Jason Hollands director of wealth manager Tilney gives his eight financial steps to help your finances through the Covid-19 crisis.
Most people have had a lot to worry about in recent months: the health and welfare of their families during the coronavirus pandemic, the threat to their jobs from the resulting recession and, for many, serious disruption to the education of their children.
Alongside these understandable worries, interest rates have been slashed to an all-time low which has decimated the already meagre returns on savings accounts and sharp declines on stock-markets since the start of the year have impacted the value of pensions, stocks and shares Individual Savings Accounts (ISAs) and other investments.
These in turn might put at risk the ability to pay-off a mortgage or provide financial security in retirement. For those already drawing upon their investments to support their income, widespread dividend cuts and cancellations have added to the financial squeeze.
If that combination of worry, financial pain and uncertainty wasn’t enough already, lurking in the shadows is the prospect for tax increases further down the line as the government stares at the mounting costs of the pandemic.
With that in mind, I have put together a check list of eight areas that people should consider:
- Get a balanced picture by reviewing your outgoings
The crisis has undeniably made many families worse off, with earnings lost, reduced or at risk and lower income on savings and investments as well. While it is completely understandable to dwell on this, a balanced pictured of the overall situation also requires a fresh look at your outgoings.
The lockdown means many peoples’ monthly outgoings have also dramatically declined as cars sit idle, pubs, bars and restaurants are closed, sporting and social events are cancelled, and holidays aren’t happening.
Oil prices have more than halved since the start of the year, meaning lower household energy costs and reduced prices at the pumps.
By understanding the impact of the pandemic on both your income and outgoings, you will be in a much better position to draw up a household budget that can get you through the current period.
- Identify further cost savings
Thoroughly reviewing your actual outgoings is also an opportunity to identify any further savings that can made and is time well spent during the lockdown or while furloughed. A careful inspection of your standing orders and direct debits may reveal subscriptions and memberships taken out long ago that you are just not using. This might include travel insurance or gym memberships you are unlikely to need any time soon.
For those facing cash flow difficulties, mortgage providers are providing temporary three payment holidays. It may also seem tempting to opt out of contributions to workplace pension schemes during the current period but do think very carefully before doing so. This is likely to mean forgoing employer contributions – effectively “free money” – and any extra cash in your wage slip will also be taxable, so the real saving may not be what it seems. On top of this, it makes sense to continue investing when investment prices are lower.
Time spent checking the most competitive electricity, gas, mobile phone and internet tariffs can be surprisingly rewarding, yielding meaningful savings. And the same applies when it comes to renewing vehicle or home insurance: don’t just automatically renew with the existing provider without shopping around.
These savings can be used to shore up any short fall in income, rebuild rainy day funds or ploughed into investments so that you benefit from the recovery phase and help repair the blow to any longer-term financial plans.
- Review your cash balances
Everyone should endeavour to have some ‘rainy day’ cash savings squirreled away to provide a financial buffer for emergencies such as times like these. Yet some people hold a lot more cash than they need to for such purposes, often left untouched for many years.
While a large cash war chest can seemingly provide a sense of security, over time the real value – the future spending power of that cash – will be slowly eroded by inflation. With interest rates now at their lowest level in history, the case for keeping large cash balances that you are highly unlikely to need to access for years is particularly poor. While inflation isn’t a problem currently, the huge new amounts of cash being created to try and support the global economy, do raise the risk of rising inflation in the years to come.
Take a long-hard look at how much cash you need to keep readily available. Interest rates are very low across the board, but make sure you are getting the best terms possible while taking care to ideally not hold more than £85,000 with any one UK bank or building society. This is the amount that is protected under the Financial Services Compensation Scheme in the event a financial institution collapse.
Consider feeding any excess cash that you can identify as highly unlikely to be needed in a hurry, into investments for the longer-term. It really is important to try and get a return on this wealth that at the very least keeps pace with inflation over the longer-term.
- Investing when the news is gloomy makes sense
While many people will naturally shy away from the idea of investing when the economic news is dire and markets have experienced a period of turmoil, investing during periods when share prices have weakened presents strong opportunities for long-term investors.
Stock-markets try to look ahead to the future and so declined sharply in February and March, anticipating the global economic havoc that the coronavirus outbreak would create. More recently, markets have started to recover as central banks – like the Bank of England and US Federal Reserve – and governments, have announcement huge rescue packages to support economies during the crisis. An incredible amount of new money has been created by central banks in the last couple of months and much of this is finding its way into the financial markets, providing a powerful backstop for investors for taking risk.
- Review your existing investments
Anyone with existing investments – including pensions – should take a close look at what they already own and not leave this until the end of the tax year when many of us typically do to cast an eye over their affairs. The past few months are behind us now but what matters from here is being positioned as well as can be for the future so that your investments can get back on track. Reducing risk now, such as selling shares and moving into cash, risks locking in losses made year-to-date. Take a long hard look at how your investments are spread across shares, bonds and cash, as well as different markets and consider making any adjustments that will help ensure you don’t miss out on the recovery. If that sounds too demanding to do yourself, seek out the help of a financial adviser.
- Maximise tax efficiency
The two core pillars of tax-free investment in the UK are ISAs and pensions and utilising these should be first ports of call for most people able to do so. Adults can invest up to £20,000 per person in an ISA this year. Any returns are completely tax-free, and ISAs are also very flexible, allowing you to withdraw your money whenever you like.
Pensions have greater restrictions than ISAs and cannot be accessed until you are at least 55-years old, but they do currently have unbeatable tax features as contributions to pensions provide tax relief at your marginal income tax rate. This means that a 40% taxpayer can make a £10,000 pension contribution at a net cost of just £6,000 after the impact of the tax relief.
- Support your family with financial gifts
If you have children or grandchildren who may be struggling financially, perhaps because they have been made redundant or been furloughed, now might be a time to consider providing them with a financial helping hand. Everyone can make financial gifts of up to £3,000 per annum without adverse tax implications but any gift is potentially exempt from future inheritance tax if the person who makes it lives for a further seven years.
Outright lifetime transfers of assets, such as a property or shares, can give rise to capital gains tax on any increase in value under their existing owner. Therefore, doing so while valuations are currently depressed might make sense rather than waiting until these have recovered in future years as the tax bill could be much lower.
- Protect yourself for the future
Few people would have anticipated a health crisis like this just a few months ago. It is a reminder that life can be very unpredictable. Unforeseen events, such as critical illness or being involved in serious accident, can have life changing consequences with drastic financial implications.
Few of us like to think about such things happening to us, but it is responsible to think about how we can protect ourselves and our loved ones from future uncertainty. Consider insurance arrangements, like life cover, critical illness cover or income protection that will protect your finances should anything unexpected happen and give you greater peace of mind.