Investment market update: May 2022

Investment markets in May experienced volatility amid concerns that economies could fall into a recession as inflation pressure remains high.

While you may be worried about the volatility your investments have experienced, keep your long-term goals in mind. A long-term time frame can help smooth out the peaks and troughs of markets. This is because, historically, markets have recovered when you look at the bigger picture.

UK

At the end of May, chancellor Rishi Sunak unveiled a package of measures designed to alleviate some of the cost-of-living challenges families are facing.

The £15 billion package will be paid through a levy on the profits of energy companies, known as a “windfall tax”. Among the measures introduced were one-off payments to vulnerable families and support to reduce energy bills for all households.

The measures were made after the latest inflation figures show that, on average, prices increased by 9% in April – the highest level since 1982.

Young investors are championing the “S” in ESG investing, so what does it mean?

ESG investing means considering environmental, social, and governance issues when investing. While ESG encompasses a wide range of issues, there’s often a focus on the environmental aspect, from climate change to plastic pollution. However, that could be about to shift.

According to a report in FTAdviser, young investors are placing more importance on social factors.

In a survey, 57% of investors under the age of 45 said their preference was social impact investments rather than environmentally motivated ones. Among the under-25s, this rises to 67%.

There are plenty of reasons why younger generations are keen to focus on the social aspect of ESG investing.

Improvements in technology mean people are more aware than ever of the issues others are facing, including those they may not cross paths with day to day. This is likely to have played a role in investors wanting their decisions to have a positive effect on people and communities.

How a virtual “shopping basket” is used to calculate the rate of inflation

Over the last few months, you’ve probably heard a lot about inflation and the effect it can have on your cost of living. While you may be familiar with the headline figures, how is it calculated?

The key figure that you normally see is the Consumer Price Index (CPI).

In the 12 months to March 2022, according to the Office for National Statistics (ONS) data, the CPI rose to 7%. This is the highest rate of inflation for 30 years and was driven by rising fuel and energy costs, which has been linked to the war in Ukraine.

The Bank of England (BoE) has a target of keeping inflation around 2%. However, the BoE expects inflation to rise to around 8% and then fall back over the next two to three years. It noted that even though the rate of inflation is expected to slow down, the prices of some things may stay at a high level when compared to the past.

Misconceptions mean that 40% of homeowners don’t have life insurance

Do you have life insurance in place? A survey suggests that some homeowners are choosing not to take it out because of common misconceptions about how life insurance works.

Life insurance would pay out a lump sum to beneficiaries if the policyholder passed away during the term. As a result, it can provide financial support to your loved ones when they need it most and ensure they don’t need to make large financial decisions when they’re grieving.

You can choose how much cover life insurance provides. Often, this is linked to how much your mortgage is. You can also consider other things, such as school fees or day-to-day living costs, to ensure your family would be financially secure if the worst happened.

You can also select how long cover will last. This is often tied to how long remains on your mortgage or when children will reach adulthood.

8 things entrepreneurs can do to improve their financial resilience

More people than ever before are working for themselves and setting up businesses. It can be incredibly rewarding, but you also need to consider how it’ll affect your financial resilience.

The UK has a great spirit of entrepreneurship. According to the Office for National Statistics, around 4.8 million people (more than 15% of the labour force) is self-employed, and it’s something younger generations are continuing.

According to a report in Business Leader, 50% of new businesses set up between July 2020 and June 2021 were done so by people aged between 25 and 40.

And Generation Z, who are under 25, is already responsible for 7.8% of new companies.

The data suggests that being self-employed is going to become even more common in the coming years. The graph below shows the different types of self-employment across the UK.

“Midlifers” are hit by time and financial pressures. Financial planning can help balance your priorities

Individuals aged between 40 and 60 – dubbed “midlifers” – are facing time and financial pressures as they try to support their families. Many are feeling the strain and don’t have the resources to focus on their own goals, and financial planning could help.

