Category Archives: Financial Planning

If I Knew Ten Years Ago What I Know Now… 4 Steps for Successful Retirement Planning

We all imagine a retirement rich in sun-soaked holidays, cultural experiences, rounds of golf and memberships at luxury leisure clubs.  However, many people we meet have unrealistic expectations of what their savings and investment pots can provide.

Why is this? There may be many reasons, however, in my view a failure to understand how expensive retirement income actually is means that people fail to prioritise their retirement and do not act early enough to build up sufficient capital.

The average pension saving for those surveyed aged 45-54 is £71,342 (LV State of Retirement 2017). According to current life expectancy figures, this amount may have to fund a retirement of 30 plus years, meaning fund values of this size will be unlikely to provide a sufficient amount of regular income throughout this period.

To put this into context, a 65-year-old male in good health with a fund of £500,000 could purchase a guaranteed income for life via an annuity totalling £12,426pa (assumes 3.00% annual increases) or £20,051pa (assumes no annual increases). This equates to 2.49% or 4.00% before deduction of tax. Figures include a 50% spouse’s pension. (Aviva 2019).

Rules introduced in 2011 abolished the requirement to buy an annuity, and income drawdown strategies became more available to a wider audience following ‘pension freedom’ changes in 2015. Allowing you to leave your pension invested and elect to take income from it as and when you need to, income drawdown pensions have rapidly increased in popularity. Further benefits, in addition to flexible withdrawals, include a far greater ability to pass on wealth to future generations tax efficiently. However, unlike annuities, income is not guaranteed.

Therefore, in order to ensure the money lasts a lifetime the rate of withdrawal needs to be sustainable. The Faculty of Actuaries 2018, found that a consumer in normal health who enters drawdown at age 65 has a high likelihood of generating a sustainable income if they withdraw 3.5% per annum, falling to 3% per annum if funds are drawn from age 55. Returning to the average pension pot, these figures equate to £2,497 per year at 3.5% or £2,140 at 3%. Clearly, these amounts will not go very far for the vast majority of people.

These figures clearly indicate that there is a huge misconception relating to how much is needed to support income throughout retirement. However, exactly how much you’ll need will depend on personal circumstances, the availability of other forms of income and your health. Other factors that may or may not be within your direct control include your cost of living, lifestyle choices and your health.

With all of this in mind, whilst retirement might not be a fun or sexy topic of conversation, if you want to ensure that you are on track to attain the lifestyle you envisage in retirement, it is a necessary one. So what should you do? Start to build a financial plan by following the steps outlined below.

Step one – build a personal balance sheet

Establish where you are now by obtaining valuations of all your savings, pensions and investments. It’s important to get a comprehensive view of all the sources of income you will have available at retirement – income does not have to come from pensions alone.

Step two – complete your own cash flow forecast

Create a retirement budget by quantifying how much you need to meet:

  • Regular committed expenditure – e.g. household, transport, healthcare, insurance and food costs.
  • Discretionary expenditure – e.g. club memberships, theatre tickets, socialising.
  • Regular large item expenditure – e.g. holiday costs and replacement cars.
  • Other financial commitments that coincide with, occur close to your retirement date or during your retirement – e.g. helping children purchase properties, helping elderly relatives or grandchildren and planned home refurbishments.

Step three – Quantify your shortfall

You should now have your net asset position and your budgeted cash requirement. This information should help establish how well placed you are to retire at your chosen date.

Step four – Take appropriate action

If you are likely to face a shortfall there are things you can do.

If you have a business, working on its valuation might be one option.

Individuals and business owners should also consider taking action to direct surplus income and cash to tax efficient savings vehicles. Pension contributions provide fantastic opportunities to mitigate corporation tax liabilities and offer employed individuals the opportunity to reduce their liabilities to income tax. When made regularly alongside ISA contributions, individuals can build tax efficient portfolios capable of delivering a large proportion of income without much liability to income tax.

However, this can only be achieved with a commitment to a plan which is reviewed regularly to ensure you are on track.  The sooner you act, the cheaper your retirement income is likely to be because funds have a longer period of time to grow.

The FCA (Financial Conduct Authority) does not regulate tax planning. The contents of this article are for information only. The article does not constitute individual advice. The value of investments and income derived from them can fall as well as rise. You may not get back what you invest.

 

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Investing in the Face of an Election – Top Tips

The past couple of years have seen significant political volatility and economic uncertainty. With another general election looming, and the potential for significant taxation changes on the horizon, it can be tempting to hold off from making any significant financial decisions.

Here we give three tips on how to approach a general election from an investment perspective.

  1. When any period of volatility is likely, it’s advisable to ensure you have enough cash available in your ‘emergency fund’. This is particularly important if you are in or approaching retirement and have a need to draw on your assets to meet income needs.

 

  1. Knee jerk reactions are often unhelpful and disinvesting will often result in you losing out in the long term. Investing in the stock market should always be viewed as a long term strategy. Whilst riding out periods of volatility can be uncomfortable, being prepared to do just that may well deliver better overall gains over the course of your life.

 

  1. With the polls proving to be unreliable at best, predicting the outcome of the election is virtually impossible. In this time of instability, the benefit of having a well-diversified portfolio in smoothing your investment experience is accentuated.

Regardless of the outcome of the election, it’s likely that there will be changes ahead. Consulting a financial planner will help to ensure that any potential negative impact of such changes on you and your family are minimised.

For more information or to consult one of our Chartered Financial Planners, please get in touch.

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Not Saving Enough Tops List of Biggest Financial Regrets

A survey has revealed some of the biggest financial regrets held by individuals, with not saving enough found to be the most common concern.

