lumin news Issue 10 / Winter 2024

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Page 8 lumin news 10 / winter 2024 Is cash really king? Watch out for the short-term cash trap Savers are finding comfort in higher rates, but interest earned on cash is rarely sufficient to expand wealth. Investments offer greater return potential in the long run. FIONA READ Senior Financial Consultant fiona.read@luminwealth.co.uk Phone 01727 893 333 Uncomfortable losses for bond investors in 2022 and sustained volatility in the equity market could make cash a tempting proposition, especially with headline interest rates exceeding 5%. Many savers have piled large sums into savings accounts. This can make sense in the short term, but it hasn’t been successful in growing wealth over the long run. Are interest rates peaking? While cash may offer immediate comfort, high rates are likely to be temporary as they typically follow the direction of the base rate set by the Bank of England. This poses a reinvestment challenge for cash further down the line. The Bank of England is expected to lower its rate from 2024. Bond funds offer potential for substantial gains in a falling rate environment. Investors need to weigh up the risks of investing in fixed income funds and /or direct bond investments. Bonds issued by the UK government (gilts) are exempt from capital gains tax. Beware of the invisible inflation tax At face value cash may appear to offer the best capital protection, but the impact of inflation is often overlooked. The purchasing power of your wealth comes from real returns, which is when you deduct inflation from the nominal return or interest. Interest rates may have soared in 2022 and 2023, but cash has historically yielded negative or minimal real returns, even over long periods – see table below. UK real returns by asset class (% p.a.) since 1899 History favours investing over cash While UK equities underperformed cash in 2022, the table shows they have outperformed both cash and UK government bonds (gilts) in real terms over long periods. Holding more than an emergency cash reserve (which can be used to cover a job loss or other urgent financial issue) could be short-sighted. Savings accounts are unlikely to match the returns generated via an investment account over the long term. The longer your investment horizon, the greater your chance of succeeding with equities and other investments. Patience and discipline are key when investing, as there will be leaner years, alongside fruitful years where you harvest strong returns. The benefits of staying invested Predicting successful exit and re-entry points into the market is an immensely challenging task, even for the most sophisticated private investors. Bloomberg data shows that if an investor missed the 10 best days for global equities over the two-decade period from 2002 – 2022, they would have seen their annualised returns cut by over 3% per year. Long-term investors are best-served by sticking to a defined strategy, in line with the principle of ‘time in the UK 2022 10 years 20 years 50 years 123* years Equities -11.5 2.6 3.8 4.5 4.8 Gilts -34.0 -3.3 0.0 2.4 0.9 Cash -10.9 -3.3 -1.8 0.7 0.5 Source: Barclays Equity Gilt Study 2023; *denotes entire sample OFFER Are your investments working hard enough? A second opinion from a professional can make sure that your investment plan is in the best possible shape. A portfolio check systematically investigates key aspects, such as: • Does your long-term investment strategy and goals match with your circumstances? • Has your asset mix drifted with market movements? • Are your investment risks reduced through diversification? • Are you holding too much cash? • Which funds have performed well, and which have lagged behind? • Do you have excessive exposure to single company shares? • Are excessive fees undercutting overall returns? A second opinion from Lumin is complimentary and without any obligation to work together afterwards. Call 03300 564 446, or scan the QR code to request a portfolio check. market’, rather than ‘timing the market’. Cash is designed to fulfil shorter-term needs. Any money set aside for the long term can expect a superior return over time if it’s invested in more suitable longterm assets. Call 03300 564 446 to learn more.
lumin news 10 / winter 2024 Page 9 You don’t have to sell investments to fund a property purchase Certain lenders lend against notional investment income/values, allowing you to keep investments intact, while helping children or grandchildren onto the property ladder. Affordability can often be an issue for investors who are seeking to fund a house purchase. But certain lenders will lend against the value of existing investments, or the value of future investment income that could be generated. In this scenario the property is the security, rather than the investment portfolio. This notional investment ‘income’ can help borrowers to bridge the income gap and get a loan. Advantages This can be an ideal solution for helping children and /or grandchildren onto the property ladder. It allows you to keep investments where they are, and benefit from potential returns, rather than selling off a portion of your assets to help fund a house purchase. Some lenders will lend well past retirement age, providing additional flexibility for those at later life stages. How does it work? Each lender’s terms will vary. Some may use a notional amount – for example 5% of the investment value – as income, irrespective of whether your investments are returning that amount annually, or being drawn. In the example (right) an 80% value is applied to investments worth £1,000,000, with the notional annual income value ranging from £25,000 to £80,000 depending on the lender and borrower’s age. Potential limitations Each lender will have different requirements, but typical caveats to consider include term lengths, which can be limited to a set maximum term. Lenders may also require a substantial minimum investment value. In certain cases this could be upwards of £250,000. Certain higher-risk funds or products may be discounted. Mortgage affordability with investment income Illustrative example £1,000,000 £800,000 £600,000 £400,000 £200,000 £0 Investment portfolio Notional income value 1 1 £25,000 – £80,000; notional income value depends on the lender and the borrower’s age. If you would like to find out more about borrowing with investments please get in touch with our in-house mortgage experts on 03300 564 446. orange blau Funding the cost of school fees by remortgaging Over the past few years we have seen an increasing number of borrowers look to raise funds against their homes in order to pay school fees. This trend comes as the cost of private education has continued to rise. Funding the cost of private education Typically this is done by remortgaging and borrowing a larger sum (although occasionally taking out a second mortgage may be an appropriate solution). Often the amount raised can cover expected costs right up until the last child in the family leaves higher education. This can provide a valuable revenue stream to cover fees and help with affordability. Lender problems when remortgaging A specialist mortgage broker can provide access to lenders who will ignore the school fee commitment, in the knowledge that the capital raised is specifically for covering this expense. In many cases lenders count the school fees cost as an additional financial commitment, on top of the cost of the increased mortgage. This could mean that borrowers fail to meet a lender’s affordability criteria in some cases. Offset mortgages Some schools may offer a discount on the total cost if you pay the whole sum up front. If parents prefer to hold back the funds and pay school fees on a termly basis, remortgaging via an offset mortgage may be an appropriate solution. With an offset mortgage funds can be drawn as and when they are required. This provides flexibility and can be cost-effective, as interest is effectively only charged as and when the funds are spent. While offset mortgages provide valuable flexibility, interest rates can often be higher than for traditional mortgages. A specialist broker can help you find the best deal for your circumstances. Our independent inhouse mortgage experts have access to exclusive lender deals and provide a ‘whole-of-market’ brokering service that covers all types of property finance, including offset mortgages. Call 03300 564 446 to find out more. Important: It’s necessary to think carefully before securing other debts against your home. Your home may be repossessed if you don’t keep up with repayments on your mortgage.
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lumin news Issue 10 / Winter 2024

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