Income Protection Insurance

How would you pay the bills if you were sick or injured and couldn’t work?

Protecting your income should be taken very seriously, given the limited government support available. How would you pay the bills if you were sick or injured and couldn’t work? Income protection insurance, formerly known as ‘permanent health insurance’, is a financial safety net designed to help protect you, your family and your lifestyle in the event that you cannot work and cope financially due to an illness or accidental injury preventing you from working. Most of us need to work to pay the bills.

Tax-free income
Without a regular income, you may find it a struggle financially, even if you were ill for only a short period, and you could end up using your savings to pay the bills. In the event that you suffered from a serious illness, medical condition or accident, you could even find that you are never able to return to work. Few of us could cope financially if we were off work for more than six to nine months. Income protection insurance provides a tax-free monthly income for as long as required, up to retirement age, should you be unable to work due to long-term sickness or injury.

Statutory sick period
By law, your employer must pay most employees statutory sick pay for up to 28 weeks. This will almost certainly be a lot less than your full earnings. Few employers pay for longer periods. If you find yourself in a situation where you are unable to return to work, your employer could even stop paying you altogether and terminate your employment. After that, you would probably have to rely on state benefits. Some employers arrange group income protection insurance for their employees, which can pay out an income after the statutory sick period.

Maximum income amount
Income protection insurance aims to put you back to the position you were in before you were unable to work. It does not allow you to make a profit out of your misfortune. So the maximum amount of income you can replace through insurance is broadly the after-tax earnings you have lost, less an adjustment for state benefits you can claim. This is usually translated into a maximum of 50% to 65% of your before-tax earnings.

Self-employment
If you are self-employed, then no work is also likely to mean no income. However, depending on what you do, you may have income coming in from earlier work, even if you are ill for several months. The self-employed can take out individual policies rather than business ones, but you need to ascertain on what basis the insurer will pay out. A typical basis for payment is your pre-tax share of the gross profit, after deduction of trading expenses, in the 12 months immediately prior to the date of your incapacity. Some policies operate an average over the last three years, as they understand that self-employed people often have a fluctuating income.

The cost of your cover will depend on your occupation, age, state of health and whether or not you smoke.

Comprehensive definitions
The ‘occupation class’ is used by insurers to decide whether a policyholder is able to return to work. If a policy will pay out only if a policyholder is unable to work in ‘any occupation’, it might not pay benefits for long – or indeed at all. The most comprehensive definitions are ‘Own Occupation’ or ‘Suited Occupation’. ‘Own Occupation’ means you can make a claim if you are unable to perform your own job; however, being covered under ‘Any Occupation’ means that you have to be unable to perform any job, with equivalent earnings to the job you were doing before not taken into account.

You can also usually choose for your cover to remain the same (level cover) or increase in line with inflation (inflation-linked cover):

Level cover – with this cover, if you made a claim the monthly income would be fixed at the start of your plan and does not change in the future. You should remember that this means, if inflation eventually starts to rise, that the buying power of your monthly income payments may be reduced over time.

Inflation-linked cover – with this cover, if you made a claim the monthly income would go up in line with the Retail Prices Index (RPI).

When you take out cover, you usually have the choice of:

Guaranteed premiums – the premiums remain the same all the way throughout the term of your plan. If you have chosen inflation-linked cover, your premiums and cover will automatically go up each year in line with RPI

Reviewable premiums – this means the premiums you pay can increase or decrease in the future. The premiums will not typically increase or decrease for the first five years of your plan but they may do so at any time after that. If your premiums do go up, or down, they will not change again for the next 12 months

Waiting period
How long you have to wait after making a claim will depend on the waiting period. You can usually choose from between 1, 2, 3, 6, 12 or 24 months. The longer the waiting period you choose, the lower the premium for your cover will be, but you’ll have to wait longer after you become unable to work before the payments from the policy are paid to you. Premiums must be paid for the entire term of the plan, including the waiting period.

Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of and reliefs from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. This information does not constitute advice and should not be used as the basis of any financial decision, nor should it be treated as a recommendation for any specific protection product. Although endeavours have been made to provide accurate and timely information, Professional Practice Services cannot guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough review of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions.

