Since the start of the Covid-19 pandemic, Octopus Wealth has been running a series of webinars with the title of “Coronavirus: what does it mean for my finances?”. This blog summarises the questions we received during our presentations and we hope you find this helpful. Please do get in touch if you have any further questions or would like to find out more about what steps you can take to protect your portfolio.
Q1: Is it a good time to buy shares?
Q2: Should I move my house deposit to an ISA?
Q3: Should I keep saving for a house or invest in my pension?
Q4: What is the impact of the crisis on pensions?
Q5: What products should I be investing in?
Q6: What is the impact on existing buy-to-let properties and tenant rental holidays?
Q7: What should I do with my excess cash, repay the mortgage or invest?
Q8: How will a greater sense of togetherness and community impact the recovery from this crisis?
Q1: Since the markets are so low, is now a good time to be buying shares?
A: If your question is about investing for the long term (more than 10 years), then our answer is ‘Yes, this could be a good time to invest’. Why? The right time to invest for the long term is not dictated by short term market movements. It comes down to the fact that you should not be a forced seller during a market fall if you have the time horizon and discipline to ride out periods like this. As a starting point, focus on the factors we talked about in the Webinar: have a cash buffer that suits you; focus on what you can control and what matters to you; understand your tolerance to risk; formulate your plan. It will be very important that you get your risk profile right as market swings are particularly pronounced right now.
If your question is about the short term (a few years or less), then we would not like to say either way - it might be a good time to invest... or it might not. Trying to time the market is one of the biggest detractors from performance for investors, so be careful not to fall into that trap. We believe investments should be for long term planning - if not then you are effectively making a gamble on how the market will perform in the short term, which is out of your control. Most market commentary right now is saying we are only at the beginning of the economic impacts that this health crisis will have, and that means plenty more volatility to come. This could present both opportunity and risk of loss in the short term.
Q2: Should I move my savings for a deposit on a new home (first time buyer) into an ISA for now?
A: I'm going to answer on the basis that you plan to buy your new home in the next two years (or as soon as normality is restored in the property market). During times of uncertainty, using the tax efficient wrappers made available by the government (such as ISAs), is one of the positive things we can control. However, take care to understand what type of ISA you are putting short term money into. If it is a Cash ISA, then it may make sense to have your house deposit there; have a shop around for the best rate. If it is a Stocks and Shares ISA, then be careful as investing money is for the long term (5-10+ years). Remember, build any investment plan around you never needing to be a forced seller of risk assets during a downturn.
Q3: Purchase of a first house - what are the likely impacts?... and weighing that against adding to pension at low valuations?
A: Transactions in the residential property market are likely to stall for a while. Many lenders are now requiring 30-40% deposits from buyers for example. For many first-time buyers this will mean waiting until the mortgage market returns to normal (which will likely be frustrating of course). Pensions can be very tax efficient, however you can only access the funds at age 55 or later. Therefore, make sure you understand that money in a pension is for the very long term (depending on your age) - which is very different to money for a first home. So, by all means, consider pension contributions; but be careful not to sacrifice your house deposit at the expense of them.
Pension Contribution Tip for Earners between £100k-£125k p.a:
The effective rate of income tax relief that you can receive when your total income is between £100,000 and £125,000 is 60%. Therefore, if you ever have total taxable income at this level, pension contributions will be as tax efficient as they ever could be in the current legislation. If you are in this bracket I would recommend you seek financial advice on how to maximise this.
Q4: What is the impact of this crisis on pensions?
A: Everyone's pension will be affected differently. The most important thing is that you try to avoid selling risk assets in your pensions during a time when they are depressed, like now, unless there is a really strong and compelling reason to do so. If you're not sure what your pension is invested in, take this opportunity to find out. Make sure your investments match your tolerance for investment risk and then stick to the plan. Investment markets reward discipline and it's important to allow your pension funds to recover over time, if they have fallen in value.
Q5: Is it worth investing at this time? And if so, what products?
