ALMOST everything you will ever want or have to do in life will cost you money, so it is worth – every now and again – taking stock of your situation to think about your goals and how you can plan your finances accordingly. Next week is Financial Planning Week, which should provide you with an incentive to do just this.
Financial planning is just as relevant to wealthy City workers, however financially savvy they might think themselves to be. Sue Whitbread at the Institute of Financial Planning says: “Financial planners tell us that high net worth individuals quite often don’t plan.”
Julie Lord at Bluefin Wealth Management says: “They will all think that they know something about money, and they will. But what is missing is that there is no coordinated strategic plan. They all have a bit of money here and a bit there and they don’t know what size of fund this is going to generate them nor is it targeted towards any particular outcomes.”
Life-changing events such as having children and retiring will affect your finances. Here’s what you should be thinking about when you do your planning.
KEY MOMENTS | STARTING OFF
It doesn’t matter how old you are. Knowing what your goals are is critical to planning your finances. People often won’t think about planning finances until they get married or have children because they see it as not particularly exciting. But ideally, you should think about it as early as possible.
“You have to find out how much you are worth and prepare a budget to work out what your net cash flow is,” says Adrian Lowcock, senior investment adviser at BestInvest. Lowcock adds that you often find out very quickly what you are doing wrong with your finances. As part of any financial plan, you should always aim to have about three months’ salary in easily accessible rainy day funds.
Bluefin Wealth Management’s Julie Lord says: “The main thing that people ignore is inflation and what it will do to their value of their money in the future. It’s a hidden demon that sneaks up on people. With inflation having been low for some time, its effects have almost been forgotten.”
In essence, people should have a ballpark figure of what they can afford to save on a weekly, monthly or even annual basis. Then how they save is down to their discipline and need for flexibility. For example, there is no point putting all your money into a pension if you need it aged 40 for school fees.
KEY MOMENTS | CHILDREN
Planning for children can be as simple as how many you want to have – and even this can cause disagreements with your partner. But, assuming you do want children, having an idea of how many and how far apart will help you manage your cash flow.
Children are certainly expensive – estimates run at £200,000 before you’ve even added on private school fees and the rising cost of university tuition. You will have to be able to cope with reduced income for at least the duration of maternity leave and potentially for longer if one half of the couple decides to reduce working hours to look after the kids.
Financial planning for those with young families is not just about managing the higher daily expenditure. It may also be about putting some money aside – perhaps well before the children are born – to help pay for school fees, computers and the like.
Parents should also consider financial protection. What happens to the rest of the family if you and/or your partner are involved in an accident? Will they be able to manage financially? Look into getting insurance against unforeseen events such as redundancy, long-term illness and premature death.
KEY MOMENTS | ESTATE PLANNING
Thinking about one’s death is never a particularly appealing prospect but that does not mean you should avoid estate planning. You never know when you might fall ill, become less able to manage your finances, or even get hit by a bus, so forethought really is essential.
If you do have significant wealth or complicated finances, then restructuring your assets to make them as tax efficient and as simple as possible will help your relatives after your death. In an age of austerity, your children and grandchildren will appreciate whatever financial help you can give, whether this is the form of gifts before you die or as an inheritance.
If you have a large estate and are likely to be liable for inheritance tax, then you are likely to need the assistance of a financial planner. “Financial planners can be worth their weight in gold in this scenario,” says BestInvest’s Adrian Lowcock.
The rules and regulations surrounding bequests and gifts are extremely complicated – ie, any gifts you make to individuals will be exempt from inheritance tax as long as you live for seven years after making the gift. If you are planning to pass on some of your wealth to reduce the size of your estate, it is worth speaking to a financial adviser or tax expert.
KEY MOMENTS | RETIREMENT AND OLD AGE
Every financial expert agrees that people need to start putting away money sooner if they want to have a comfortable retirement. “Because of the power of compounded growth, people should be thinking about things way ahead of when they need the money,” warns Bluefin’s Julie Lord.
“People assume that if they’re earning good money now, they’re going to continue earning good money,” says Chris Nicholls at Investment-Advice-Online.com.
With annuity rates dropping like a stone, it has also become more difficult to transform your pension pot into a sizeable retirement income. For example, if you have a pension pot of £500,000 when you retire, then your income – if you enter drawdown to preserve capital – is around £20,000. “There are enough people out there who want a lot more than that,” points out Lowcock.
If you are aged 40 or more, he says that getting financial planning advice is essential. “Just in retirement alone people are living longer and the healthcare associated with that can eat away a lot of money very quickly indeed. A planner can help you tidy up complicated tax affairs and make them more effective,” he adds.
For example, one of Bluefin’s clients was a couple in their fifties with poorly structured pensions – spread between various life offices, mostly in with-profits schemes. By consolidating their pension and cash accounts after purchasing an annuity with their accumulated pension fund, Bluefin could create a bespoke investment portfolio.
But it doesn’t have to be all doom and gloom. A financial planner may be able to help you restructure and consolidate your finances so that you can reduce your hours as you approach retirement or even retire earlier than you ever thought possible.