Great expectations for the year ahead
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Given the challenges of the past two years we could be forgiven for focusing on life’s trials and tribulations as a new year dawns. However, while concerns about supply chain disruption, new COVID variants and rising inflation may be disconcerting for investors, all the signs are that the coming 12 months will be a time of opportunity as well as risk, as we move towards a post-pandemic future.
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In
its final 2021 assessment of economic
prospects, the International Monetary
Fund (IMF) predicted a continuation of
the global recovery in 2022, with the
world economy forecast to grow by 4.9%
this year. The international soothsayer
did, however, acknowledge that the
degree of uncertainty surrounding future
prospects has risen with policy choices
becoming more difficult and increasingly
complex.
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Inflation-proof your wealth
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In particular,
concerns surrounding global supply chain
issues and rising inflation have created
a policy dilemma for central banks.
These twin concerns have also heightened
the need for investors to employ careful
and considered strategic thinking in
order to reposition their portfolios to
take advantage of new growth
opportunities while ensuring their
wealth is inflation proofed.
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Although the spectre
of rising inflation is expected to see
central banks tighten monetary policy as
the year progresses, deposit-based
savings rates are forecast to remain at
historically low levels.
Such meagre returns have prompted many savers to shift their money into investments, with research1
suggesting over half of all adults have
done so. This move though has raised
concerns that unrealistically high
return expectations could leave some
investors susceptible to investment
scams.
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While the coming year
is sure to present ongoing challenges
for investors, the key to successful
investing will remain the adoption of a
carefully considered strategy based on
sound financial planning principles.
Attractive investment opportunities are
likely to present as 2022 unfolds and,
with our help and careful repositioning
of your portfolio, you should be able to
make the most of these as and when they
arise.
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The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.
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Climate disclosures – high on corporate agendas in 2022
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To protect investors from greenwashing, the IMF is urging regulators to do more to prevent financial companies from making misleading claims concerning their environmental credentials - 'Proper regulatory oversight and verification mechanisms are essential to avoid greenwashing.’ Achieving the scale of expansion needed to meet the goal of reducing worldwide carbon emissions to net zero by 2050 will demand that investors properly understand how their money is used.
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The
UK’s largest companies will be required
to make climate-related financial
disclosures from April this year. Firms
with a turnover in excess of £500m and
at least 500 employees are expected to
publish the climate-related risks they
face. On behalf of the first G20 country
to make this compulsory, Economic
Secretary to the Treasury, John Glen
commented, “These requirements will not only help tackle greenwashing but also enable investors and businesses to align their long-term strategies with the UK’s net-zero commitments.”
Disclosure requirements will be aligned
to the Task Force on Climate-Related
Financial Disclosures, which is backed
by over 1,000 global financial
institutions, and is responsible for
$194trn of assets. The new rules mean
companies will need to
“focus on the effects of climate change on their business”
and communicate to investors how these
are being managed, according to Chief
Executive of the Investment Association,
Chris Cummings.
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The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.
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What’s on your playlist this year?
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Over the years,
several studies have proven that
investors can enter emotional
relationships with the stocks in which
they invest. Research has reinforced the
concept that equity prices are not only
driven by analysis of a company’s
prospects but also by external factors
which can directly impact investor mood.
For example, correlation has been found
between improved stock market
performance on sunny days or poor
performance after a country loses a
crucial football match.
One recent study
introduces a novel measure of investor
sentiment, which it suggests captures
actual sentiment rather than shocks to
sentiment2. A significant
correlation has been determined across
40 national stock markets between weekly
equity returns and the emotional content
of that week’s top 200 songs on Spotify.
The findings suggest that stock markets
perform better when a country is
listening to happier songs!
‘In our main findings, we document a positive and significant relation between music sentiment and contemporaneous market returns, controlling for world market returns, seasonality's (sic) and macroeconomic variables. Music sentiment also predicts increases in net mutual fund flows and absolute sentiment precedes a rise in stock market volatility. Our study provides evidence that the actual sentiment of a country’s citizens significantly affects asset prices.’
Whatever’s on your
playlist in 2022, you can rely on us to
take the emotion out of your investment
decisions.
