Business Matters – Issue 13

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Economy update

Inflation, earnings and ESG

Climate change

Investing in a world worth living in

ESG investing

Looking beyond the ‘E’

Income protection

Better to be safeguarded than sorry

Your retirement toolkit

The value of ISAs

Economy update: Inflation, earnings and ESG

Recent UK government figures offer positives for the jobs market, but how worried should business owners and investors be about inflation? And, with the UN Climate Change Conference (COP26) currently taking place, what are the major hurdles to business owners in cutting their emissions?

Business owners and investors have understandably been keeping a keen eye on the economy throughout the pandemic, so the most recent government figures would certainly have been a cause for optimism when it comes to the jobs market. However, with ongoing concerns over inflation, surging petrol prices and shortages of lorry drivers and materials, is the overall picture a rosy one?

The job market bounces back

The latest figures from the government indicate the UK labour market is continuing to recover, with the number of payroll employees returning to pre-pandemic levels – reaching a record 29.2 million in September 2021.1 What’s more, the number of job vacancies in July to September 2021 was a record high of 1,102,000 – an increase of 318,000 from the level in January to March 2020.2

Another encouraging sign came from the total volume of online job adverts in mid-October, which was 143% of its February 2020 average. Perhaps unsurprisingly, given the current challenges, jobs in the ‘Transport, logistics and warehouse’ category are currently claiming the highest volume of ads – over four times higher than the period shortly before the first UK lockdown.3

In the three months from June to August 2021, growth in average total pay (including bonuses) was 7.2% and regular pay (excluding bonuses) was 6.0% among employees.4 However, it’s important to note that annual growth in average employee pay has been inflated by certain factors – not least because the latest months are being compared with low base periods (when earnings were first affected by the pandemic).

Will the inflation dip discourage the Bank of England?

Inflation was the headline topic of our last issue of Business Matters, and it’s continuing to dominate the global narrative. Interestingly, it dipped slightly to 2.9% in the year to September 20215; however, if it persists above 2% for much longer, many experts are anticipating the Bank of England (BoE) will look to raise interest rates sooner rather than later.

For business owners in particular, inflation might reduce profits if companies are unable to share these price increases with their customers. On the other hand, it’s often the case that higher inflation helps to boost a company’s debt situation, with many companies being able to pass on increased costs direct to the consumer – for instance, in mobile phones, insurance and utilities.

For investors, it’s a timely reminder of the importance of diversification. It’s unrealistic to think that one sector could outperform other sectors for ever, and as inflation increases, some investments may perform better, whereas others may need some adjustment. By investing in a range of assets and companies, potential protection against the harmful effects of inflation over the longer term is available. 

ESG – What’s holding businesses back?

The issue of Environmental, Social and Governance (ESG) factors is a key theme of this issue of Business Matters, with all eyes on the UN Climate Change Conference (31st October to 12th November 2021).

As you’ll discover in the following articles, good ESG practice can help to increase a company’s profits and financial sustainability; however, it’s interesting to read recent government statistics that 22% of businesses reported that no action had been taken to reduce their carbon emissions.6

Businesses were asked if they had taken any actions to reduce their carbon emissions, and if anything has prevented any such actions being taken. 37% reported taking at least one action, but the cost of implementation was the main factor preventing businesses from making changes – nearly one in five reported that this is preventing them from taking actions to reduce their emissions.7

However, with people becoming increasingly concerned about global warming and ESG when it comes to choosing where to put their money, it’s clear that companies need to ask themselves whether they can afford not to make the changes. 

Looking ahead

As we contemplate life beyond the pandemic, business owners and investors have been looking ahead and asking what this brighter future means for them. On 27th October, Chancellor Rishi Sunak presented his Autumn Budget and Spending Review to parliament, with the headline announcements being lowered business rates and a reduced cut to Universal Credit, with few changes to tax reliefs or pensions. In our next issue of Business Matters, we’ll review the budget in detail – and what it means for you.

