What do levels of risk mean in investing? What’s right for you?

Low risk doesn’t mean no risk - but would-be investors can find the specifics confusing. Mark Norman explains what the varying levels of risk entail and how investors can best balance risk versus return in an evolving market.

Investments can be a lucrative way to maximise returns on your existing assets and increase your financial security - but for some investors, the terms ‘low risk’ and ‘high risk’ can pose a dilemma: Is it best to err on the side of caution and stay in the slow lane, or is it better to throw caution to the wind and increase your risk for potentially greater rewards? 

As there is a level of inherent risk with any investment, the choice should ultimately come down to your objectives and your timescale. What do you hope to generate over the course of the venture and how long does it have to achieve this?

We also have to assess an individual's capacity for loss. (ie. If the stake were to reduce in value, what is their ability to absorb the losses?)

Levels of financial investment explained

We all seek to make well-informed decisions and enjoy fidelity in our finances, but not everyone is familiar with the varying levels of risk in making a financial investment. How can a would-be financier differentiate between different portfolio options?

While every portfolio is unique, broadly speaking, there are five levels of risk that Matthew Douglas offers its discerning clients: Low risk, balanced growth, medium risk, adventurous, and high risk.

Typically speaking, you’ll enjoy the highest expected yields from a high-risk portfolio, with which you can hope to earn an average 7% annual return after charges over the medium term. This falls to 6% for an adventurous investment, 5% for medium risk, 4% for a balanced growth stake and 3% for a low-risk portfolio.

Calculating investment returns over time

While a difference of around 4% might sound negligible, it’s anything but. Let’s use an example. Say you’re investing £100,000 for 10 years and adding £1,000 per calendar month into your pot; with a high-risk portfolio of assets (assuming favourable market conditions) you could reasonably expect to expand your investment to more than £375,000.

The same initial £100,000 invested into a low-risk portfolio with the same monthly contributions in similar market conditions could yield just under £300,000 - adding £55,000 over the course of the venture to create a final total yield of £275,000. While this is still effectively tripling your earnings, it is on a less pronounced scale.

This is because investments operate on the principle of high risk, high reward - but lower and medium risks are still rewarded, simply with varying and often lesser levels of return.

What determines the specific level of risk?

Essentially, when you select your preferred level of risk, your financial adviser will carefully select assets to invest in, typically a mix of domestic and overseas, that match your specified risk tolerance. So, it is the assets your funds will be invested in that are themselves higher or lower risk rather than the overarching investment itself.

For example, your funds might be invented in the money market for low-risk short-term investments, whereas investing in bonds, property or equities all (typically) entail a higher associated risk factor, respectively.

This is why it’s important to have a broad and varied portfolio, as investing in a variety of different assets will mean that your hard-earned funds aren’t reliant on a singular yield but instead on a dynamic spread of intelligent ventures tailored to your exact needs.

Advice for young investors

My advice to young investors who are seeking to maximise their earnings and build a significant long-term personal investment portfolio is to invest in higher-risk assets over a prolonged period of time. Of course, it’s only prudent that this should include paying into a pension. However, individuals should also review the level of their debts before committing to an investment strategy.

I’m not saying you should expect a guaranteed increase in funds every time you check your balance, as market conditions inevitably will rise and fall in line with economic and inflationary pressures. However, if you can have the steadfastness to invest your funds with sage financial advice from a qualified IFA, you can confidently close the book on your investments for 15, 20, 30 years and trust that the framework is in place to amplify your assets.

Ultimately, you have to play the game and be willing to invest your time as well as your money - and time is often the key variable. The longer you can hold your nerve, the higher the likelihood of a positive long-term outcome that can boost your finances and your prospects. 

To learn more about the varying levels of risk in making a sound financial investment, get in touch with our award-winning team of experts today. 

Amplify your assets: How to make the most of your ISA allowances

With the end of the tax year fast approaching, savers are encouraged to maximise their ISA contributions to enjoy a host of tax reliefs and benefits. Mark Norman explains how to make the most of your ISA before 6th April.

5th April marks the end of the 2023/4 tax year. While this is good in terms of refreshing your allowances and allowing you to start the new financial year with a clean slate, the short window between now and then offers savers a vital opportunity to make significant tax savings.

In any given tax year, savers can invest up to £20,000 in their ISA - which benefits from being free from income tax and capital gains tax. However, this allowance is fixed and does not roll over into the new tax year. 

