18 May 2020
The Covid-19 crisis has had a significant impact on every aspect of people’s lives, not least their personal finances.
Brewin Dolphin, the wealth manager, has said that the current situation makes it more important than ever for everyone to sit down and make a financial plan to help them navigate the months and years ahead, potentially under very different circumstances.
Alan Harvey, financial planner at Brewin Dolphin, said: “Financial plans should be reviewed on an ongoing basis – it’s not something that you do once. They are particularly pertinent at times of change, which makes it more important than ever to make a new one, whether it is your first or you’re reassessing an existing plan.
“The Covid-19 crisis has changed a lot of people’s lives in different ways and posed some fundamental questions. From a financial perspective, generally speaking, there is a five-point plan you can work through to get a handle on your situation and take the right steps to address any issues.”
- Understand your income and look at alternatives
The wider measures taken to manage Covid-19 have had a significant impact on many people’s income. Some have, unfortunately, lost their jobs altogether, while others have seen their wages cut significantly by being placed on the government-backed furlough programme or through salary reductions. Similarly, company dividend cuts will have an impact on people who invest for income – particularly retirees.
Alan Harvey said: “If you’ve recently been furloughed, had to take a pay cut, or lost your job entirely, you need to get a firm handle on what that means for your income. When you have done that, double-check your insurance policies – especially income protection – to see if they will pay out for redundancy or income loss. But, pay attention to the wording, as some only pay out if you cannot work due to illness.
“Alternatively, you may want to look at your existing savings and assets. If you have stocks and shares where the dividends are being reinvested for growth, this could be source of income to top up any salary loss. In the current environment, you may want to set up a standing order that pays out a certain amount of money, regardless of the dividend paid – although this may eat into previous capital gains and accrued dividends.
“It’s worth remembering that all money taken from an ISA is tax-free. If you need money in the short-term and withdraw from an ISA, you can look to top it back up at a later date. And, if you’re fortunate enough to be able to put the money back before the end of the tax year, this won’t eat into your annual allowance, thanks to the flexible ISA rules introduced a few years ago. If, for example, you needed a lump sum of £10,000, you could take this out of an ISA in May and return it before April 2021 and still have your full ISA allowance. However, it must be done in the same tax year.
“Also remember to speak to your family. They may be in a fortunate position to help you, particularly if they are older and have one eye on inheritance tax. Rather than waiting until they have passed away, they may feel it is a better idea to pass on wealth now in these unique circumstances. While there is the £3,000 annual gifting allowance, they may also want to look at passing on excess income. If, for example, they have a pension that generates income of £20,000 per year, but they only use £15,000 of it, the other £5,000 can be gifted to a family member.
“However, before doing this you should sit down with an adviser and look through the practical implications. There is also paperwork: it’s a good idea to demonstrate that you knowingly relinquished the income by logging the IHT403 form next to your Will that shows you decided to pay excess income to a child or grandchild, in case HMRC decide to look at your tax affairs.”
- Engage with your expenditure and find savings
The other side of the same coin is expenditure. While many people’s day-to-day costs will have been reduced by the absence of a daily commute and the spending habits that come with normal working life and socialising, there will still be opportunities to find other ways of keeping cash in your household. It is also important to engage with the issue if you find yourself in a difficult position when it comes to the larger expenses.
Alan Harvey said: “Understanding your expenditure is as important as getting to grips with your income. That means going through your bank statements, looking at what standing orders and direct debits go out every month, along with any subscriptions or memberships. Ask yourself, do I really need this? Some people may have considered eating at restaurants and buying clothes a necessary expense, but in tough times it’s important to reassess whether they are essential. Make a spreadsheet or write it all down – while many people could have a good guess at their expenses, having it down on paper can be a real eye-opener.
“For those who cannot match their current expenditure, don’t let it become a bigger problem by avoiding or ignoring the issue. Speak to your landlord or mortgage provider about payment holidays; contact your local authority about the options available on council tax. Even if it means paying later rather than now, at least you can avoid falling into arrears or more debt. Pick up the phone and actively address the issue – the majority of businesses should be sympathetic in the current climate and they will no doubt be dealing with many similar cases.”
- Keep a nest egg aside and assess other assets
Normally associated with companies, liquidity – the availability of ‘liquid’ assets, usually cash – is just as important for individuals. The impact of lockdown on individuals’ income may have made their usual sources of income more precarious or seen them cut or disappear altogether, underlining the importance of having a source of easily accessible savings.
Alan Harvey said: “Regardless of the situation, it’s important to make sure you have enough cash for short-term needs. We would always recommend having six months of essential expenditure available – if you normally spend £1,500 per month, that means £9,000 in the bank. This should also take into consideration any large one-off expenses coming up, such as plans to replace a car or any work required on a property. If any of those are on the horizon, you may want to build in a bit extra.
“Another step to take is look at what assets you have and who owns them. Are they in your name or both your and your partner’s? There may be opportunities to transfer assets to reduce liabilities. This can be difficult to do now, with values so wildly affected by the Covid-19 crisis; but there may have been some stocks or shares that were previously loaded with gains that you could transfer to a partner who can benefit from their recovery.”