Professional financial advice you can trust
Depending on your circumstances, it is possible that the payments from the plan may affect any state benefits due to you. This will depend on your individual situation and what state benefits you are claiming or intending to claim. If you are unsure whether any state benefits you are receiving will be affected, or to discuss how we can help you protect your income, please contact us.

Call our friendly, knowledgeable team for a confidential, no obligation discussion:
01527 880345
 

Visit our Website at:
www.pps-vet.co.uk
 

Professional Practice Services is a Veterinary Business Consultancy and Independent Financial Advisory Firm. Professional Practice Services is authorised and regulated by the Financial Conduct Authority
The Financial Conduct Authority does not regulate finance, will writing, commercial lending, taxation or trust advice.

Article Reference: PPS062014.GM08

Critical illness Protection

Providing vital financial security when you’re in need of it most
The diagnosis of a serious illness can mean a very difficult time for your health and your wealth. But critical illness cover can provide vital financial security when you need it most. Most homebuyers purchase life assurance when they arrange a mortgage, but overlook critical illness cover – another form of financial protection that we are statistically more likely to need before reaching retirement.

Something critical
You really need to find the right peace of mind when faced with the difficulty of dealing with a critical illness. Critical illness assurance pays a tax-free lump sum on diagnosis of any one of a list of specified serious illnesses, including cancer and heart attacks. The good news is that medical advances mean more people than ever are surviving life-threatening conditions that might have killed earlier generations. Critical illness cover can provide cash to allow you to pursue a less stressful lifestyle while you recover from illness, or use it for any other purpose.

It’s almost impossible to predict certain events that may occur within our lives, so taking out critical illness cover  for you and your family, or if you run a business or company, offers protection when you may need it more than anything else.

Whichever happens first
The illnesses covered are specified in the policy along with any exclusions and limitations, which may differ between insurers. Critical illness policies usually only pay out once, so are not a replacement for income. Some policies offer combined life and critical illness cover. These pay out if you are diagnosed with a critical illness or you die, whichever happens first.

If you already have an existing critical illness policy, you might find that by replacing a policy you would lose some of the benefits if you have developed any illnesses since you took out the first policy. It is important to seek professional advice before considering replacing or switching your policy, as pre-existing conditions may not be covered under a new policy.

Core specified conditions
All policies should cover seven core specified conditions. These are cancer, coronary artery bypass, heart attack, kidney failure, major organ transplant, multiple sclerosis and stroke. They will also pay out if a policyholder becomes permanently disabled as a result of injury or illness.

But not all conditions are necessarily covered. The Association of British Insurers (ABI) introduced a set of best practice guidelines. In May 2003, the ABI introduced other measures. These included conditions such as non invasive skin cancers and less advanced cases of prostate cancer. Tumours that have not yet invaded the organ or tissue, and lymphoma or Kaposi’s sarcoma in the presence of HIV, are excluded.

There are also more restrictive conditions for heart attacks. There has to be evidence of typical chest pain, or changes in the electrocardiogram (ECG), for example, if a claim is to be successful. Cardiac conditions, such as angina, will not be covered.

Lifestyle changes
Some policies allow you to increase your cover, particularly after lifestyle changes such as marriage, moving home or having children. If you cannot increase the cover under your existing policy, you could consider taking out a new policy just to ‘top up’ your existing cover.

A policy will provide cover only for conditions defined in the policy document. For a condition to be covered, your condition must meet the policy definition exactly. This can mean that some conditions, such as some forms of cancer, won’t be covered if deemed insufficiently severe.
 

Similarly, some conditions may not be covered if you suffer from them after reaching a certain age, for example, many policies will not cover Alzheimer’s disease if diagnosed after the age of 60.egulated by The Financial Conduct Authority.
Partners: David Hodgetts, Paul Jackson & Amira Norris
 

Survival period
Very few policies will pay out as soon as you receive diagnosis of any of the conditions listed in the policy, and most pay out only after a ‘survival period’. This means that if you die within the specified number of days of meeting the definition of the critical illness given in the policy, the cover would not pay out.

How much you pay for critical illness cover will depend on a range of factors including what sort of policy you have chosen, your age, the amount you want the policy to pay out and whether or not you smoke.

