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Clarke Nicklin Financial Planning

'protecting your wealth and helping your investments grow'

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January 2017

Capturing the upside – Forecasting future variations in volatile investment returns

To invest successfully, you have to navigate complex market forces, so it’s important to take a more rounded approach. Investors have much to think about when choosing and understanding investments; in particular, market volatility and the impact it can have on your investment.

Choosing the right investments

Understanding volatility is vital to the overall process of choosing the right investments. Volatility is how sharply and how frequently a fund or share price moves up or down over a certain period of time.

It can be triggered by any number of factors. The UK stock market, for example, can fluctuate because of various factors both home and away: the Eurozone debt crisis, the slowdown in the US and problems as far flung as China can all have a turbulent effect on markets. Periods of losses/downturns can be followed by upswings (also known as ‘rallies’) and vice versa. But this is the very nature of the stock market.

Standard deviation

The most common measure of volatility is standard deviation. This measures how much the value of an investment moves away or deviates from its average value over a set period of time, i.e. how much it rises and falls. The more volatility, the higher the standard deviation.

Forecast volatility attempts to use standard deviation to forecast future variation in returns. The higher a forecast volatility figure, the more an investment could move both up and down over time.

Loss or gain

Generally, investors are happier with lower volatility, even if this means making less money over time. Investors worry most about volatility when markets are falling. When this happens, remember that any loss or gain is only realised when you sell your holdings. Investing for the long term means short-term volatility is not necessarily a reason to panic and make drastic changes.

It can actually work to your advantage if you invest a monthly amount. When prices go up, the value of your investment rises; when they go down, your payment buys more. This is often referred to as ‘pound cost averaging’. However, this cannot be guaranteed.

Smooth out any bumpy rides

Spreading risk through diversification is often said to be the first rule of investment. Diversification across a range of markets and asset classes will enable your savings to go to work in different markets and, crucially, reduce exposure to one individual area, as one asset class may go up while another goes down.

Strategies of long-term investing and regular saving will help smooth out any bumpy rides. Matching your attitude to risk with your investments is crucial to getting the right portfolio for your needs.

Give your money greater potential to grow

 Investing gives your money greater potential to grow in value than if you put it in a savings account or cash ISA, and the longer it’s invested the more opportunity it has to grow in value. Your investment choices can make a significant difference to the value of your long-term savings, so it’s important to obtain professional financial advice to find a solution that’s right for you.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

 

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Freedom to choose – Using your pension pot

Have you considered all the potential costs of retiring? Some people find their expenses fall once their working life ends, but it’s important not that assume that all your expenses will go down – some may increase, such as heating and leisure costs.

The constantly evolving landscape of legislative change provides both challenges and opportunities in the retirement planning process. The pension reforms that came into effect on 6 April 2015 were introduced to offer more choice and flexibility on what we can do with our pension savings if we’re aged 55 or over.

There has always been the option to take 25% of your pension pot tax-free, but with the new pension changes you can now take your whole pension pot in one go.

You now have many options available to you:

  • Leave your pension invested if you don’t need to take money straight away
  • Take the tax-free cash and leave the rest invested
  • Take some or all of the money as a cash lump sum
  • Buy an annuity to provide a lifetime’s secure income
  • Use a combination of the above

Taking your whole pension fund as a cash lump sum is the biggest change to come out of the 2015 pensions changes, so what does it all mean?

The pension changes mean you can access your pension fund as and when you like from the age of 55 (rising to age 57 in 2028). One option is to take the whole pension pot in one. However, it’s important to remember that the first 25% of your pension pot is tax-free, and you will pay Income Tax on the remaining 75%.

Income Tax charge

Taking your entire pension as cash could involve a high tax charge. There is a standard Personal Allowance (£11,000 for 2016/17) on which no Income Tax is paid. Above this amount, tax is paid on your total income. Currently, the tax bands are 20%, 40% and 45% depending on your income. So, any cash you take out of your pension (except for your tax-free lump sum) is added to your income for the year and may well push you into a higher rate tax band.

There are added risks you need to consider, such as:

  • Paying too much tax on pension withdrawals
  • Buying unsuitable investments
  • Using all of your funds too fast

Using your pension money now could help your finances but also affect your future. It’s important to receive expert financial advice so that you make an informed decision. Whatever you choose to do, it’s important to understand the tax implications and consider all your pension options to avoid any unnecessary tax bills. If you would like to review your options, please contact us.

A PENSION IS A LONG-TERM INVESTMENT. THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

YOUR PENSION INCOME COULD ALSO BE AFFECTED BY INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION, WHICH ARE SUBJECT TO CHANGE IN THE FUTURE.

 LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION MAY BE SUBJECT TO CHANGE, AND THEIR VALUE DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF THE INVESTOR.

 

Your financial future is in your hands

Now might be an ideal time to plan ahead financially for you and your family.

Independent Financial Advisor and Partner of Clarke Nicklin Financial Planning, Scott Herbert discusses the benefits of having a plan in place for a healthy financial future.

‘The main message is ‘don’t delay!’ Scott emphasises ‘Set objectives of where you want to be, when you need to start and how. Do it now and don’t procrastinate as another six months will go by.

‘For a healthy retirement fund establish how your pension is performing and whether you need to top it up, consider what age and what level of income you wish to retire at. Bearing in mind there are differing factors as to what it’s worth when you actually retire, such as at what age you retire and start drawing your pension.

‘To build up a healthy investment plan firstly consider your attitude to risk. The higher levels of return have a higher risk factor due to the more volatile sectors and regions that are targeted   whereas the more cautious have a lower return.

‘Think about your long-term financial future. You are at the centre of your financial plan: your goals (both short term and long term), your situation, and your financial strengths and challenges.

‘Over time, both markets and your lifestyle can change dramatically. Therefore it’s important to keep your pension and investments under continual review to get the most out of them‘.

At the end of the day your financial future is in your hands, if you would like any further advice or to come and have a chat with Scott or his team for a no obligation meeting please contact us on 0161 495 4700 or email katha@cnfp.co.uk.

A PENSION IS A LONG-TERM INVESTMENT. THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

YOUR PENSION INCOME COULD ALSO BE AFFECTED BY INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION, WHICH ARE SUBJECT TO CHANGE IN THE FUTURE.

 THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

 

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