As entrepreneurs and investors re-evaluate their positions, this is where financial advice comes into its own. Stay ahead of the curve, with Wellesley.

Sources:

1,2,4 ONS, Labour market overview, UK: October 2021, accessed 21 October 2021
3,5,6,7 ONS, UK economy latest, accessed 21 October 2021

Climate change: Investing in a world worth living in

Responsible investing is about using your money as a force for good, to help create a world that’s a better place for future generations.

The fight against global climate change is firmly in the spotlight this autumn, with the UN Climate Change Conference (COP26) currently running in Glasgow. Lasting until 12th November, this momentous meeting is taking place just months after the UN’s Intergovernmental Panel on Climate Change (IPCC) produced a report described as “code red for humanity”, emphasising the task facing current and future generations.1

In such a hard-hitting context, it can be all too easy to feel debilitated. However, if you’ve got any money in pensions and investments, you can actually make a veritable difference. Why? Because every company you invest in through your investment and pension funds has their part to play in tackling climate change – and it’s your money that helps make sure they do precisely that.

Be the change

An increasing number of people want to know that certainly some of the money they invest is being used for the greater good, as opposed to helping finance companies that contribute to climate change – such as big polluters.

Awareness of the effects of climate change is ever-present and there’s a much sharper focus on company behaviour, meaning interest in responsible investment has soared. Research in early 2020 discovered that 85% of investors see climate change as the largest long-term threat and, in turn, many have begun to move their money into greener assets.2 

Sharon Bonfield, Propositions Manager at St. James’s Place Wealth Management, notes:

“There’s a rising interest in sustainability and the future of the planet. Our clients want to know their money is being invested in a way that’s responsible and sustainable. Even if it’s just a small amount of money you want to invest, it could potentially be growing at the same time as making a difference to the world we’re living in.”

An estimated £5.5 trillion is due to pass between different generations over the next 30 years3 – therefore there’s an opportunity for older family members to consider their priorities for the future. “That £5.5 trillion could make a huge difference if invested responsibly,” Bonfield says. 

Make it happen

The positive news is that there’s a whole host of ways to marry your investments with your values and your hopes for future generations. With a number of different approaches and an array of acronyms, however, it’s not always easy to know how to invest.

Ethical investing, responsible investing and impact investing will be terms that you’ll come across, for example. It might be helpful to picture these different approaches as being on a spectrum.

At one end are funds that focus on avoiding harm by excluding (or ‘screening out’) specific companies and industries (ethical investing). In the middle are strategies that unite environmental, social and governance (ESG) factors into the investment decision-making process, while accounting for financial performance (responsible investing). Finally, there are the approaches that prioritise positive green outcomes (impact investing).

Responsible investing is the most effective way to optimise long-term value and shape a more meaningful world. All fund managers at St. James’s Place now apply ESG considerations to their investments – in other words, using it as a way of considering the quality and resilience of the companies they invest in. Not only that, but all their portfolios now align behind ESG principles, and are monitored for ESG compliance.

This makes sense from an investment perspective, as six out of ten sustainable funds delivered higher returns than equivalent conventional funds over the past decade, according to analysis by Morningstar.4

As Bonfield points out, it could be said that companies committed to sustainability are more likely to take a long-term view and prove to be more resilient.

“Companies that are future-proof are more likely to be successful, so that bodes well for their performance too.”

For many individuals, responsible investing is just another logical step to those they’re already taking in order to live a sustainable life.

Bonfield concludes:

“If you want to know more, our Partners are there to talk through this with you and help you understand how responsible investments can fit into your broader financial plans.” 

Our world is changing at a rapid pace, and it’s clear that responsible investing has a major role to play in creating a better world and thereby building a sustainable future.

Past performance is not indicative of future performance.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

Sources: 

1 Secretary-General calls latest IPCC climate report ‘code red for humanity’, stressing ‘irrefutable’ evidence of human influence, UN, August 2021
2 Socially responsible investing predicted to double in 2021, Unbiased, April 2021 (Based on research by OnePlanet Capital, 2005 people surveyed)
Intergenerational wealth transfer in the UK, Kings Court Trust, 2020
4 Do sustainable funds beat their rivals?, Morningstar, June 2020

ESG investing: Looking beyond the ‘E’

Why companies with good social and governance records offer excellent opportunities for investors.