Permanent total disability is usually included in the policy. Some insurers define ‘permanent total disability’ as being unable to work as you normally would as a result of sickness, while others see it as being unable to independently perform three or more ‘Activities of Daily Living’ as a result of sickness or accident.

Getting it covered
If you are single with no dependants, critical illness cover can be used to pay off your mortgage, which means that you would have fewer bills or a lump sum to use if you became very unwell. And if you are part of a couple, it can provide much-needed financial support at a time of emotional stress.
While life assurance is often the priority of those with dependant family members, critical illness cover can be vital if you are the sole breadwinner, rely heavily on your income or are single. It provides a welcome financial boost at a time of emotional stress and financial hardship.

Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of and reliefs from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. This information does not constitute advice and should not be used as the basis of any financial decision, nor should it be treated as a recommendation for any specific protection product. Although endeavours have been made to provide accurate and timely information, Professional Practice Services cannot guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough review of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions.

Professional financial advice you can trust
Before you apply for critical illness cover, you should obtain professional financial advice to ensure that it is right for you and offers sufficient cover for your specific requirements. To discuss the options available to you, please contact us. Don’t leave it to chance.

Call our friendly, knowledgeable team for a confidential, no obligation discussion:
01527 880345
 

Visit our Website at:
www.pps-vet.co.uk
 

Professional Practice Services is a Veterinary Business Consultancy and Independent Financial Advisory Firm. Professional Practice Services is authorised and regulated by the Financial Conduct Authority
The Financial Conduct Authority does not regulate finance, will writing, commercial lending, taxation or trust advice.

Article Reference: PPS062014.GM07

Greater choice for retirees

Proposals to fundamentally redesign the UK private pensions system

Fundamental plans proposed to redesign the UK defined contribution pension system (as opposed to workplace final salary schemes) were announced as part of the Budget 2014 speech. This is the most far-reaching reform to the taxation of pensions since the regime was introduced in 1921, introducing new flexibility to the pensions system.

By further relaxing the rules around income withdrawals from pension funds, which will be introduced from 6 April 2015, people will have greater flexibility and choice about how they can access their money. Those who want to guarantee a regular income for life will still be able to purchase an annuity, of course.

Taking pension savings
This announcement means that people will be in a position to choose how they take their pension savings: for example, they could take all their pension savings as a lump sum, draw them down over time or buy an annuity.

The Government also intends to explore with interested parties whether those tax rules that prevent individuals aged 75 and over from claiming tax relief on their pension contributions should be amended or abolished.

Savings freedom
In the meantime, as a first step towards this reform, a number of changes have been announced to the rules. These commenced from 27 March 2014 and now allow people greater freedom and choice over accessing their defined contribution pension savings at retirement.

The changes are:
•    Reducing the amount of guaranteed annual income people need in retirement to access their savings flexibly, from £20,000 to £12,000
•     Increasing the amount of total pension savings that can be taken as a lump sum, from £18,000 to £30,000
•    Increasing the capped drawdown withdrawal limit from 120% to 150% of an equivalent annuity income
•    Increasing the maximum size of a small pension pot which can be taken as a lump sum (regardless of total pension wealth) from £2,000 to £10,000, and increasing the number of personal pots that can be taken under these rules from two to three

Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of and reliefs from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. This information does not constitute advice and should not be used as the basis of any financial decision, nor should it be treated as a recommendation for any specific product. Although endeavours have been made to provide accurate and timely information, Professional Practice Services cannot guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough review of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions.

Professional financial advice you can trust
This major announcement to give retirees more choice as to how they take the income from their pension fund will mean that other options may now be given more consideration. These changes make it even more important, if you are approaching retirement, to seek professional financial advice in order to make the most of your pension pot. If you would like to find out how the changes could affect your future retirement plans, please contact us.

Call our friendly, knowledgeable team for a confidential, no obligation discussion:
01527 880345
 

Visit our Website at:
www.pps-vet.co.uk
 

Professional Practice Services is a Veterinary Business Consultancy and Independent Financial Advisory Firm. Professional Practice Services is authorised and regulated by the Financial Conduct Authority
The Financial Conduct Authority does not regulate finance, will writing, commercial lending, taxation or trust advice.

