17 March 2020
If you are covering the economic consequences of the coronavirus outbreak and its impact on household finances, please see the following commentary from Quilter, covering cash savings; mortgages; protection insurance; and investment.
Gordon Andrews, Quilter financial planning expert, on the importance of cash savings:
“Unfortunately, the impact of this virus is likely to have a lasting financial impact on households across the UK. It seems inevitable that some employers will come under pressure and job security may become a concern for people. And there will be worries for people about the financial impact if they or a family member were to contract the virus and suffer complications. Preparing for a financial shock like this is extremely difficult, particularly when combined with the obvious concerns about our own health and the consequences of this pandemic on wider society. However, there are steps that can be taken and those that have some defences in place will at least have reassurance that from a financial perspective they’re braced for what could be a bumpy ride ahead.
“It is absolutely crucial to have a cash savings buffer in place. Without some cash readily available, families can be extremely vulnerable to a financial shock and will struggle severely if they were to lose their job, or confront an unexpected bill. Research from the UK’s national Money & Pensions Service shows that 71% of UK adults get an unexpected bill each year, and an estimated 11.5 million people have less than £100 in cash savings to fall back on.
“The first step is to calculate your monthly outgoings on essential items like bills, mortgage payments and food. Use those calculations to work out your costs for 3-4 months and try to keep that much in easily accessible cash savings at all times. If you don’t already have those savings in place, try to build on any cash reserves you do have. This can provide a crucial buffer against a financial shock, preventing the need to turn to short term borrowing, such as credit cards, to meet day to day expenses.”
Gemma Harle, managing director of the mortgage and financial planning network at Quilter Financial Planning, with suggestions for mortgage holders:
“If you have financial worries and find yourself concerned about your ability to meet your existing mortgage payments, for example if you are out of work, then be sure to contact your lender to discuss your options. They may be willing to offer a break on repayments or allow you to move to an interest only repayment plan for a brief period while you get your finances in order.
“The tighter affordability rules in place today should ensure that fewer people find themselves in a position where they struggle to keep up on their mortgage repayments, but if you are having difficulty don’t bury your head in the sand. If you default on a mortgage repayment it could count against you in a future borrowing application, and of course there is the risk of repossession in extreme scenarios. So be sure to speak to someone rather than just letting the situation drift.
“In response to a contraction in the economy, interest rates are normally cut in order to reduce the cost of borrowing and encourage spending. The Bank of England reacted quickly to the Covid-19 outbreak, with a rate cut to reduce the base rate to just 0.25%. For homeowners, this is likely to mean that the low interest borrowing available at the moment will probably continue to be on offer for some time to come.
“Recent data from the FCA shows that far too many people fail to shop around for the best mortgage rate at the end of their term. It shows customers that obtained their mortgage through an adviser are more likely to remortgage at the end of their term, whereas ‘DIY’ borrowers are more likely to stay with their existing lender and move onto the variable rate. They could be missing out on the chance to fix their mortgage at a more competitive rate.”
Jonathan Raymond, Investment Director at Quilter Cheviot, on why not to instinctively sell your investments:
“Following the recent setback in equity markets, we have had a number of clients contacting us about whether they should move their investments to cash given the uncertainty around. These concerns are of course justified. The world always carries uncertainty and there is enough of it about what with the threat of trade wars and a slowing global economy.
“The trouble is that equity markets generally trend upwards over the longer term, even though it’s not unusual for them to fall by 10% over a short time. The FTSE 100, for example, has regularly fallen by 10% since 1990, though it’s relatively rare for it to fall by more than 20%.
*FTSE data sourced from Refinitiv Datastream
“Many clients talk about selling and moving to cash for six months, effectively suggesting a wait and see approach. But any decision to move to cash or sell down equities means that two things need to happen to make it ‘work’: 1) markets must continue to fall and 2) a decision must then be taken to reinvest after they have fallen from current levels.
“From experience, it is not obvious that 1) always happens. Markets are just the collective opinion of what the price of something should be. Everyone buying and selling securities has taken a view as to what might happen and even if markets do fall further, getting back in is extremely difficult. When markets fall further then the gloom is amplified and people do not want to invest or buy.
“It is possible that you sell down to cash only to see the market recover. This then puts a massive dent in your returns profile and forces you to make an uncomfortable decision to reinvest with markets at a higher level.
“As a discretionary wealth manager, we ensure our client’s investments are suitable for them. A 10% correction, or even one of 20-30%, should not change that assessment. If it does, think about your appetite for risk, but we would caution against any knee-jerk decisions. It’s better to review your risk profile regularly rather than move it around depending on how you feel on a day to day basis.
“On a long-term view, these setbacks are ‘blips’. If you are still working and ‘accumulating’ capital, these setbacks allow you to buy more equities with a given amount of capital: when the recovery comes, you get an outsized effect on your overall pot.
“It is obviously unnerving to see the value of your portfolio suddenly drop. However, if you move to cash you run the risk of selling at exactly the wrong time. Regular corrections are the ‘price’ investors pay for good returns over the long term.”
Gemma Harle, managing director of the mortgage and financial planning network at Quilter Financial Planning, on the value of protection insurance:
“Everyone insures their car, their home and often their mobile phone. But far too many people insure their possessions and forget to insure their biggest asset, which is themselves.
“Nobody wants to consider how they and their family might cope under difficult financial circumstance. But it is really important to have those hard conversations and be prepared. Everyone hopes that they will never have a reason to claim on their protection policy, but having it there provides comfort and reassurance that your finances will be secure if your life is thrown into turmoil by an unexpected event.
“Income protection, which provides financial cover if you lose your job, is a really important way of gaining financial security. Similarly, critical illness insurance will provide financial cover if you become seriously ill and are unable to work. These policies provide cover for serious long-term illness, not coronavirus, but the current situation offers a very timely reminder of the fragility of our household finances and that critical illness cover can be an important part of the package to protect yourself.
“Finally, life cover is crucial for those with children and a family that depends on their income. If you have life cover in place, it means you have the reassurance that your family will have some financial security if they were to lose you.
“If you are unsure about what level of cover you currently have in place and want to review your insurance options, speak to a financial adviser about the best options for protecting your family.”
For more information contact
0207 7789 638
07469 144 535
023 8072 6260
Notes to Editors:
About Quilter plc:
Quilter plc is a leading wealth management business in the UK and internationally, helping to create prosperity for the generations of today and tomorrow.
Quilter plc oversees £110.4 billion in customer investments (as at 31 December 2019).
It has an adviser and customer offering spanning: financial advice; investment platforms; multi-asset investment solutions; and discretionary fund management.
The business is comprised of two segments: Advice and Wealth Management and Wealth Platforms.
Advice and Wealth Management encompasses the financial advice business, Quilter Financial Planning; the discretionary fund management business, Quilter Cheviot; and Quilter Investors, the Multi-asset investment solutions business.
Wealth Platforms includes Old Mutual Wealth UK platform and Quilter International, including AAM Advisory in Singapore.
The Old Mutual Wealth Heritage life assurance business was acquired by ReAssure Group Plc on 2 January 2020.
Since its IPO in June 2018, Quilter plc’s businesses have progressively rebranded to Quilter, as follows:
- Quilter Financial Planning (previously Intrinsic)
- Quilter Private Client Advisers (previously Old Mutual Wealth Private Client Advisers)
- Quilter Financial Advisers (previously Charles Derby Group)
- Quilter Financial Adviser School
- Quilter Cheviot
- Quilter Investors
- Old Mutual Wealth (becoming Quilter Wealth Solutions in 2020)
- Quilter International (previously Old Mutual International)
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