If you’re yet to invest your maximum contribution, I’d encourage you to do so quickly because if you don’t use your allowance, it’s gone!

As well as topping up your annual savings, you can also benefit from further allowances that extend the benefits of your ISA - in some cases, across your entire portfolio of assets. Here’s how:

Double up your allowances with spousal support

Married couples benefit from double the standard ISA allowance, meaning you can invest up to £40,000 between you. Make sure to check whether your other half has saved as much as possible to maximise the tax benefits to your household. 

Similarly, children can save up to £9,000 annually in a Junior ISA account, so it pays to use this full allocation where possible. 

If your child is 17 years old, or approaching that age, bear in mind that they are in the unique position of being able to contribute to a Junior ISA and a full adult ISA once they turn 18. Unless their birthday happens to fall on April 6th, they could benefit from saving £29,000 in just one year.  

ISA gains are tax-free

Unlike products liable to Capital Gains Tax (e.g. those investments not in a tax wrapper), ISA gains are tax-free. Remember, Capital Gains Tax reliefs are diminishing rapidly. From £12,300 in 2022/23 to £6,000 2023/24 and just £3,000 in 2024/25, savers are seeing a reduced allowance - which means they will be liable to pay more tax on assets sold. 

In stark contrast, all ISA gains are entirely tax-free, so it pays to max out your contributions when you can. Of course, while gains are tax-free, the content of your ISA itself isn’t. This will form part of your estate, so be careful not to misconstrue savings as gains.

Enjoy flexible savings by reinvesting in your ISA

Use, don’t lose your savings allowance. If you have funds invested elsewhere, it may pay to withdraw your money and then reinvest in your ISA. Always make sure to check the savings yield on the account these funds come from however, as some accounts (such as a flexible saver account) offer varying levels of interest based on your withdrawal history - so this should be checked on a case by case basis. 

Cash is not always king, but should you have the funds, you have the option to open a cash ISA and then switch to a share ISA in the future, which can help you to maximise contributions to ensure you don’t lose your allowance. 

Use your ISA to protect your portfolio

Your ISA is a valuable tool that can be effectively used to safeguard your portfolio of assets - if used correctly. Build your income-producing portfolio to be more tax-efficient by investing funds in your ISA, as income and dividends are then tax-free.

Remember, spouses inherit their partner’s ISA portfolio on passing, so it’s important to always ensure your assets are accurate and current.

If you’d like to know more, get in touch today to use your ISA allowance before you lose it on April 6th.

Why should you pay into your pension when you’re young?

Half of all UK adults reported an increase in their cost of living last year. Worse still, the Office for Budget Responsibility (OBR) projects the disposable income of the average Briton will drop a further 1.5% per head throughout 2024. While covering your outgoings is essential, Mark Norman explains why ignoring your pension contributions at a young age is an especially high-risk decision.

With energy costs having gone up a further 5% in January and inflation holding steady at 5.25%, many UK taxpayers are understandably worried about their increasing outgoings. For young working people, this is especially true.

While navigating your current circumstances is crucial, you can’t overlook planning for your future financial security, and one of the most effective ways to achieve this is by contributing to your pension from a young age. Of course, it may be tempting to prioritise short-term disposable income, but the long-term benefits of early pension contributions cannot be overstated. 

Read on to explore five key reasons why paying into your pension while you're young is a smart financial move that will pay dividends in later life.

Harness the power of compound interest

One of the most compelling reasons to start contributing to your pension early is the magic of compound interest. By investing your money at a young age, you give it more time to grow exponentially. 

Compound interest allows your money to generate additional earnings, creating a snowball effect that significantly boosts your pension fund over time. The earlier you start, the more your money works for you. 

In fact, compounding returns are further increased by the tax reliefs available. For every £100 an individual pays into their pension, they receive a £25 top up from the tax man - and then, at retirement, they are only taxed on 75% of the total fund (below lifetime allowance level).

What’s more, if your employer pays directly (via salary sacrifice), then you save on National insurance contributions as well.

Take advantage of automatic enrolment 

Automatic enrolment has been in place since October 2012. This means that young people now become eligible to pay into a workplace pension scheme from the age of 18. This process happens (as the name suggests) automatically - meaning that you have to make a conscious effort to opt-out.