Article Reference: PPS062014.GM09

Peace of mind for you and your family

Making the right decisions to protect your financial situation

With so many different protection options available, making the right decision to protect your personal and financial situation can seem overwhelming. There is a plethora of protection solutions which could help ensure that a lump sum, or a replacement income, becomes available to you in the event that it is needed.

We can make sure that you are able to take the right decisions to deliver peace of mind for you and your family in the event of death, if you are too ill to work or if you are diagnosed with a specified critical illness.

You can choose protection-only insurance, which is called ‘term insurance’. In its simplest form, it pays out a specified amount if you die within a selected period of years. If you survive, it pays out nothing. It is one of the cheapest ways overall of buying the cover you may need.

Alternatively, a whole-of-life policy provides cover for as long as you live.

Life Assurance Options
Whole-of-life assurance plans can be used to ensure that a guaranteed lump sum is paid to your estate in the event of your premature death. To avoid inheritance tax and probate delays, policies should be set up under an appropriate trust

•    Level term plans provide a lump sum for your beneficiaries in the event of your death over a specified term
•    Family income benefit plans give a replacement income for beneficiaries on your premature death
•    Decreasing term protection plans pay out a lump sum in the event of your death to cover a reducing liability for a fixed period, such as a repayment mortgage

How would you cope financially?
Simply having life assurance may not be sufficient. For instance, if you contracted a near-fatal disease or illness, how would you cope financially? You may not be able to work and so lose your income, but you are still alive so your life assurance does not pay out.

Income Protection Insurance (IPI), formerly known as ‘permanent health insurance’, would make up a percentage of your lost income caused by an illness, accident or disability. Rates vary according to the dangers associated with your occupation, age, state of health and gender, but IPI is particularly important if you are self-employed or if you do not have an employer that would continue to pay your salary if you were unable to work.

Specified ‘critical’ illnesses
If you are diagnosed with suffering from one of a number of specified ‘critical’ illnesses, a critical illness insurance policy would pay out a tax-free lump sum if the event occurred during the term of your policy. Many life insurance companies offer policies that cover you for both death and critical illness and will pay out the guaranteed benefit on the first event to occur.

Managing your affairs
Beyond taking the obvious step of ensuring that you have adequate insurance cover, you should also ensure that you have made a Will. A living will makes clear your wishes in the event that, for example, you are pronounced clinically dead following an accident, and executes an enduring power of attorney, so that if you become incapable of managing your affairs as a result of an accident or illness, you can be reassured that responsibility will pass to someone you have chosen and trust. All of these protection options also apply to your spouse and to those who are in registered civil partnerships.

Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of and reliefs from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. This information does not constitute advice and should not be used as the basis of any financial decision, nor should it be treated as a recommendation for any specific protection product. Although endeavours have been made to provide accurate and timely information, Professional Practice Services cannot guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough review of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions.

Professional financial advice you can trust
 
Choosing the right mix of financial protection for your particular situation is essential to ensure that your specific requirements are fully covered. If you would like to discuss the range of protection services we offer, please contact us for further information – we look forward to hearing from you.

Call our friendly, knowledgeable team for a confidential, no obligation discussion:
01527 880345
 
Visit our Website at:
www.pps-vet.co.uk
 
Professional Practice Services is a Veterinary Business Consultancy and Independent Financial Advisory Firm. Professional Practice Services is authorised and regulated by the Financial Conduct Authority
The Financial Conduct Authority does not regulate finance, will writing, commercial lending, taxation or trust advice.

Smoothing out your porfolio's returns

A time-tested method for controlling risk over time

In the light of more recent historic market volatility, it’s perhaps natural to be looking for ways to smooth out your portfolio’s returns going forward. Investing regularly can smooth out market highs and lows over time. In a fluctuating market, a strategy known as ‘pound- cost averaging’ can help smooth out the effect of market changes on the value of your investment and is one way to achieve some peace of mind through this simple, time-tested method for controlling risk over time.

It enables investors to take advantage of stock market corrections, and by using the theory of pound-cost averaging you could increase the long-term value of your investments. There are however no guarantees that the return will be greater than a lump sum investment, and it requires discipline not to cancel or suspend regular Direct Debit payments if markets continue to head downwards.