A: See Q2 regarding a good time to invest. In terms of products, pay close attention to your mix of tax efficient wrappers like ISAs and pensions so that, in the long term, when you start to draw an asset based income, you are well diversified. This should mean you can draw more income from fewer assets. It's equally important to use investment wrappers that match your objectives. You can't access your pension until at least aged 55 for example, so bear that in mind before locking your funds away and make sure those funds are for the long term.
If you are interested in finding out how we invest money for our customers, stay tuned for the deep dive webinar into investments.
Q6: What is the impact on existing buy-to-let properties and tenant rental holidays?
A: The government has made it very clear that tenants remain liable to pay their rent as per any existing agreement in place. However, the government is encouraging flexibility from landlords and, if you are a landlord, is likely to make it much harder in the short term for you to evict tenants, in order to provide protection for the most vulnerable. The first point of call is to understand the impact of this crisis on your tenants. Open that dialogue if you have not done so already. In the event they are going to need to delay/reduce some payments for a while, negotiate a position that works for you both. As a landlord, you can use mortgage payment holidays with the lender who is supplying your buy-to-let mortgage. As with your tenants, communicate well with your lender to make your position clear.
Build a cash reserve if you have not got one already. Liquidity will be very important, especially if tenants cannot afford to pay full rent for a while.
Q7: Under what conditions do you recommend using excess cash to make early repayments on your mortgage, as opposed to other investment options?
A: This is something we often model for our clients as it is not easy to see which will leave you better off in the long term, and it is quite a complicated tax calculation. We like to consider a mortgage like a sort of reverse savings account. Every time you repay the loan part of your mortgage you will be paying less interest as a result. This is particularly good when interest rates are high, but in the current environment it is worth assessing other options.
The first thing we normally consider is cash flow and cash position. If you do not have a cash buffer or ‘rainy day’ fund then perhaps this is something you should do first before either repaying the mortgage or investing. Liquidity is very important, especially in times of crisis.
If you have enough of a cash buffer, it's about establishing which option is most likely to suit you best in the long term. When we do this type of analysis for our clients, we consider factors such as: expected investment return, length of mortgage, interest rate payable, tax position of the individual and the attitude to risk and tolerance for loss of the individual. These all play a key part in understanding what is right for you. For some people, repaying mortgage debt will help them sleep better at night. For others, they would rather invest for the long term to try and achieve a higher return than the interest payable on their mortgage.
Q8: Commentators suggest that following Covid 19, GDP could reduce by 15% as compared with the 2008 financial crisis which led to a 6% reduction in GDP. However, in terms of the public mood, Covid 19 feels different to the 2008 financial crisis in that Covid 19 will affect the vast majority of sectors and communities across the globe and there appears to be a greater sense of togetherness whereas the 2008 crisis seemed more negative and focused on those involved with the financial sector. How important is the public mood to the prevailing circumstances in terms of recovery from a recession?
A: I agree that public mood will be a factor in the recovery, but it's hard to tell how important it is. Historically in the initial period of any crisis there is a sense of togetherness, alongside resources ready to be aimed at combating the issues at stake. As time goes on, and resources get used up, and the crisis deepens, it is often the case that public sentiment turns on trying to look for someone, or something, to blame. Largely this could manifest itself in our international relations with countries like the USA and China, and internally within this country around how we all pay for the massive increase in government spending that is coming. These will be tense sticking points and a test of our resolve to deal with this together.
I sincerely hope that the community spirit and sense of togetherness remains strong throughout this crisis and into the period of economic recovery. If it does, I think it could help speed up recovery, as people will be more able to return to normal and increase spending, which is what is likely needed to keep the economy from entering a prolonged recession. Hopefully the government support will also enable enough businesses and individuals to come out on the other side and restart the economy once this is over.
However, we always acknowledge to our clients that the timing and strength of the next recovery is something that we do not have control over and advise that you plan accordingly for the long term.
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Compliance notes kept simple
This document is for UK retail investors. Circumstances vary for individuals and any personal opinions or firm opinions represented in this presentation should not be seen as advice or a recommendation to take any specific course of action. We are not tax advisers. Past performance is not a reliable indicator of future results. Investments may fall as well as rise, and you could get back less than your original investment.