Is cash really king?
14/05/2021
14/05/2021
As you can imagine the financial services industry is rife with expert views, analysts’ reports, commentator opinion, surveys, and a heap of marketing data. I am sure there is a great deal of merit in what most of this ‘durable’ media is saying and promoting, but the sheer volume means we have to be very ‘picky’ about what to read.
Every now and again a few little gems pop up and I wanted to share a few of these as it helps put into perspective what your Independent Financial Adviser is here for!
The first of these ‘gems’ was a report conducted by Standard Life Aberdeen2. They surveyed 2,000 adults who were due to retire in the next twelve months and were named ‘The class of 2021’. The scary headline, which initially attracted me, said ’Two thirds (around 66%) of those surveyed are likely to exhaust their pension savings before they die’.
The research indicated that The Class of 2021 expect their yearly retirement spend to average out at £21,000 a year. (This figure includes the amount payable from the State Pension.) The ‘spend figure’ does vary from region to region with those living in Yorkshire expecting to pay out an average of £25,465 a year. The lowest region being the South West, where the average planned retirement spend is £19,064.
Of those intending to retire, a third admitted to having less than £100,000 saved. In reality the size of the retirement pot would need to be around four times this amount, (depending on personal circumstances), in order to sustain the income throughout retirement. Many of this Class of 2021 said they were aware of the financial challenges they face, and that reducing expenditure will play an important role in their retirement. One in ten of those surveyed are planning to sell their home or opting to downsize to help.
Clearly there is no substitute for planning ahead. (One thing the survey didn’t reveal was how many of those were benefitting from ongoing financial advice…)
The second of these little ‘gems’ was a survey from Aviva2 which also received responses from 2,000 recipients. This survey, quite coincidentally, followed on from the previous one from Standard Life Aberdeen, surveyed individuals to find out if they were financially confident and whether this would lead to a better financial outcome. The survey asked those who were financially confident whether their pensions would attract tax relief. Forty-five percent of those questioned answered this incorrectly – nearly a quarter did not know that the amount of the State Pension payable would be dependent on their national insurance record, and surprisingly 28% of recipients did not know when they would receive their State Pension.
One notable trend identified a tendency for individuals to keep all their savings in cash, with 70% of the confident savers saying that they would rather play it safe in cash than invest their money. Bizarrely, despite these figures, only around 25% of the non-advised individuals who were surveyed conceded that they had made financial mistakes which would have been avoided if they received advice!
To put this into perspective we have put together a bar chart showing the differences between cash accounts vs asset backed investments. The return that a cash investor could expect to receive from an average 90-day notice deposit account (as provided by Moneyfacts) is shown below and represented by the blue bar on the chart. We compared this to two asset backed investments: the first of these is the average return of the UT Mixed Investment 0 – 35% Shares sector (green bar) which invests broadly across investment asset classes (cash, fixed interest securities, property, and equities) with no more than 35% of the underlying investments held in equity assets. (The risk profile of this is below average.) The second is the average return from the Unit Trust Mixed Investments: 20% – 60% Shares sector (red bar) which also invests across asset classes with between 20% and 60% held in shares. The risk profile of this is average (medium) risk. The black bar shows inflation as measured by the Consumer Price Index (CPI).
This bar chart shows the calendar year return for each of these investments during the last ten years. Clearly, the 90-day cash account has produced the lowest return with its real value being eroded by inflation over the term. The below average and average investment risk options have performed much better, but performance has been more erratic.
Another way of showing the same data over the same period is to use a cumulative line chart (below). This covers the same 10-year term but rolls up returns over the whole period. This calculates what the value of a £10,000 investment would have been worth had it been deposited/invested on 31st December 2010 and withdrawn on 31st December 2020.
The 90-day notice deposit account would be worth in the region of £10,888 but it has failed to keep pace with inflation, as its value should have been closer to £11,973. Had this been invested it could have provided around £14,735 or £15,936 depending on the level of investment risk taken. The line chart provides a better indication the fluctuation in value experienced by the investment options, which we often refer to as volatility, and it is the risk/reward trade-off we have to accept when investing in asset backed investments. What this does show is inflation risk.
Clearly the majority of respondents that were financially confident would have benefitted from advice with more than two thirds of those that used a financial adviser confirming it gave them peace of mind.
Your Lloyd & Whyte IFA is here to discuss any queries you may have about your pensions, investments, mortgages, or protection needs. Our Independent Financial Advisers are always happy to chat about your current or future plans.
Other articles you should read:
Reflecting on your past finances to secure the future
Key Points of the Spring budget 2021
Market update from Lloyd & Whyte
Hopes of a “swifter and more sustained economic recovery”
Why it pays to update your pension expression of wishes
Every piece of jewellery tells a story
Vaccines put a spring in investors’ step
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