I would strongly advise against doing so, as automatic enrolment presents a golden opportunity to kickstart your pension savings effortlessly. By staying in the programme, you lay the foundation for a secure financial future without the need for complex processes or significant effort on your part. Your employer also pays in a proportionate amount based on your contributions - so, if anything, I would advise paying the higher 10% salary sacrifice now to more than double your earnings down the line.

Build a solid financial foundation

Starting your pension contributions early gives you a keen advantage against your peers who don’t, as you’ll be regularly adding to your future financial safety net. Inevitably, as you progress in your career, life's unavoidable twists and turns will rear their head. 

There will be times when your expenses are higher and income perhaps lower, but the journey to financial wellbeing becomes more manageable when you have a well-funded pension. This financial security not only provides peace of mind but also gives you the freedom to pursue opportunities without the constant worry about your long-term financial well-being.

Mitigate the impact of inflation

Inflation erodes the purchasing power of your money over time. We’ve all been reminded lately of just how powerful the effects of inflation are - so why not use it to your advantage?

By contributing to your pension early and consistently, you can help to drastically minimise the impact of inflation on your retirement savings. The growth potential of your investments, combined with regular contributions, ensures that your pension fund keeps pace with or even outpaces inflation, maintaining its real value.

By starting early and staying committed, you are not only securing your future but also setting yourself up for a more financially stable and fulfilling retirement. 

For advice on how you can best grow your pension pot with specialist guidance and savvy investments, get in touch with our expert team of financial advisers today.

Money Vault

How to reduce tax by increasing pension contributions and retirement savings

Saving into your pension is not only important to secure a comfortable retirement lifestyle, but can also unlock tax relief that boosts your savings and benefits you in the here and now. Mark Norman explains more.

How to reduce tax by increasing pension contributions and retirement savings - Matthew Douglas

Whatever stage you’re at in your career, it’s never too early to start planning for your retirement. Of course, the main benefit of retirement saving is ensuring that you have a comfortable income to live off once you’ve stopped working.

However, by being savvy with your pension contributions, you can also reduce the amount of tax you pay. That’s because all the money you pay into a pension qualifies for tax relief. 

What is pension tax relief?

Pension tax relief is a government incentive to promote retirement savings by allowing your pension provider to reclaim tax from HMRC and add it to your contributions, effectively boosting your savings. 

The amount of tax relief you receive is based on your income tax rate, with basic rate taxpayers getting 20%, which means each pound contributed becomes £1.25. Higher-rate taxpayers receive 40% (turning every pound into around £1.66), and additional rate taxpayers get 45% (effectively an 80% boost). However, higher and additional rate taxpayers must claim this additional relief through their tax return.

In essence, pension tax relief offers a substantial financial advantage, making pensions a compelling investment choice for long-term savings, especially for high earners. In some cases, higher-rate taxpayers can put money into their pensions via salary sacrifice and reduce their taxable income to below the higher-rate threshold, making them even more tax efficient. 

Things to consider

While maxing out your pension contributions is generally a good idea for a lot of people, it’s not necessarily always the best thing to do. It’s important to consider that your money will be locked away and, from 2028, you will need to be 57 to access a private pension. If you have high-interest debts like credit card debt, it's advisable to prioritise paying them off first before maxing out your pension contributions.

It is, however, important to start saving into your pension as early as you can, even if it’s just a little bit per month to start with, to avoid playing catch up later. Auto-enrolment schemes offered by employers are a convenient way to begin saving for retirement, but it's worth noting that they may not provide sufficient savings as the amount needed for a comfortable retirement can be surprisingly substantial.

Lifetime ISAs 

A Lifetime ISA (Individual Savings Account) is another option that offers tax savings for those looking to save towards their retirement. Just like other types of ISAs, Lifetime ISAs are tax free.

They can be opened by those aged 18 to 40 and you can contribute up to £4,000 annually until age 50, with the government providing a 25% bonus, capped at £1,000 per year. 

Once you reach 50, contributions and the 25% bonus cease, but your account remains open and continues to earn interest. You can then access your savings from your Lifetime ISA at age 60 without incurring penalties. Withdrawing funds or transferring the account to another ISA type before then will result in a 25% charge. 

Lifetime ISAs are cheap and simple investment solutions, and are very easy to set up, with many banks and providers allowing you to open them via an app. People tend to have a Lifetime ISA in conjunction with a pension so you can essentially max out your tax relief. 

