Financial Planner at Aberdeen-based Welsh & Taylor Wealth Claire Lang looks at how best to prepare in uncertain times.
It is not the first time I have said saving for a rainy day is important, but I also know financial planning can be confusing.
From annuities and GARs (Guranteed Annuity Rate) to flexi-access, even managing a simple pension can feel overwhelming.
With a UK economic recession looming and many people already feeling the pinch of the cost of living crisis, financial planning can no longer be ignored.
Energy bills: Here’s how your costs are set to rocket unless government takes action
However, knowing where to start can often be a challenge in itself.
Beware the bear market
For now, holding investments must take resolve. We are currently in a bear market, which is when a broad stock market index, such as the S&P 500, experiences a 20% or greater decline from recent highs for at least a two-month period.
We can’t know for sure how long this will last, but history tells us the past 14 bear markets since World War II have lasted little more than a year – a reported average of 359 days (CNET Media, June 2022).
If the current UK economic situation follows this trend, we can logically predict the markets will bottom out around January 2023.
This prediction aligns with a new UK Economic Outlook report (NIESR, August 2022), which has concluded the UK economy is likely to enter recession in the third quarter of 2022 and remain there until the first quarter of 2023. It’s now more important than ever to make sure your long-term plans are on track.
In an effort to curb the soaring inflation cost, the bank of England has now increased its base rate. While this is bringing some positives not everyone is reaping the benefits.
Secure advice ahead of mortgage rate renewal
Anyone looking at re-mortgaging or buying a property will now see the increase in the Bank of England base rate reflected in the mortgage rates being offered by lenders, with some lenders already having increased their rates twice in the last few weeks.
If you have mortgage rates due for renewal in the next six months, it is pertinent to consider your options and get advice ahead of the renewal.
If rates continue to go up, millions of people could easily find themselves paying hundreds of pounds more a month for their mortgage as rates are looming ever closer to 5%.
If rates continue to go up, millions of people could easily find themselves paying hundreds of pounds more a month for their mortgage.”
Alongside the soaring rise in energy costs and the general cost of living this can really have an impact on people’s finances.
While this isn’t great news for homeowners, for those of us with cash savings the Bank of England base rate rise will likely have a positive impact. Many banks are upping their savings account interest rates making it slightly more beneficial to have cash savings.
Looking at different offerings from providers right now may enable you to switch your current cash savings to an account, generating more return than you’re currently getting. However, be cautious of locking into fixed interest savings accounts.
As inflation rises for the rest of the year and likely into 2023, securing a fixed rate savings deal now could mean missing out on higher rates tomorrow should the Bank of England base rate see continued increases.
On the face of it, the increase in savings rates looks like great news, but when you compare it to the current levels of inflation, which we expect to hit 11% in the next few months, it’s hard to get excited by the increase.
Planning to buy a Ferrari or have weekends away?
In real terms, unless your account is generating at least the level of inflation, then the value of your money is still shrinking in real terms.
Typically, the longest-term plan people have is for retirement. When discussing current finances and retirement planning with my clients, I find it helps when people can visualise it. I often start by looking at their goals – are they planning to buy a Ferrari or do they simply want to do more of what they are doing now, be it holidays, weekends away, dinners out and so on.
It is also useful to split retirement planning into three stages: active, where you will be spending the most money; contented, where you have settled into retirement and are perhaps not quite as extravagant and later life.
By setting goals for each stage and using various assumptions, you can look at what you have now and how that might look at the point you want to retire. You can then easily see if there are any shortfalls and establish a plan to start filling the gaps.
One of the great things with a plan is you can stress test it against different situations such as the predicted recession and see what effect different situations might have on the long-term plan.
A good financial planner can certainly help you to feel more prepared for uncertain times. They can also advise you on decisions along the way that could potentially have a detrimental effect on your long-term financial well-being. However, the most important thing to do is get started and do this sooner rather than later.
When working with a financial planner, I am a firm believer the adviser you choose should be someone who is with you throughout your whole financial journey. Planning is a long game so it should be someone you like and who you can see yourself working with for many years.
As well as the working relationship, reviews and testimonials from others are always useful. However, qualifications are also an important consideration.
Important to check adviser can provide what you need before you start
While the gold standard of qualifications for financial planners is Chartered status, specific types of advice require additional qualifications such as advice around final salary pensions. It is therefore important to check your adviser can provide what you need before you start.
While the looming recession and current economic climate may feel overwhelming and even a little stressful, procrastinating on tackling your finances will only delay what you need to do now.
If you start planning for today and the future you can then make sure you are as prepared as you can be to weather the storm and start to enjoy those rainy days.
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