Regular intervals
The basic idea behind pound-cost averaging is straightforward: the term simply refers to investing money in equal amounts at regular intervals. One way to do this is with a lump sum that you’d prefer to invest gradually – for example, by taking £50,000 and investing £5,000 each month for 10 months.

Alternatively, you could pound-cost average on an open-ended basis by investing, say, £5,000 every month. This principle means that you invest no matter what the market is doing. Pound-cost averaging can also help investors limit losses, while also instilling a sense of investment discipline and ensuring that you’re buying at ever-lower prices in down markets.

Market timing
Investment professionals often say that the secret of good portfolio management is a simple one – market timing. Namely, to buy more on the days when the market goes down, and to sell on the days when the market rises.

As an individual investor, you may find it more difficult to make money through market timing. But you could take advantage of market down days if you save regularly, by taking advantage of pound-cost averaging.

Savings habit
Regular savings and investment schemes can be an effective way to benefit from pound-cost averaging, and they instil a savings habit by committing you to making regular monthly contributions. They are especially useful for small investors who want to put away a little each month.

Investors with an established portfolio might also use this type of savings scheme to build exposure a little at a time to higher-risk areas of a particular market.

The same strategy can be used by lump sum investors too. Most fund management companies will give you the option of drip-feeding your lump sum investment into funds in regular amounts. By effectively ‘spreading’ your investment by making smaller contributions on a regular basis, you could help to average out the price you pay for market volatility.

Pound-cost averaging
Any costs involved in making the regular investments will reduce the benefits of pound-cost averaging (depending on the size of the charge relative to the size of the investment and the frequency of investing).
As the years go by, it is likely that you will be able to increase the amount you invest each month, which would give your savings a valuable boost. No matter how small the investment, committing to regular saving over the long term can build to a sizeable sum. The key to success is giving your investment time to grow. Choose the amount you want to invest and set up automatic deposits. Once this is up and running the chances are you won’t even notice it going out of your monthly budget.

Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of and reliefs from taxation are subject to change. Tax treatment is based on individual circumstances. The value of investments and the income from them can go down as well as up and investors may not get back the amount invested. This information does not constitute investment advice and should not be used as the basis of any investment decision, nor should it be treated as a recommendation for any investment. Although endeavours have been made to provide accurate and timely information, Professional Practice Services cannot guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough review of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions.

Professional financial advice you can trust
Regular investing may be ideal for people starting out or who want to take their first steps towards building a portfolio of funds for their long-term future. To find out more about the different options available to you, please contact us.

Call our friendly, knowledgeable team for a confidential, no obligation discussion:
01527 880345
 

Visit our Website at:
www.pps-vet.co.uk
 

Professional Practice Services is a Veterinary Business Consultancy and Independent Financial Advisory Firm. Professional Practice Services is authorised and regulated by the Financial Conduct Authority
The Financial Conduct Authority does not regulate finance, will writing, commercial lending, taxation or trust advice.

Investing with a conscience

Seeking the best financial returns but with socially responsible principles

For investors concerned about global warming and other environmental issues, there are a plethora of ethical investments that cover a multitude of different strategies.

The terms ‘ethical investment’ and ‘socially responsible investment’ (SRI) are often used interchangeably to mean an approach to selecting investments whereby the usual investment criteria are overlaid with an additional set of ethical or socially responsible criteria.

Ethical criteria
The Ethical Investment Research Service (EIRIS) defines an ethical fund as ‘any fund which decides that shares are acceptable, or not, according to positive or negative ethical criteria (including environmental criteria)’.

Funds that use negative screening, known as ‘dark green funds’, exclude companies that are involved in activities that the fund manager regards as unethical. Each fund group has a slightly different definition of what is unethical, but this typically includes gambling, tobacco, alcohol and arms manufacturing. It could also cover pollution of the environment, bank lending to corrupt regimes and testing of products on animals.

Positive screening funds
Positive screening funds use positive criteria to select suitable companies. Funds that take this approach look for companies that are doing positive good, such as those engaged in recycling, alternative energy sources or water purification. So an ethical fund of this type might buy shares in a maker of wind turbines or solar panels.