- Change your plans to reflect personal and family circumstances
The current situation has often been described as ‘unprecedented’. Many people have speculated about the fundamental changes it may bring about to the way society functions and businesses operate. Such turning points often lead individuals to re-assess their lives and decide to take a different path.
Alan Harvey said: “The crisis will likely lead to a lot of changes in personal circumstances for people that need to be factored into any financial plan. For example, many solicitors are expecting a rise in divorce cases on the back of lockdown, while unfortunately many families will have lost loved ones.
“It may also cause some people to re-evaluate their lives and make some big, lifechanging decisions. Some may decide to change career, start their own businesses or even go back to university. All of these sorts of changes will inevitably have consequences for every aspect of people’s lives and any financial plan needs to reflect any major change in circumstances.”
- Reassess your appetite for risk
The stock market drop on the back of the Covid-19 crisis has been severe and it will be the first time many newer investors will have experienced such a level of volatility. While some may see it as an opportunity to buy in at lower valuations, others may see it as a painful reminder that markets can go down as well as up. Either way, it will mean that the majority of people re-assess their financial affairs.
Alan Harvey said: “The crisis will probably have a binary effect on attitudes toward risk. It will put some people off risk completely – likely to be the people who have only been investing after the financial crisis of 2008. If you fall into this category, it may be time to consider whether you are still comfortable with the level of risk in your investments and if it is appropriate for your circumstances.
“Greater risk typically means more exposure to equities, while more conservative portfolios will include fixed-income products, such as bonds, and a mixture of other assets like commercial property. The idea is that these assets offer greater diversity, are not correlated with one another, and, therefore, shouldn’t all move in the same direction simultaneously.
“Other people will have been through this before and are experienced in the ups and downs of markets through events like the dotcom bubble and the Iraq War. They may see it as a good time to invest and pick up assets at a lower value. But, even for the experienced investor, there are questions around whether the level of risk is correct and whether the fall in values influences their day-to-day life.
“The length of time you plan to be invested will be a big factor in decision-making and whether a portfolio has time to recover. If you do have an adviser, speak to them. Don’t try to make the decision alone and second-guess yourself. Get reassurance and, if you can, talk to your family as well who may also have more experience with finances.”
– ENDS –
PRESS INFORMATION
For further information, please contact:
Peter McFarlane peter.mcfarlane@brewin.co.uk / Tel: 07412 739 093
Richard Janes richard.janes@brewin.co.uk / Tel: +44 (0) 20 3201 3343
Anita Turland: anita.turland@brewin.co.uk / Tel: (0) 20 3201 4263
Payal Nair payal.nair@brewin.co.uk / Tel: +44 (0) 20 3201 3342
NOTES TO EDITORS
Disclaimers:
- The value of investments can fall and you may get back less than you invested
- The value of investments and any income from them can fall and you may get back less than you invested
- The opinions expressed in this document are not necessarily the views held throughout Brewin Dolphin Ltd.
- Past performance is not a guide to future performance
- We or a connected person may have positions in or options on the securities mentioned herein or may buy, sell or offer to make a purchase or sale of such securities from time to time. In addition we reserve the right to act as principal or agent with regard to the sale or purchase of any security mentioned in this document. For further information, please refer to our conflicts policy which is available on request or can be accessed via our website at www.brewin.co.uk.
- This information is for illustrative purposes only and is not intended as investment advice.
- No investment is suitable in all cases and if you have any doubts as to an investment’s suitability then you should contact us.
- If your clients invest in currencies other than their own, fluctuations in currency value will mean that the value of their investment will move independently of the underlying asset.
- The information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.
- Please note that this document was prepared as a general guide only and does not constitute tax or legal advice. While we believe it to be correct at the time of writing, Brewin Dolphin is not a tax adviser and tax law is subject to frequent change. Tax treatment depends on your individual circumstances; therefore you should not rely on this information without seeking professional advice from a qualified tax adviser.
About Brewin Dolphin
Brewin Dolphin is a UK FTSE 250 provider of discretionary wealth management. With £41.4* billion in total funds, it offers award-winning personalised wealth management services that meet the varied needs of our clients including individuals, charities and corporates.
We give clients security and wellbeing by helping them to protect and grow their wealth, in order to enrich their lives by achieving their goals and aspirations. Our services range from bespoke, discretionary investment management to retirement planning and tax-efficient investing. Our focus on discretionary investment management has led to significant growth in client funds and we now manage £35.7* billion on a discretionary basis.
Our intermediary business manages £12.5* billion of assets for over 1,700 advice firms either on a discretionary basis or via our Managed Portfolio Service.
In line with the premium we place on personal relationships, we’ve built a network of 33 offices across the UK, Jersey and Dublin, staffed by qualified investment managers and financial planners. We are committed to the most exacting standards of client service, with long-term thinking and absolute focus on our clients’ needs at the core.
*as at 31st March 2020