At Matthew Douglas, our team of retirement planning experts are here to help you ensure your pension and savings are right for you. Get in touch with us to discuss your options.

Senior couple in sports car

Should I delay my retirement?

Delaying retirement could boost your chances of a secure financial future

With the persistently high inflation rate, it’s crucial for individuals nearing retirement to evaluate the impact of escalating living expenses. Adjusting or postponing retirement plans may provide enhanced financial stability in their golden years.

Delaying retirement has various benefits for your financial future. It can provide more time to build up pension contributions, which can lead to a more significant income in later life, access to additional support from the government, and more extended periods for employers to contribute to workplace pensions.

Consider your circumstances
On the other hand, there are some drawbacks of delaying retirement, including fewer years of employment for younger people entering the workforce, an additional taxation period; and potential inflationary pressures on wages if salaries remain static over an extended period. It is also essential to consider your circumstances before deciding whether to delay retirement.

Factors such as your current health, lifestyle, and financial situation should all be considered before deciding. Obtaining professional financial advice is essential to help you understand the implications of delaying retirement for your particular circumstances.

Here are some reasons why you might consider postponing your retirement
Increased State Pension: 
In the UK, you can defer your State Pension, resulting in a higher weekly payment when you later claim it. For every nine weeks you delay, your pension increases by 1%, which equates to just under 5.8% for each full year deferred[1].
Greater workplace pension: By working longer, you can continue contributing to your workplace pension, potentially resulting in a larger pension pot when you retire. Additionally, your employer’s contributions and potential tax relief will continue to boost your savings.
Maximise personal savings: Delaying retirement allows you to save more money, providing a more substantial financial cushion when you eventually stop working. This extra time also gives your investments more opportunity to grow.
Pay off debts: If you have outstanding debts, continuing to work can help you pay them off faster, reducing the financial burden during your retirement.
Improved health and wellbeing: Studies have shown that staying in the workforce can positively impact your mental and physical health, contributing to a higher quality of life during retirement.
Social Security Benefits: If you’re eligible for social security benefits from another country, delaying retirement might enable you to receive higher benefits based on your age and work history.

More time to save and invest for later life
Delaying retirement can give you more time to save and invest for later life. However, it is essential to weigh up the advantages and disadvantages carefully before deciding if this option is right for you. If you are considering delaying retirement, speak with us so that you can make an informed decision that aligns with your individual needs and goals.

Source data:
[1] https://www.gov.uk/state-pension




Man calculating a sum

The importance of understanding tax free pension withdrawals

Many over 55s are unaware that they can access 25% of their pension pot tax-free

A surprising 43% of individuals over 55 need to be made aware that they can withdraw 25% of their pension pot tax-free, according to recent research[1]. Knowledge could lead to better decision-making when it comes to accessing pension savings.

Similarly, 52% of those surveyed between the ages of 50 and 54 were also unaware of this rule, indicating a widespread lack of understanding about pension withdrawal options.

Maximising your tax-free pension withdrawal
The study found that among the 57% of over-55s who know about the tax-free pension withdrawal option, 21% have already taken advantage of this benefit, while 9% plan to do so in the future.

Most individuals who plan to take their tax-free lump sum did or will do so at retirement (69%). However, 16% have made or intend to withdraw at different points during retirement.

Understanding the various options available
The study emphasises the importance of understanding the various options available when withdrawing from your pension pot, including the 25% tax-free cash entitlement.

Considering factors such as whether to take the lump sum all at once or split withdrawals into smaller chunks over time and the potential implications and benefits of each approach are essential.

Important questions regarding tax-free pension withdrawals

How much can you withdraw tax-free?
Typically, most people can withdraw 25% of their total pension pot tax-free, although this may vary depending on the type of pension plan and if you’ve exceeded your lifetime allowance. The remaining 75% is subject to Income Tax.

When can you access your tax-free lump sum?
Generally, you can access your pension savings, including the tax-free lump sum, at age 55 (rising to 57 in 2028). In rare cases, you may be able to access your pension earlier due to ill health or a protected scheme.

Can you take the lump sum in smaller amounts?
This depends on your pension product and its terms. Taking smaller withdrawals over time can be beneficial in most cases, as it allows for potential growth and tax-efficiency.

Should you take the lump sum immediately?
It’s essential to consider the longevity of your pension savings throughout retirement. Taking too much too soon could result in running out of funds later in life. Delaying access to your savings may allow for additional growth.

