Updated 14 December 2020
For once, the New Year hype is justified – the whole world is looking forward to a better year ahead. But 2020 didn’t just bring a pandemic. It also taught us some useful lessons in life and finance that could pay off in years to come. Article by Nick Green.
This time last January, we were welcoming the new Twenties as the ‘Decade to Decide’ – a time for taking control of life’s biggest decisions. It’s fair to say that it didn’t get off to the best start. And yet 2020 was a timely wake-up call to show us how unpredictable life can be, and why it’s so important to plan for the unexpected.
Mark Twain once said, ‘Eat a live frog first thing in the morning, and then you know the worst is behind you.’ Now that we’ve all had the frog, so to speak, we can look at the rest of the decade in a new light. Even as we hope that we won’t have another year like 2020, we can still learn valuable lessons from it. It tested our patience and ingenuity, gave us a crash course in adapting to new lifestyles, and prompted us to think about what we value most.
Here are the 12 gems of wisdom that we’d take away from 2020.
No-one should forget that stocks & shares are a higher risk investment, and can fall in value as well as rise. But sometimes these falls can be huge – such as when the pandemic put the world into lockdown. ‘So what,’ you may think, ‘I don’t invest in shares.’ But if you have a pension, then you do. And if you’re ready to draw your pension, then some methods of doing this involve leaving your pension invested.
The point is, a stock market crash can have a big and lasting impact on your income if you’re reliant on an invested pot of funds. Huge falls like the Covid crash happen around every 23 years, but smaller ones (known as ‘bear markets’) happen about three times as often. A typical retirement is about 20 years, so you can expect to see at least one big fall and several smaller ones in that time.
So before you make any snap decisions about how you’d like to access your pension, talk to an IFA about how to protect yourself against the risks of market crashes.
When the property market had to shut down temporarily due to Covid, the government went out of its way to ensure that it was one of the first industries to get back to something like normal. The Chancellor also took additional measures to boost home sales, in the form of the stamp duty holiday (which lasts until the end of March this year).
It underlined the fact that the property market is seen as a linchpin of the UK economy. The government has shown it will take a huge tax hit to prevent a house price crash, so – although still not a bulletproof asset – property is still probably the best long-term investment a person can make outside of a pension. So although getting on the housing ladder may be harder than ever, it’s still a goal worth striving for as hard as you can.
Use our First-time Buyer’s Guide to get started, find out about help-to-buy and shared ownership, and discover all the ways that family can help you get a mortgage. We also have a mortgage calculator to help you estimate how much you can borrow.
For millions of Britons, the financial support offered during lockdown was a lifeline. Employees unable to work were paid 80% of their wages via the Coronavirus Job Retention Scheme (‘furlough’), while the self-employed add access to a similar scheme (SEISS). It was a great deal better than nothing – but it still represented a massive 20% loss of income at best.
Hopefully lockdowns will be rare events, but this was just one example of how financial challenges can arrive without warning. Having a safety net in place is therefore always good practice, regardless of whatever else the government may offer in the way of support.
Being self-employed makes a person especially vulnerable, since there is no sick pay, automatic workplace pension, death-in-service cover or other employee benefits. If you work for yourself, therefore, you need to take care of these things yourself. And everyone should aim to build up an emergency savings fund – three months’ salary is often recommended, but again – anything’s better than nothing.
Who else is heartily sick of staring at the same four walls? Things we used to take for granted, like going to the theatre, flying off on holiday or even taking a long weekend or day trip, now seem like a lost golden age. We’ll get those times back again, but we won’t ever be so blasé about them. Because we’ve learned that those experiences are where memories are made, and where we get to enjoy life to its fullest.
So you shouldn’t just save for the rainy days. Save for the sunny ones too. Make a list of things you want to do and places you long to visit, and set up savings or investment funds with those in mind. It turns saving from a chore into a pleasure.
If someone had told us this time last year what 2020 was going to bring, we would all have run a mile. But things that seemed unimaginable very soon became normal, as we adjusted and worked together to fight the pandemic. When we’re thrown in at the deep end, it’s astonishing how fast we can adapt and make the best of things.
And that’s a really important lesson for anyone with big dreams. The most common obstacle to achieving dreams isn’t a lack of time or even a lack of money, but simply low confidence. So we should all remember how much we can achieve when we have to. There’s no need to wait for a crisis to let your creativity flourish. Perhaps you have plans to start a business or grow a business you already have. Instead of denting your confidence, the year just gone should inspire you to chase those dream and tackle the challenges as they come. An accountant can be a great help here.
