It can be easy to inadvertently make big mistakes when you don’t have an expert knowledge in financial planning, but advisers have seen it all before.
Here, Killik & Co’s head of financial planning Will Stevens shares the six most common blunders he sees his clients make time and again.
Leaving it too late
Most people seek out financial advice after they have reached a milestone in their life – whether that be starting a new job or approaching retirement age.
Stevens said: “You tend to see individuals leaving it too late to get started, or leaving it later than they should. Although it is never too late, delaying has all sorts of implications. The later you get started the less time you have to benefit from compounding.”
The majority of new clients come to Stevens when they are in their 40s and 50s and are “staring down the barrel of retirement,” but would be in a far better situation if they had started thinking about it earlier.
Some arrive even later, when they have already decided to retire, at which point they are “potentially leaving it too late to get advice”.
“I often have clients coming to me to talk about inheritance planning, but they're already into their 80s and have already become unwell,” he added. “Then they have time against them because most the strategies we look at implementing are not necessarily a quick fixes.”
Getting swept up in the hype and mistiming the market
The principle of buying low and selling high sounds straightforward at face value, but very few people follow this basic rule. Many clients Stevens works with become overconfident in rising markets, buying at the peak and then making a loss when they reduce their positions as conditions get tough.
He said: “You can get swept up in a hype cycle like we’ve seen with things like cryptocurrency. People tend to get it wrong when they're trading on momentum because they're late into the game. The same is true at the other end of the spectrum, which is really relevant now.
“The market is down significantly from its peak, but clients want to de-risk now. The good times almost always follow the bad times quite closely, so you don't want to be de-risking at a time like this unless you have to.”
Not saving enough – and saving too much
Most of Stevens’ clients can be split into two groups – those that underestimate how much they need to save and those who overestimate it. He said there are “very few that can get it spot on”.
“People underestimate the sustainability of their withdrawal rate,” Stevens explained. As people stop earning and start lowering the amount they invest, often they need to make lifestyle changes, but most find it difficult to do this.”
Hoarding money can also be a problem, however, according to Stevens, who noted that many could have started passing their wealth on earlier.
“They want to give it away, but they also want to make sure they're secure and trying to make that judgement in their own head is very difficult,” he said.
Property is the crown jewel of most savers’ portfolios. It is seen as a safe asset in which to protect capital, but people subscribing to this may have been misled, according to Stevens.
“People have emotional attachments to investments that, from a financial perspective, don't make much logical sense,” he explained. “Property is a classic example that falls into that category.
“The UK in particular has investors who are very keen on property, even though it hasn't delivered good returns compared to equity markets and is very tax inefficient.”
Property is held in high regard by UK savers because the simplicity of bricks and mortar is easy to grasp, yet they pay more taxes on an asset that often generates little capital growth and comes with little diversification.
Sitting in default pensions
It can be easy to forget about your pension when it routinely comes out of your payslip each month, but Stevens warned that “not thinking about what it's doing is a big mistake to make”.
Around 90% of new clients are investing into a default pension scheme which mixes bonds and equities. These are rarely suited to their situation, he said, particularly early on when savers “don't need any element of bonds and should be focused on long-term growth in equities”.
Stevens added: “There is a massive lack of understanding around pensions and how they work that I think the industry needs to work really hard to address, especially from a government perspective. A lot of people just assume that their pension is a fund that money goes into and there's nothing they can do about it, which is not the case.”
Claiming tax relief
Higher additional rate taxpayers are taxed 20% to 25% on their pension contributions but very few know that they can claim that back, according to Stevens.
He said: “If you are a higher additional rate taxpayer and you're making a personal contribution to your pension on a monthly basis, you need to make sure you're claiming tax relief back. I'm amazed by the number of people that aren’t – even very astute individuals are losing a huge amount of money on an annual basis.”