Are there any implications to be aware of?
Accessing your pension savings can impact state benefits, such as Universal Credit or Pension Credit. Additionally, taking a tax-free lump sum won’t affect the amount you can contribute to your pension plan, but accessing taxable income may reduce your annual allowance.

Source data:
[1] Opinium conducted research among 2000 UK adults aged 18+ between 12th and 16th May 2023 for Standard Life, part of Phoenix Group. Results have been weighted to be nationally representative.




Serious confident middle aged female journalist with cup of coffee sitting at desk with books and laptop

Should I invest as early as I can?

Does the early bird get the ISA worm?

If you’re an investor looking to maximise your Individual Savings Accounts (ISA) returns, it’s worth considering investing your ISA allowance as soon as possible each year, as soon as it becomes available on 6 April. Not only will this help ensure that your money is protected from taxes right off the bat, but it also means that your investment has more time to grow in the market. This can result in a bigger ISA pot in the long run.

Of course, this strategy may not be right for everyone, and there are risks to investing in the market. It’s important to carefully consider your investment goals, risk tolerance and overall financial situation before making any investment decisions. However, for many investors, investing their ISA allowance early on can be a smart move that pays off over time.

Highly efficient way to protect investments from tax
An Individual Savings Account (ISA) is a highly tax-efficient way for people to protect their investments from tax. In the 2022/23 tax year, everyone in the UK had an annual Capital Gains allowance of £12,300, which was reduced to £6,000 in the Autumn Statement on
17 November 2022. This will reduce further to £3,000 from April 2024.

However, when you invest into an ISA, you can enjoy tax-efficient returns and don’t need to declare any interest from an ISA or any income or capital gains made from it when completing your annual tax return.

Make sure you use your full ISA allowance
The maximum amount that can be invested into an ISA in the 2023/24 tax year is £20,000. This allowance hasn’t changed since April 2017 when it was increased from £15,240 and is higher than the £7,000 maximum allowance offered in 2008. However, any unused allowance will not carry over to the next tax year, meaning that it’s essential to make sure you use your full ISA allowance during the current tax year if possible.

Investing early can certainly offer many benefits, including an extra year of tax-sheltered growth. However, it’s important to be aware that investing outside of an ISA can come with tax risks. The halving of the dividend tax allowance this tax year means that you may end up paying tax on dividends earlier in the year if you hold investments outside of an ISA.

Take advantage of pound cost averaging
Starting an ISA early in the tax year provides many benefits when investing, particularly when it comes to setting up regular monthly payments into a Stocks & Shares ISA. By doing so, you can take advantage of pound cost averaging, which is a process of drip-feeding money into an investment over time in order to reduce the impact of market ups and downs.

The idea behind pound cost averaging is that when you invest a fixed sum every month, you’ll buy more units when an investment’s price falls, which can provide the potential for greater profits if they then rise.

Establishing a regular investment plan early on
Of course, the opposite can also be true – if prices rise, you’ll buy less. However, over time, pound cost averaging can help to smooth out the ups and downs in an investment’s value, reducing the risk of dramatic swings in your portfolio.

By establishing a regular investment plan early on, you’ll also be able to take advantage of the full tax year for your investments, allowing you to spread your investments across the entire year. This can help to reduce the risk of investing all of your money at a time when the market may be overvalued.

Good news is that you can transfer your ISA
Transferring an existing ISA could also be a practical option if you’re looking for a more competitive deal or want to consolidate your investments. The good news is that you can transfer your ISA at any point during the tax year, but it’s essential to take note of some things before you do.

For instance, you need to transfer the whole ISA, so you cannot partially transfer your existing Stocks & Shares ISA for the current tax year. It’s wise to check with your current provider if they impose fees for transferring out. Taking this step can help you avoid unnecessary costs and ensure that you get the most out of your investment.

Consistently max out your ISA allowance each year
The old adage holds true when it comes to investing: time in the market is more important than timing the market. This means that the longer your money is invested, the more time it has to grow and potentially compound over time.

Investing in an ISA can be a great way to grow your savings pot beyond the limits of a tax-efficient allowance. It’s important to consistently max out your ISA allowance each year, if affordable, and enjoy generous investment returns. Even if you don’t have a large lump sum to invest, you can still benefit from regular, small contributions from the beginning of the new tax year. So start saving and investing today and see how far you can go!