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Global attitude to risk variance
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Affluent to
ultra-high-net-worth UK investors are
more conservative than their
international counterparts, according to
new research3. Over half
(54%) of UK respondents rated themselves
as conservative in their approach to
risk, with the lowest percentage of any
nation surveyed (10%) saying they take
an aggressive approach. In stark
contrast, almost half of Chinese
respondents rated themselves aggressive
in their approach to risk, with just 19%
conservative. Possibly reinforcing the
lower risk, long-term mindset, the main
reason for two-thirds (66%) of UK
respondents for investing and saving is
for their retirement, with 35% citing
future healthcare costs and
entrepreneurial activities (17%).
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Recent data
analysis4 has highlighted
that over 1.5 million of the UK’s
highest earners failed to claim an
estimated £810m in tax relief in the
2018/19 tax year, totalling around
£2.5bn between 2016/17 and 2018/19.
Higher rate taxpayers benefit from 40%
tax relief, yet eight in ten didn’t use
their Self-Assessment tax return to
claim it; similarly, over half (53%) of
additional rate taxpayers failed to
claim the 45% tax relief for which they
are eligible.
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2The London Business School, 2021, 3Avaloq, 2021, 4Pension Bee, 2021
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The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.
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Investor income boosted by ‘special dividends’
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UK dividends climbed to £34.9bn in Q3 2021, an 89% year-on-year rise, according to the latest UK Dividend Monitor5. Sizeable one-off special dividends were partially responsible for the increase, a trend expected to be evident in Q4 too; however, the underlying total in Q3, excluding specials, leapt up 52.6% to £27.7bn. In context, this large year-on-year rebound is set against a pandemic-hit Q3 2020, in which dividends halved.
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Ian Stokes, Managing
Director of Corporate Markets at Link,
commented on the
data, “The good news is that we have consistently seen companies deliver more in dividends than we thought likely at the beginning of the year… Companies were progressively less impacted by each lockdown and many of them took action to bolster their balance sheets during 2020… Dividend firepower is now much stronger as a result.”
In reference to the
prevalence of special dividends, he
continued,
“The boom in special dividends reflects how some companies are making catch-up payments, some are capitalising on very strong demand, and others are seizing the moment to sell assets at a time of high prices and numerous cash-rich potential buyers.”
Although this is good
news for income investors, dividend
growth may be driven by sectors which
might not do as well in the future,
which is why it’s important to diversify
across different sectors.
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The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.
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Consider all the variables
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From many people’s perspectives, the Autumn Budget may have left a feeling that nothing much had changed in the world of personal financial planning, as there were no major changes announced to Income Tax, Capital Gains Tax, Inheritance Tax or pensions. However, the key consideration is how outside factors such as higher inflation could affect your finances and what steps you should take before the end of the tax year to make the most of any allowances and exemptions.
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Official figures from
HM Revenue and Customs (HMRC) for April
to September 2021 show that IHT receipts
totalled £3.1bn, £0.7bn higher than the
same period in 2020. With the nil rate
band and residence nil rate band now
frozen until April 2026 at £325,000 and
£175,000 respectively, the importance of
effective estate planning shouldn’t be
overlooked.
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Individual Savings Accounts (ISAs)
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The annual ISA limit
has now been frozen at £20,000 for five
years. If the allowance had increased
with inflation each year since 2017, it
would stand at £21,440 today, sheltering
an additional £1,440 from the taxman.
JISAs celebrated their tenth birthday in
November – the allowance remains at
£9,000.
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The government
revealed in September that it would
increase Dividend Tax by 1.25 percentage
points from 6 April 2022 to help fund
health and social care. This means
investors will have to pay more on any
income from shares held outside ISAs and
above the £2,000 Dividend Allowance.
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The Lifetime Allowance
remains at £1,073,100 and the Annual
Allowance remains at £40,000. As these
allowances haven’t increased with
inflation, it effectively means those
saving to the maximum extent possible
with tax concessions can save less in
real terms each year.
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It’s important to be
aware of all the variables at play;
inflation, interest rates, taxation and
frozen allowances all affect your
finances. Talk to us for help with your
individual circumstances.
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The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. The Financial Conduct Authority (FCA) does not regulate Will writing, tax and trust advice and certain forms of estate planning.
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Rise of the ‘Late Financial Bloomers’
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Research6 suggests a new group of consumers – Late Financial Bloomers – are set to change the face of retirement.
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A series of
socioeconomic factors, including later
home ownership, are the main drivers
behind this shift. Marriage and divorce
trends are also key contributors: on
average, first marriages now take place
four years later than they did 20 years
ago; similarly, divorce rates peak 20
years later than they did two decades
previously.
