AIG have recently replaced their old Critical Illness cover with a new and improved version known as Term Assurance with Critical Illness Choices. The goal is the same – to offer cover to customers in the event that themselves or a loved one develops a critical illness; is diagnosed with a terminal illness with a life expectancy of 12 months or less; or passes away.
What is different with the new offering is in the wording of the product name, “choices”. Customers will automatically get the standard cover which will cover them for the core critical illnesses. This is great for those that want a lower cost critical illness cover, but for those that want additional benefits, they can customise their policy to suit their needs and budget. The options available at an additional cost are enhanced critical illness cover, children’s cover, waiver of premium and total permanent disability.
“Risk comes from not knowing what you’re doing” – Warren Buffett
Investing was never easy. As humans, we are naturally risk-averse, and losses hurt us more than we enjoy equivalent-sized gains. You probably did not need to read this to suddenly become aware of it – this is encrypted in our brain and teams of psychologists and economists have gathered plenty of empirical evidence proving it.
This self-defence mechanism has been useful in our collective survival, but prosperity and recognition reward the wise risk-takers, innovators and entrepreneurs. To put it simply: avoiding risks allows us to survive but knowing when to take risks allows us to thrive. What constricts us from taking more potentially rewarding risks? Lack of knowledge – we fear what we do not know!
Today we’re going to talk an extremely important, yet rarely addressed topic – how do you maximise your retirement income, without substantially increasing the likelihood of depleting your assets? For a long time, finding an answer to this problem could be compared to finding the Holy Grail of financial planning. Worry not, as I might have good news today.
During most of this article, I will avoid diving into the details and technicalities, as my goal while writing this article is for it to be readable by the ‘average individual’ as much as possible. Furthermore, I always thought that the intricacies of financial planning and investing to be more appealing to financial planners, like myself, and that clients like simplicity – the more, the merrier. It’s also worth noting that the only reason why we’ll be using US data is that there’s more information readily available. We’ve done some testing, and the results are pretty reliable across different countries.
From a retiree perspective, I find that their goal is simple, and it usually manifests itself in four simple questions:
- Do I have enough to retire?
- How much is enough?
- Will my income be able to keep up with a rising cost of living (inflation)?
- If the market were to fall by, say, 30% tomorrow? How would that change my situation?
The world economy is facing a big challenge as the coronavirus outbreak causes a drastic drop in financial markets across the globe. This has a direct impact on pension investments and pension holders may be concerned about the value of their pension fund, and how this may affect their retirement savings.
You may also be asking yourself what the most appropriate course of action is at the moment. Should you continue your regular contributions? Should you take a pause, and wait for all this to be over before resuming your monthly payments? Or should you just keep to cash savings as this pandemic is the perfect example of how volatile financial markets can be when put to the test?
Whilst it may seem a bizarre time to be thinking about investing money, the words of perhaps the worlds most savvy investor (Mr Warren Buffett) should not be ignored.
For those that have not heard Mr Buffett’s mantra, it goes along the lines of “When others are being greedy, be fearful, when others are being fearful, be greedy”.
The recent collapse in global stock markets brought about by fears of the economic impact of Covid-19, has already provided investors with cash the opportunity to buy into the market at heavily discounted prices.
The crisis is still in it’s early stages and it is reasonable to assume that further investment opportunities will present themselves over the coming, days, weeks and possibly months.
Whilst the utopian situation would be to invest at the bottom of the market, there is one fundamental problem all prospective investors face and that is calling the bottom. It is not possible to predict either the utopian timing or pricing.
Given recent circumstances, we would like to reassure clients that we will be conducting business as usual.
All staff are well equipped to work from home and all client meetings can be conducted through phone or video call.
We will continue to provide all services including life and critical illness insurance, pensions and investment advice.
The Abacus Wealth Management Team
Put simply, inflation is the rate at which the average price of a basket of selected goods and services in an economy increases over a period. Usually expressed as a percentage, inflation means a decrease in the purchasing power of the relevant national currency. For example, if inflation is running at an annual rate of, say, 1.5%, goods that currently cost £100 will cost you £101.50 in a year’s time. Consequently, the buying power of £100 is reduced, demonstrating the need to increase its value.
In the UK, inflation is measured in two ways. The most used measurement is the Consumer Prices Index (CPI). The latest CPI figure for the UK released by the Office for National Statistics in January 2020 shows an annual rate of 1.8%. Whilst very low, there is no certainty it will remain at that level, so there is a very real need to look at ways of increasing the value of your savings in order to keep pace and indeed, outpace the prevailing inflation rate.
Why Investing Can Be Preferential to Saving With a Bank
Saving and investing are both extremely important but completely different. Whilst both can help you secure a more prosperous financial future, it is very important to understand when to consider saving and when to consider investing.
Arguably, the most fundamental difference between saving and investing is the ‘risk versus reward’ concept. Saving allows you to deposit your money with only the risk of the deposit taking institution failing, however your returns will be limited to the interest rates on offer. Investing provides the potential of a much higher return, but you take on the risk of capital loss.
A common concern most people have when investing their hard-earned money is losing it. In Gibraltar, HM Government of Gibraltar Debentures have been a popular choice for investors for some time and it’s hard to argue against this. An investment held with a government institution that offers a very competitive, guaranteed rate of interest and return of capital (conditional on the security of Government provisions of the Gibraltar Savings Bank Act) is very appealing.
However, investors should also be aware Governments are not immune to solvency issues and defaulting on payments of capital and interest to investors. You need look no further than what happened to Greece, Cyprus and more recently, Venezuela.
There is also an often, unnoticed consequence of investing all one’s savings in Debentures or indeed any investment that pays a fixed rate of interest. That is the effects of inflation. Gibraltar’s rate of inflation has averaged 2.7% for the last 10 years. Therefore, the real return on your investment (considering the interest rates payable on the current 5-year Debentures in issue) is 0.3% (3% - 2.7%) or 2.3% (5% - 2.7%) for pensioners.
A SIPP is a type of pension that enables you (and/or your financial adviser) to choose investments from an almost unlimited range. These differ from traditional personal pensions offered by insurance companies whereby the investment opportunities may be restricted to a much narrower range.
Tax Relief for U.K. Residents
SIPPs work in much the same way as other U.K. personal pension schemes. You pay money in as and when you like. Relevant UK individuals enjoy tax relief at the basic rate of 20%. If you pay a higher rate of tax, you’ll usually be able to claim back even more through your tax return. You need to be under age 75 to receive tax relief. You should also ensure that you don’t contribute any more than 100% of your earnings (subject to the annual allowance – currently £40,000) after tax relief has been received or £3,600, if this is greater. Inside a SIPP, your money grows free from UK capital gains and income tax with the exception of some un-reclaimable withholding tax on dividends.