Although it’s admirable that investor emphasis is turning firmly towards the environment (see previous article), it’s also important that businesses don’t lose focus on social and governance factors – i.e. the ‘S’ and ‘G’ in ESG investing.

The term ‘governance’ refers to the way companies are led – how their boards and shareholder groups are made up and remunerated, for example, and how they make decisions. Social factors include the way companies manage their relationships with workforces, supply chains and communities.

Good practice in these areas can help to increase a company’s profits and financial sustainability; equally, bad practice can prove disastrous for both corporate reputations and share prices. Because well-run companies perform better, governance has been on fund managers’ radars long before ESG became popular.

Social investing is a newer interest, which has grown out of the news of neglect from various companies regarding the rights and well-being of staff, communities, and workers in supply chains. Indeed, COVID-19 saw employee well-being climb the list of issues that investors look at in companies from an ESG perspective.1

Petra Lee, Responsible Investment Analyst at St. James’s Place Wealth Management, explains:

“The focus on social issues has grown further because COVID-19 brought to light so many problems, such as imbalanced vaccination rates and social inequality. Supply chains in the fashion industry are also an increasingly recognised problem. It’s great for consumers to buy cheap clothes.

“But if you think of all the factors that made them that cheap, who has sacrificed what? Social mobility is yet another issue. For example, in the UK alone, the government publishes a long list of companies that have failed to pay the minimum wage.”

Social and governance links to business performance 

There is plenty of evidence showing the connection between social and financial performance, and therefore share prices. S&P Global Ratings, for example, conducted an analysis that found accounting for social concerns when investing can protect portfolios, particularly when part of a comprehensive ESG investing strategy.2

S&P also said that the market usually rewards companies that minimise their exposure to social issues. Selling controversial products, for example, or relying on materials from geopolitical hot spots, and using an unpredictable labour force, can hurt profits and increase volatility.

Alongside this, there have been numerous studies showing that diversity in boards, which is an essential aspect of good governance, is positive for long-term performance – encouraging innovation and improved decision-making as well as avoiding group think. A 2020 McKinsey report, for example, found that companies with higher levels of ethnic diversity were 36% more profitable than their peers.3 

Shaping a better world

Our partners, St. James’s Place look for transparent measurement and communication of environmental, social and governance (ESG) practices and outcomes. They also use several processes and initiatives to invest in social and governance factors, from signing modern anti-slavery and human-rights conventions to ensuring the increased traceability of supply trains and integrating consideration of communities into their investment decision processes.

Want to find out more about ESG investing? Contact your adviser today!

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

Sources: 

1 ‘Workplace wellness and employee mental health – an emerging investor priority’, Harvard Law School Forum on Corporate Governance, December 2020
2 ‘What is the ‘S’ in ESG?, S&P Global’, August 2021
3 ‘Diversity wins: how inclusion matters’, McKinsey & Company, May 2020

Income protection: Better to be safeguarded than sorry

The pandemic has sparked increased interest in taking out policies that will pay out during long-term sickness or unemployment. It’s a wise move, and one you should certainly consider – here’s why.

From cars to homes, and anything precious – such as pets and bicycles – everyone realises the value of insurance. However, the twists and turns of the COVID rollercoaster have brought us all back down to earth with a jolt – and one of the many lessons we’ve learned is that there’s no time like the present to have a plan B ready to ensure our mortgage and bills are paid in that dreaded worst-case scenario.

Indeed, life insurers paid out a staggering £90 million in claims between 1 March and 31 May 2020, according to the Association of British Insurers – this was to support families in light of COVID-19 deaths and pay off outstanding mortgages.1 What’s more, the issue of income protection was perhaps more prevalent for women, who made up the majority of those on the government’s furlough scheme, and 57% of the workers in industries forced to shut down.2

It’s little wonder then, that more and more people have sought to protect themselves from future financial shocks.