Childbirth plays a
role too. More women over 40 now give
birth each year than those under 20,
which means a growing proportion of the
population will be supporting children
through education later in life rather
than focusing on retirement planning.
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Currently, Late
Financial Bloomers account for just 6%
of retirees, but this figure is set to
rise significantly over the next 15
years. This shift towards later
financial security means more people
will face complex retirement journeys,
thereby increasing the need to plan
ahead.
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Protect your retirement from the risk of mental decline
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Retirement – that magical time when we can finally live our lifelong dreams. Increased life expectancy means that many of us can now expect a longer retirement, but this comes at a cost: the increasing prevalence of age-related cognitive decline, which could leave us vulnerable to costly financial errors.
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According to the
Alzheimer’s Society7, there
are almost 885,000 people living with
dementia in the UK, and estimates
suggest that between 5% and 20% of
over-65s suffer from mild cognitive
impairment (MCI), a condition in which
someone has minor problems with
cognition, such as memory or thought
process.
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Planning for the
possibility of cognitive decline is an
essential part of preparing for
retirement. Although many people still
have the capacity to live independently
and make decisions for themselves, MCI
has been linked in scientific studies to
poorer financial capacity and an
increased susceptibility to scams.
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Over 80% of investors
surveyed8 thought the ideal
time to transfer financial control would
be ‘sometime after they had begun to
experience some cognitive decline but
before they became completely
incapable.’ Respondents thought there
was a higher than one-in-three chance of
a mistimed transfer, partly attributable
to a reluctance to relinquish control,
which exemplifies the need to start
planning sooner rather than later, so
that any future transfer takes place on
your terms.
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Although it may feel
awkward, preparing for the possibility
of cognitive decline requires careful
planning, not only having legal
documents in place but also starting
conversations with your family and those
you trust about money and your goals for
the future, in advance of its possible
onset. This means that everything is out
in the open and close connections are
more likely to notice if you begin
making decisions about your money that
appear to contradict your objectives.
We can assist you with
planning and in starting these
conversations with your family well in
advance and help you better plan for the
future, giving you a greater sense of
ownership and control over your
plans.
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7Alzheimers Society, 2019, 8Vanguard. 2021
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The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.
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Tackling pension scams head on
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With pension scam losses totalling millions each year, the Financial Conduct Authority (FCA) has reaffirmed its commitment to tackling scams in order to ensure the long-term health of the pensions market.
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In a
speech to delegates at the Pensions and
Lifetime Savings Association, the FCA’s
Executive Director of Markets Sarah
Pritchard said steps have been taken to
stop scams reaching consumers,
“We want people to be better protected from the risks of scams and know how to protect themselves against them. Our ScamSmart campaign... gives knowledge and tools to help people protect themselves from scams.”
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We can all take simple
steps to protect ourselves against
potential scams. These include:
- Make sure you check who you’re
dealing with
- Don’t give out personal information
you wouldn’t share with a stranger
- Don’t feel pressurised into making
quick decisions.
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New regulations came
into force on 30 November 2021 to
protect pension savers and stop
suspicious scam transfers, as pension
trustees and scheme managers received
new powers to intervene. Previously
pension providers were not allowed to
refuse to carry out a transfer where the
saver has the right to do so, even if
they were suspicious, but the new
regulations will enable trustees to
prevent a transfer request if they
see evidence of ‘red flags.’
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The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.
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IF YOU WOULD LIKE ADVICE OR INFORMATION ON ANY OF THE AREAS HIGHLIGHTED IN THIS NEWSLETTER, PLEASE GET IN TOUCH.
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It is important to take professional advice before making any decision relating to your personal finances. Information within this newsletter is based on our current understanding of taxation and can be subject to change in future. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK; please ask for details. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor.
The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. Changes in the rates of exchange may have an adverse effect on the value or price of an investment in sterling terms if it is denominated in a foreign currency. Taxation depends on individual circumstances as well as tax law and HMRC practice which can change.
The information contained within this newsletter is for information only purposes and does not constitute financial advice. The purpose of this newsletter is to provide technical and general guidance and should not be interpreted as a personal recommendation or advice.
The Financial Conduct Authority does not regulate advice on deposit accounts and some forms of tax advice.
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Thomson Cooper is authorised and regulated by the Financial Conduct Authority for financial advice and consumer credit activities. FCA number 104673 Office: 3 Castle Court, Carnegie Campus, Dunfermline, Fife, KY11 8PB VAT number GB268913814.
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