Engagement funds
Engagement funds take a stake in companies and then use that stake as a lever to press for changes in the way that the company operates. This could mean persuading oil and mining companies to take greater care over the environmental impact of their operations or pressing companies to offer better treatment of their workers.

In addition, this process may involve making judgements regarding the extent to which such investments are perceived to be acceptable, and about the potential for improving through engagement the ethical performance of the party offering the investment.

Best financial returns
Ethical investors will believe that they should not (or need not) sacrifice their life principles in exchange for chasing the best financial returns, with some arguing that in the long term, ethical and SRI funds have good prospects for outperforming the general investment sectors.

Since ethical investment, by definition, reduces the number of shares, securities or funds in which you can invest, it tends to increase the volatility of the portfolio and therefore the risk profile. This can be mitigated by diversifying between funds, and between different styles of funds and fund managers. Like their non-ethical equivalents, some ethical funds are much higher risk than others.

Professional financial advice you can trust
Investing ethically considers your investment’s impact on society and the environment as well as its profitability. But profit doesn’t need to be at the expense of the world’s most pressing environmental problems. To find out more or to discuss your ethical options, please contact us.

Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of and reliefs from taxation are subject to change. Tax treatment is based on individual circumstances. The value of investments and the income from them can go down as well as up and investors may not get back the amount invested. This information does not constitute investment advice and should not be used as the basis of any investment decision, nor should it be treated as a recommendation for any investment. This information does not constitute advice and should not be used as the basis of any financial decision, nor should it be treated as a recommendation for any product. Although endeavours have been made to provide accurate and timely information, Professional Practice Services cannot guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough review of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions.

Call our friendly, knowledgeable team for a confidential, no obligation discussion:
01527 880345

Visit our Website at:
www.pps-vet.co.uk
 

Professional Practice Services is a Veterinary Business Consultancy and Independent Financial Advisory Firm. Professional Practice Services is authorised and regulated by the Financial Conduct Authority
The Financial Conduct Authority does not regulate finance, will writing, commercial lending, taxation or trust advice.

Growing your wealth over time

Choosing investment vehicles that match your feelings and preferences is the key

It may no longer be enough to simply preserve what you have today; you also have to build what you will need for tomorrow. When deciding whether to invest, it is important that any investment vehicle matches your feelings and preferences in relation to investment risk and return.

Market volatility in recent years may have left some investors feeling uncertain and many have stepped away from investing in the stock markets. But not all stocks and shares are the same. For those seeking long-term total returns, there still are some high-quality companies – at attractive prices – offering the potential to grow wealth over time.

Long-range financial goals
Diversification is a term that can be summed up with this phrase: ‘Don’t put all your eggs in one basket’. Diversification is a technique that reduces risk by allocating investments among various financial instruments, industries and other categories. It aims to maximise return by investing in different areas that would each react differently to the same event. Diversification is the most important component of reaching long-range financial goals while minimising risk.

Hence your asset allocation needs to be commensurate with your attitude to risk. Another key question to ask yourself is: ‘How comfortable would I be facing a short-term loss in order to have the opportunity to make long term gains?’ If your answer is that you are not prepared to take any risk whatsoever, then investing in the stock market is not for you.

Asset allocation
If you are going to invest, you need to be prepared to take some calculated risk in the hope of greater reward. Risk is an implicit aspect to investing: shares can fall, economic conditions can change and companies can experience varying trading fortunes.

The process of deciding what proportion of your investment portfolio should be invested in the different types of investment is called ‘asset allocation’.

Asset classes
The various asset classes come with different levels of risk (volatility of returns) and thus deliver different expected returns over the medium to long term. But, no one asset class always performs best over an investment period. Asset classes consist of a group of securities with varying degrees of risk.

There are three main asset classes:

•    Equities
•    Bonds (also referred to as fixed income)
•    Cash

Each asset class has different investment characteristics, for example, the level of risk and potential for delivering returns and performance in different market conditions

Equities
Equities (also known as ‘ordinary shares’, or ‘shares’) are issued by a public limited company and are traded on the stock market. When you invest in an equity, you buy a share in a company and become a shareholder. Equities have the potential to make you money in two ways: you can receive capital growth through increases in the share price, or you can receive income in the form of dividends. Neither of these is guaranteed, and there is always the risk that the share price will fall below the level at which you invested.

