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.
As you will be aware, the statutory sick pay in Gibraltar is only 2 weeks full pay and 4 weeks half pay in any 12 month period. Group Income Protection insurance is a valuable benefit which provides financial protection in the form of a replacement monthly income for your employees (and their families) if they are unable to work for a protracted period. There are tangible and intangible benefits for the employer as well.
Firstly, the amount paid in premiums to the scheme is a deductible expense and will therefore reduce the company’s corporation tax bill. Not only is it a relatively low cost benefit, but a wide variety of features can be added and it can be tailored to the employer’s requirements. It also allows the company to demonstrate its commitment and care to its employees and their families. This is something that, in turn, may increase employee morale and loyalty from existing employees and makes a business more attractive to new employees.
Protect and care for your staff with a Group Income Protection policy.
Telephone – 20042967
Have you reviewed your employment contract recently?
Imagine a situation where something were to happen to you (or any of the earners in your family for that matter) which resulted in you, or them, not being able to return to work for an extended period of time. Unfortunately, this scenario is not all that uncommon nowadays.
Legally, the Gibraltar Government or any private company you work for only has to pay you two weeks full pay and four weeks half pay in any twelve month period. The question you have to ask yourself is, do you think that the statutory minimum is enough to cover your monthly expenses and maintain a good quality of life?
With the imminent closure of the Leeds Building Society in Gibraltar, it may be that you will have to transfer your money elsewhere, but where? The answer to this depends entirely on how much of a return you would like to receive on your current savings. You could transfer it to another bank, however, considering the current low interest rate environment, inflation could have a serious impact on the value of your savings over the long term. To put this into perspective, if you had £10,000 of savings in a bank with an interest rate of 0.5% and inflation, which has averaged 2.7% in Gibraltar over the last few years, the value of your money would erode by 2.2% per annum. On this basis, over the 10 year period, the value of your money would reduce to £8,005.50.