According to a survey from Legal & General, 6 million midlifers are finding themselves caught in the middle of providing financial support to adult children and providing unpaid care to ageing relatives. On top of this, it’s a crucial period for securing their own financial future and retirement.

The research found 17% of midlifers provide financial support to another adult, totalling £10 billion a year.

  • Those supporting grown-up children provide, on average, £247 a month.
  • Midlifers financially helping elderly parents or other relatives spend, on average, £282 a month.

The findings suggest that at age 45, you’re likely to have the greatest level of financial responsibility, while age 58 is when you’re most likely to start taking on some care responsibilities.

The chancellor is reportedly drawing up plans to scrap the additional-rate tax band. Here’s what it could mean

Reports suggest that the top rate Income Tax band could be scrapped in the next few years. It could cut your tax bill and, somewhat counterintuitively, could increase how much the Treasury takes in tax.

According to a report in Citywire, chancellor Rishi Sunak has drawn up plans to cut taxes ahead of the 2024 election, and Income Tax is one of his main targets. It’s suggested that not only will Sunak cut the basic rate of Income Tax by 2p but he will also scrap the top 45% Income Tax band.

For the 2022/23 tax year, Income Tax bands are:

The reported cuts would mean that the basic rate of Income Tax would fall from 20% to 18%. This would save basic-rate taxpayers up to £750 a year.

If you’re an additional-rate taxpayer, the changes could significantly reduce your Income Tax bill.

More people than ever are saving into a pension, but 6 in 10 aren’t confident about their knowledge

The latest figures from the Pension Regulator prove that pension auto-enrolment has been a success – more people than ever are saving into a pension. Yet, research also shows that many people don’t think they know enough about saving for retirement.

Before the government introduced auto-enrolment in 2012, just 4 in 10 private sector workers were actively saving into a pension. Now, more than 70% of employees are taking steps to secure their retirement.

According to the Office for National Statistics, pensions represent the largest portion of private wealth in the UK. Individuals hold £6.4 trillion in pensions. The figure compares to £5.5 trillion in property and £2 trillion in cash. 

The number of people saving for retirement is rising and the accumulated wealth in pensions is certainly good news, but simply paying into a pension isn’t enough to be sure of a comfortable retirement.

Half of investors admit to making impulsive, emotional decisions, and many go on to regret it

While investment decisions should be based on facts, many investors find their decisions are sometimes influenced by emotions. Whether you’re excited about an investment opportunity, or worried about market volatility, keeping emotions in check can help you make better investment decisions.

According to research from Barclays, half of investors admit to making impulsive decisions based on their emotions. While these decisions can seem right at the time, 67% of investors said they go on to regret their choice. Worries during short-term market volatility are often associated with making knee-jerk decisions. If you see the value of your investments fall, it’s natural to want to make changes. However, the study found that other emotions play a role in impulsive investment decisions, including:

  • Excitement (34%)
  • Impatience (21%)
  • Fear (16%)

Letting emotions play a significant role in your decisions can mean you make choices that you wouldn’t normally or that don’t fit into your financial plan.

Why now is the perfect time to start thinking about the end of the tax year

While it might seem some way off, preparing for the end of the tax year now can help you make the most of allowances. On 5 April 2022, the current tax year

2022 may only have just started, but now is an excellent time to start thinking about the end of the tax year. Planning now can help you make the most of allowances and reduce how much tax you pay.

The 2021/22 tax year will end on 5 April 2022. This date is when many tax-efficient allowances will reset. In some cases, it will be your last opportunity to use them, although which allowances should form part of your financial plan will depend on your circumstances. Among the allowances that will reset on 5 April 2022 are:

  • The ISA allowance, which allows you to save or invest up to £20,000 each tax year tax-efficiently
  • The pension Annual Allowance, which is the amount you can tax-efficiently save into a pension each year
  • The Dividend Allowance, which is the amount you can receive in dividends each tax year before you will need to pay tax
  • The Capital Gains Tax annual exempt amount, which is the amount you can earn in profit when selling certain items before tax is due.

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