start a family in the future, looking at more comprehensive cover can give your family additional security, for instance. This is why financial protection products should be considered alongside your lifestyle plans, including buying a home.

What type of financial protection should you choose?

When taking out a mortgage, life insurance is often considered. While important, it’s not the only protection product that can provide reassurance when you have a mortgage to pay. Here are three options you may want to consider.

  1. Life insurance: When you’re buying a home with a partner, life insurance is a protection product that may be recommended. It would pay out a lump sum on the death of the person or people covered. Usually, a life insurance policy will be linked to the mortgage term and size, to pay off the mortgage if you or your partner passed away. It can relieve one of the biggest outgoings the remaining partner may have, giving them space to grieve without worrying about the mortgage.
  2. Income protection: If you need to take an extended period off work, could you still afford to pay the mortgage? If the answer is ‘no’, it may be worth considering income protection. If you’re unable to work due to illness or an accident, this type of protection product will provide you with a regular income until you’re able to return to work, retire, or the policy term ends. It will pay a portion of your usual salary. It’s a safety net that could help ensure you’re still able to pay for the essentials, from your mortgage to grocery shopping, if something happened.
  3. Critical illness cover: Finally, critical illness cover pays out on the diagnosis of certain illnesses, which are defined in the policy. Rather than paying a regular income, you’d receive a lump sum. This could be used to pay off your mortgage, support day-to-day costs, or make adjustments to your home if necessary. It can give you some freedom by allowing you to reduce or remove expenses, so you to focus on recovery or adjusting.

We all think that we won’t need to make use of protection policies. However, the reality is that thousands of Brits make claims every year, providing them with some financial security when the unexpected happens. Despite the peace of mind financial protection can offer, just 15% of people would list life or health insurance as a top-three priority to protect their financial wellbeing, according to research from EY.

If you’d like to discuss financial protection and how it can provide peace of mind when paying a mortgage, please contact us. There is a range of products and providers to choose from, we’re here to help you find the right one for you.

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

Capital Gains Tax review: 2 things that could change

Capital Gains Tax review: 2 things that could change

The Office of Tax Simplification (OTS) is reviewing Capital Gains Tax (CGT) after being ordered to by chancellor Rishi Sunak. Changes that are made following the review could affect tax liability and how you make use of allowances. While changes have yet to be announced, there are two key areas that are being considered for modification: the CGT allowance and rates.

What is Capital Gains Tax?

CGT is a type of tax you pay when you dispose of some assets. Disposing of assets could include selling or gifting them. The profit you make may be taxed.

Assets that may be liable for CGT include:

  • Most personal possessions worth £6,000 or more, apart from your car
  • Property that is not your main home
  • Shares that are not held in a tax-efficient wrapper, such as an ISA
  • Business assets.

The chancellor has asked the OTS to: “Identify opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent.”

While the main aim of the review is to make CGT simpler and fairer, there is also a need to raise revenue. The cost of supporting the economy during the Covid-19 pandemic means the Treasury is left with a deficit. Updates to CGT could go some way to plugging the gap.

The government raises a relatively low amount from GGT; around £8.3 billion a year. Under the current rules, only 265,000 people pay CGT each year, with effective use of allowances and tax breaks meaning many can avoid paying it. However, changes implemented following the review could change that.

The 2 Capital Gains Tax rules that could change
1. The Capital Gains Tax allowance

Under current rules, every individual receives a CGT allowance of £12,300. If the profit you make when disposing of assets falls under this threshold, no CGT is due. Reducing this allowance is one focus of the review.

A small reduction is unlikely to affect many people. In 2017/18, around 50,000 reported net gains just below the threshold. However, the reduction could be more significant. There are suggestions that it could be scaled back to as little as £2,000 – £4,000. For many people, this allowance is an important part of their tax planning and could lead to a higher tax bill than expected.

If you’d be affected by a reduction in the CGT allowance, making use of other allowances will be even more important. For example, selling shares that are held in an ISA, rather than those that aren’t, could help reduce the amount of tax due. Effectively managing the disposal of assets each tax year to make full use of the allowance could also play a role in effective tax management.

2. Capital Gains Tax rates

When CGT is due, how much you pay depends on your Income Tax band and the assets you’re disposing of:

  • Standard CGT rate: 18% on residential property, 10% on other assets
  • Higher CGT rate: 28% on residential property, 20% on other assets.

If you’re not sure what rate of CGT tax you’re liable for, please get in touch.

There are suggestions that the above CGT rates will be brought in line with Income Tax bands. This could mean that higher and additional rate taxpayers face far higher tax bills. It could mean disposing of some assets no longer makes financial sense or that profits would be significantly reduced.

Bill Dodwell, tax director at the OTS, said: “If the government considers the simplification priority is to reduce distortions to behaviour, it should consider either more closely aligning Capital Gains Tax rates with Income Tax rates, or addressing boundary issues as between Capital Gains Tax and Income Tax.”

As with the first point, if this change were brought in, careful management of allowances would become even more important in tax planning. This should be incorporated into your financial plan to reduce tax liability and help you get the most out of your assets.

Reflecting changes in your financial plan

The CGT review highlights why it’s crucial that your regularly review your financial plan. For some people, potential changes to CGT could mean adjustments need to be made in how they hold and dispose of assets to keep goals on track. Continuing with a financial plan that hasn’t considered changes means tax liability could unexpectedly be higher, potentially harming your income or asset growth.

We know that keeping up to date with changes to allowances, tax rates and other areas of finance can be complicated and time-consuming. We work with all our clients to ensure their financial plan consider allowances and more to get the most out of their finances, with frequent reviews to reflect changes.

Please get in touch if you have any questions and to discuss your financial plan.

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

The Financial Conduct Authority does not regulate tax planning.