New priorities

In and amongst the low points of the pandemic, many people have found they’ve had more time to contemplate their life priorities, and make changes for the greater good.

For some people, this has resulted in turning to protection insurance and taking out policies that would pay their mortgage and living costs, or support their loved ones in the instance of another such event. Investing in such policies has been a wise move for those who built up extra savings over the lockdown periods to put their money to work.

Income protection is particularly important for part-time workers and the self-employed. After all, during periods of economic crisis, these jobs are often lost. It could be the case that the main earner in a household has an income protection policy, but the partner who earns less or works part-time should also be covered. 

Already have savings?

This tumultuous time has meant that people now understand the value of their income, revealing the importance of protection insurance too. Indeed, while many people have already executed a Will and have savings or other assets set aside for their family should the worst come to the worst, cash savings might not necessarily cover the full cost of long-term illness.

In the meantime, having to sell investments (such as shares or property) in haste, in order to meet unforeseen outgoings, can be both draining and risky. After all, it can mean accepting less for your assets than you had hoped for.

It’s also problematic once you’ve recovered, as those diminished savings and assets have to be replaced, but potentially at higher prices than you paid at the outset. What’s more, preparing a Will can be a lengthy process, potentially leaving your family financially unsupported for months or even years.

Added value

When it comes to buying insurance, most people focus on the cash value of their possessions i.e. how much it would cost to replace their smartphone or car, for instance. However, when buying income protection, you should think about the value of the unpaid ‘work’ you do alongside your salary, such as household chores and childcare.

For example, if you were to fall ill for an extended period of time, how much would you have to pay for childcare? Future expenses would need to be factored in, too – such as the extra-curricular activities that children will likely be involved in once they start secondary school.

One size doesn’t fit all

Your personal situation will always dictate what kind of protection is most suited to your circumstances, and that’s where professional financial advice comes into its own so you can be sure you have the right insurance for your individual needs.

In short, the different types of insurance available include:

  • Life insurance: A lump sum paid out on death, this could be used to pay off a mortgage and provide an additional amount of money for your family, depending on the level of cover chosen. Whole of life cover runs for your lifetime, while level term insurance lasts up the point of having repaid the mortgage. Alternatively, there’s decreasing term insurance, which covers you for a set period, such as 10 years, with the level of coverage decreasing over the life of the policy at a fixed rate.
  • Income protection: A tax-free income in case you’re unable to work for an extended period because of an accident or illness. The amount of cover varies depending on the selected plan, and usually starts after a certain period – say, six or 12 months. It may run for several years, until you go back to work or even until you retire.
  • Critical illness policies: A lump sum payout if you’re diagnosed with a condition covered by your plan, such as a heart attack, stroke or cancer.

Your financial adviser can discuss further types of cover in such critical times too, such as rent insurance – this covers rent payments if a tenant is struggling to meet them.

What’s more, if you already have cover, it’s important to review your policy to ensure it continues to meet your needs.

Be safeguarded – not sorry

Protecting your income with the professional support of a Wellesley adviser couldn’t be simpler – call us today as a first step towards a personalised protection plan that fits in with your current circumstances, no matter what the future holds!

The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.

Sources: 

1 Association of British Insurers, “Insurers pay £90 million to help families cope with Coronavirus deaths”, August 2020
2 How has the coronavirus pandemic affected women in work?, House of Commons Library, 8 March 2021

Your retirement toolkit: The value of ISAs

Pensions are often the first port of call when it comes to saving for retirement. Yet while they remain the cornerstone of any decent retirement plan, they can equally work well alongside other options.

Beyond pensions

When it comes to saving for retirement, pensions are usually the first route that spring to mind. Indeed, it’s little wonder that they’re often the first port of call, not least thanks to their tax benefits. Yet while pensions should be a key part of any retirement savings plan, the picture has developed over time, meaning there are now other routes to take into consideration.