Bonds
Bonds, also referred to as fixed income securities, are issued by companies and governments as a way of raising money and are effectively an ‘I.O.U.’ Bonds provide a regular stream of income (which is normally a fixed amount) over a specified period of time and promise to return investors their capital on a set date in the future. Once bonds have been issued, they’re bought and sold between investors without the involvement of the issuer. Bonds are generally considered to offer stable returns and to be lower risk than equities – and hence deliver lower returns than equities.

Cash
Cash tends to be held within a bank account where interest can be gained. Alternatively, cash funds use their market power to get better rates of return on deposits than you would get in an ordinary bank account. They often invest in very short-term bonds known as ‘money market instruments’, which are essentially banks lending money to each other. In addition, cash funds can provide exposure to global currencies, which may not be easy to purchase on the open market and could be costly transactions.

Different characteristics for risk
These asset classes have different characteristics for risk. When you are young you may want to invest in assets with a higher potential for growth but greater risk, because you have the time to benefit from their long-term growth. As you get closer to retirement you may want to choose more conservative investments that are steadier in both risk and return.

There is a wide variety of different asset classes available to invest in and commensurate risks attached to each one. While these implicit risks cannot be avoided, they can be mitigated as part of the overall investment portfolio by diversifying.

Different ‘styles’ of investing
Some assets are said to be ‘negatively correlated’, for instance, bonds and property often behave in a contrarian way to equities by offering lower, but less volatile, returns. This provides a ‘safety net’ by diversifying many of the risks associated with reliance upon one particular asset. It is also important to diversify across different ‘styles’ of investing, such as growth or value investing, as well as across different sizes of companies, different sectors and different geographic regions.

Growth stocks are held as investors believe their value is likely to grow significantly over the long term, whereas value shares are held because they are regarded as being cheaper than the intrinsic worth of the companies in which they represent a stake. By mixing styles that can out- or under-perform under different economic conditions, the overall risk rating of the investment portfolio is reduced. Picking the right combination of these depends on your risk profile, so it’s essential to seek professional advice to ensure that your investment portfolio is commensurate with your attitude to investment risk.

A ‘paper loss’
The important thing to remember with investments is that even if your investment goes down, you will only actually make a loss if you cash it in at that time. When you see your investment value fall, this is known as a ‘paper loss’ as it is not a real loss until you sell.

If you are going to invest, you need to be prepared to take some risk and to see at least some fall in the value of your investment.

While all investments carry an element of risk, the amount of risk you take directly affects any potential returns and losses. Generally speaking, if there is less risk to your investment, your money will grow more slowly, and with more risk, your investment may fluctuate more.

Currency risk
You should also be aware of currency risk. Currencies (for example, sterling, euros, dollars and yen) move in relation to one another. If you are putting your money into investments in another country, then their value will move up and down in line with currency changes as well as the normal share price movements.
Another consideration is the risk of inflation. Inflation means that you will need more money in the future to buy the same things as now. When investing, therefore, beating inflation is an important aim. Investing in cash may not beat inflation over the long term.

Professional financial advice you can trust
Our goal is to help you grow your wealth even in difficult market conditions. The objective of our advisory approach is to ensure that you find the right financial solutions for your situation and to provide you with full access to our investment expertise. To discuss your requirements, please contact us.

Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of and reliefs from taxation are subject to change. Tax treatment is based on individual circumstances. The value of investments and the income from them can go down as well as up and investors may not get back the amount invested. This information does not constitute investment advice and should not be used as the basis of any investment decision, nor should it be treated as a recommendation for any investment. Although endeavours have been made to provide accurate and timely information, Professional Practice Services cannot guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough review of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions.

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01527 880345
 

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Professional Practice Services is a Veterinary Business Consultancy and Independent Financial Advisory Firm. Professional Practice Services is authorised and regulated by the Financial Conduct Authority
The Financial Conduct Authority does not regulate finance, will writing, commercial lending, taxation or trust advice.