Some might say that even financial advisers can’t predict events like Covid-19, so what’s the point of planning anything? But financial advice has never been about predicting the future. What advice does is help you plan the things you hope to achieve, while anticipating the less welcome things that might happen. For instance, consider how lucky those people felt who had bought a pension annuity just before the 2020 stock market crash – their income remained guaranteed, while others faced months of uncertainty.
The pandemic affected the whole country, but most risks vary greatly from person to person. That’s why individually tailored advice is important. An IFA can help you arrange your finances is such a way that you are focusing on your goals while being mindful of the risks. By achieving this balance between optimism and pessimism, you achieve a cushion against misfortune and so ultimately have more options when it comes to planning your life.
Speaking of annuities, 2020 was a sobering reminder that people can start to take their incomes for granted. We make long-term plans (such as taking out mortgages) on the assumption that we’ll continue to earn the same amount or more, and a lot of people live only just within their means – around half of adults in the South East say they would struggle to pay an unexpected bill over £500.
Lockdown was a hard lesson in how income sources can be abruptly reduced or even cut off. And this may be an ongoing issue for people in retirement who rely solely on their pension. Drawdown products have become popular for their flexibility – but they’re vulnerable to market shifts. By contrasts, annuities have become unfashionable, yet have the huge advantage of being guaranteed for life. Perhaps 2020 will encourage new retirees to take a more cautious approach to retirement income. An IFA can advise you on the pros and cons of using an annuity as a whole or partial source of income in retirement.
This might seem a curious lesson from the year when so many things ground to a halt. But what actually happened was that many of us fell behind and now have to play catch-up. To save money, lots of people took breaks from mortgage repayments and pension contributions, giving them more cash to spend day-to-day. But those mortgage payments still need to be made eventually, while pension pots will fail to grow as predicted if people don’t keep paying into them regularly.
When it comes to saving (or repaying debt), regularity is generally more effective than one-off larger payments. With pension saving in particular, the longer you can pay into a pot, the more time it has for compound interest to accumulate, and so the more income you’ll ultimately stand to receive. This example shows how a person on modest income can out-save a person on double their earnings, just by starting sooner. That’s how powerful compound interest is, and that’s why time = money.
There are two ways you can respond to upheaval: either by continually worrying about it, or by taking action to reduce its impact. The first is cheaper – in purely financial terms – but the second is much more affordable in terms of peace of mind.
One of the challenges that can hit anyone at any time is being suddenly unable to work due to illness or injury, or due to the serious illness of a loved one. By putting suitable types of insurance in place, you can relax in the knowledge that even if you could no longer earn, your financial security would be protected. Here you can read two stories about how income protection and life insurance helped people overcome the worst.
You can also make sure your family is protected by setting up Power of Attorney in case you become incapacitated – it means your spouse can access your bank accounts and other assets easily if you can’t.
Whether we were locked down with them or separated from them for months, there’s no doubt that 2020 has made us think more about our nearest and dearest. And family is usually at the heart of most financial planning – whether it’s saving up for children’s education, moving to a bigger house, helping your children buy homes of their own, or protecting your income. But one of the most important things to do is make your will so that your family will inherit your estate without a hitch. You should do this at any age, as soon as you have dependants if not sooner.
And if your assets are above a certain level, then you may need advice on inheritance tax to ensure your family doesn’t lose out by more than necessary.
There are those who rush out to buy half a tonne of toilet roles, and there are those who figure that if all else fails, they still have a copy of The Da Vinci Code. Those who coped best with lockdown were probably those who were quickest to accept it, who didn’t panic, and also recognised it as just a temporary measure. Sure enough, the world has managed to produce vaccines in record time, and the return of normality may be just a few months away.
All of which goes to show that although bad things can and do happen (which is why we prepare for them), so do good things. For every crash, there’s usually a corresponding boom. The important thing is to remember that both sides exist, and to see the opportunities as well as the risks when it comes to things like saving and investing. Investing money is fundamentally an optimistic act, because it looks towards a time in the future. So when you invest, picture that future and it’ll strengthen your commitment to your goals.
Pretty much everyone who made plans this time last year ended up having to change or ditch them entirely. Faced with this kind of uncertainty, it’s easy just to freeze up and stop making decisions altogether. But temporary upheavals don’t change the long-term certainties: children will grow up, you will grow older and eventually retire, and you may want to move home several times between now and then. So make sure that you don’t lose sight of your long-term goals in the bustle of everyday life.
Talking to an IFA lets you hit pause, take a step back and consider where you are now and where you’d like to be. If you’re putting off thinking about big decisions, because they’re too overwhelming to tackle all at once, a conversation with your financial adviser can help you get those thoughts in order. So make this New Year the time to cut through the confusion and bring some order and stability back into your life.
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