Nowadays, saving for retirement is a blend of choice and flexibility – it’s no longer about wholly relying on a pension in retirement. Working people are now expected to live for two or three decades in retirement, and with a greater choice of income options available on reaching that stage, it makes sense to take advantage of the different available tools.

In other words, while pensions remain the bedrock of any decent retirement plan, they can work well in parallel with other options.

The most obvious one is an Individual Savings Accounts (ISA). These were introduced in 1999 – replacing Personal Equity Plans (PEPs) – and are now a major part of the retirement savings landscape.

“Now that it’s easier to access a pension as well as an ISA, the two products are much more broadly aligned,” notes Tony Clark, Senior Propositions Manager at St. James’s Place Wealth Management. There’s been an ongoing debate as to whether ISAs or pensions are the best option when it comes to retirement savings.

However, in reality, a blend of the two is perhaps the best approach – precisely because this gives you instant diversification and increased options. “Having both offers more choices when making retirement decisions, and with the tax advantages you’re getting the best of both worlds,” says Clark.

A clever combination?

The key difference between ISAs and pensions is their tax treatment. The annual ISA allowance is currently £20,000 – this can be used across Cash ISAs, Stocks & Shares ISAs, Innovative Finance ISAs, Lifetime ISAs and Junior ISAs (albeit with annual limits of £4,000 and £9,000 on the latter two respectively).

Within the context of retirement savings, it’s Stocks & Shares ISAs that are broadly referred to; however, Cash ISAs are equally a vital part of the toolkit. The money you pay into an ISA will usually be taxed beforehand, as it’s paid out of net income – on the other hand, there’s no Income Tax due on the interest or dividends you receive.

In comparison, there’s no tax when you pay into a pension, because the government gives you tax relief on pension contributions at your marginal Income Tax rate.

In other words, for every £80 paid in, your pension scheme can claim another £20 in tax relief (i.e. a £100 contribution costs just £80). Higher-rate taxpayers get 40% pension tax relief, so they only have to pay in £60 for every £100 contribution – those on the 45% Income Tax rate can claim relief at 45%. Anything above the basic rate of tax has to be reclaimed via the individual’s tax return and will be subject to eligibility. Please note that Income Tax is charged on pension withdrawals above the 25% tax-free cash entitlement.

The other major difference to keep in mind is that, generally, you can’t access your pension until the age of 55 (rising to 57 in 2028), while there’s no age restriction on withdrawing money from an ISA. “Pensions tax relief provides tax-efficient growth and access to a proportion of tax-free cash, while your ISA gives you another allowance entirely, so it makes sense to use both,” says Clark.

Pick ‘n’ mix

Furthermore, using both ISAs and pensions helps savers get to grips with the annual and lifetime pensions allowances. The former is the amount you can contribute in a tax year while still taking advantage of tax relief (currently £40,000, but reducing by £1 for every £2 of adjusted income you earn over £240,000).

The lifetime allowance is currently frozen at £1,073,100, and is the maximum amount of pension savings you can accumulate over your lifetime without facing a potential tax charge.

From a tax point of view, the way to approach it is to weigh up where the two products align with your long-term financial plans. A financial adviser can add particular value in this instance, as well as being able to answer questions, such as which pot to access first in retirement and what the tax implications might be.

Clark says:

“When it comes to all the allowances and limits, the adviser will have a watching brief over those and guide you along the best course of action. For example, your plan might be to access the ISA before age 55, especially if you want to retire before then. It depends on your future plans, and that’s where an adviser can help you map out which products to use.”

Your adviser can likewise ensure your investments are best suited to achieving the life goals you hope to achieve.

“If people aren’t sure which to use, that tells us they’re lacking a plan,” observes Clark. “An adviser will sit down with you and work out what you want to achieve and the purpose of the savings you’re putting aside.” 

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

A Stocks and Shares ISA does not have the security of capital associated with a Cash ISA.

The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.

Please note that St. James’s Place do not offer Cash, Innovative or Lifetime ISAs.