The research by Interactive Investor into the habits of those in and approaching retirement found that nearly a third (32 per cent) of non-retirees regretted not saving enough, with poor investment decisions cited as the top financial regret for 17 per cent of individuals. The survey also found that not starting to save for a pension sooner was the biggest financial regret for 17 per cent of people, while 12 per cent said they sat on too much cash which they should have invested in the stock market.

The results of the survey go to show that paying more attention to savings and making a greater effort to build up a savings pot to take into later life is something people generally need to prioritise more. The research also demonstrates the tendency of people to put off retirement planning running the risk of leaving it too late to make a meaningful difference to their retirement pot.

Early on in adult life, it can be difficult to think too far ahead into the future, focussing instead on more immediate goals, such as large purchases including cars, holidays and saving up the deposit for a property. However, these finding show that failing to think about the future and putting a plan in place to ensure you have enough savings is something that many people live to regret. The good news is that nowadays, there are so many accessible ways to save; from ISAs, regular savings accounts and even apps that help you save and invest, any of which can be set up online within a matter of minutes.

Interestingly, the Interactive Investor survey also revealed that less than a quarter of savers use an adviser when looking for retirement planning, indicating that the trend of failing to plan effectively follows through into later life.

Whilst no-one is immune to the odd financial faux-pas, the cumulative effect of having a well-considered plan in place and following it has been proven to yield benefits in the long-term.

To discuss your financial planning needs with a view to putting a long-term savings and retirement plan in place, contact Gresham Wealth Management to arrange a chat with one of our Chartered Financial Planners.

https://www.ftadviser.com/pensions/2019/10/09/minority-of-savers-turn-to-advice-for-retirement-planning/?page=1

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The Rise of the ISA Millionaire

Earlier this year it was revealed that there are now in excess of 1000 ‘ISA millionaires’ in the UK – ie. people with over a million pounds held in Individual Savings Accounts – commonly known as ISAs.

ISAs were introduced in 1999 to replace Personal Equity Plans (Peps), which had been around since 1987, and Tax Exempt Special Savings Accounts (Tessas). The annual limit an individual is able to save into an ISA each year has increased over the years and currently stands at £20,000 per year.

One of the main benefits of building up a substantial sum of money within ISAs is that there are no tax implications on any income or gains made within the ISA. Furthermore, and a key point that is often overlooked is that funds withdrawn from ISAs are also tax free. In this manner, savvy investors, or those that followed the advice of a financial adviser, will have recognised that by maximising the annual amount that can be contributed to an ISA each and every year, a sizeable pot of money could be built up that could be accessed in retirement without any income tax or capital gains tax payable. Another benefit of ISA savings over other forms of long-term saving, such as pensions, is that funds can be accessed at any time should they be needed.

We have several clients that also have built up their ISA funds in this way over the years alongside contributing to a defined contribution pension. In retirement, these clients will be able to access funds from both pots, therefore potentially giving themselves a not-insignificant retirement income with no tax payable. Even those that have used up their tax-free pension pot and enter into pension drawdown, when combined with taking an income from ISAs, it is often the case that they will still only be basic rate tax payers or even become a non-taxpayer.

Even if you don’t make it to £1 million, or even close to that figure, the benefits of ISAs still apply.

Of course to get to the point of being an ISA millionaire, you’ll need to take a disciplined approach; investing the maximum allowance each year for several years. At the current maximum of £20,000 per year, it would take 50 years to accumulate £1,000,000 with zero growth. So it goes without saying that in order to obtain the best chance of investment growth and build your pot over a shorter timeframe, you’ll need to invest in stocks and shares ISAs rather than holding in cash.

Those that have become ISA millionaires already will have had to take a fairly significant level of risk and will probably have had their fair share of luck.

The earlier you can start to accumulate savings in ISAs, the greater the opportunity compound interest will have to work its magic.

To summarise, our top tips on building ISA wealth are:

  • ​Consider maximising your ISA allowance each year – currently £20,000 per annum
  • Consider reinvesting your dividends/interest
  • Be prepared to take a moderate level of risk
  • Look to invest for the long term
  • Take a long-term view and try to ride out any periods of volatility

For more information or to access tailored financial advice for your personal circumstances, please get in touch to speak to one of our Chartered Financial Planners.  The contents of this article are for information purposes only and do not constitute individual advice.

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Creating a New Financial Plan Following a Divorce

How much money do you need to live? What would you do if your financial investments took a hit? And can you really afford that special holiday you want to book?

These are all questions someone facing life post-divorce may well need to answer. Making a new financial plan for yourself is something that can be prompted by any significant change in financial circumstances, but is particularly useful following divorce as you will not only have a new set of financial circumstances, but also other changes in your life to adapt to.

Emergency Fund

First thing’s first, you need to look at your essential fixed expenditures – these are the things that you have to pay for like mortgage/rent, council tax, bills, child-care costs, school fees, travel expenses, insurances etc.

A good financial plan really should ensure that in the worst-case scenario, your fixed expenditures can still be covered – usually for a period of around 12 months. This is what financial planners call your ‘emergency fund’ – a pot of money that is readily available for you to access should you need to if life deals an unexpected turn.

Spending habits

Once you have the basics covered, you can turn to look at the ‘non-essential’ costs in your life – your discretionary expenditure.

These will vary from person to person and could range from things such as getting your hair cut right through to holidays.

Taking a look at and totalling these up often gives people the biggest shock.

Clothes shopping, entertainment, a meal out with friends, a trip to the cinema, a family day out…all these things quickly add up. Don’t forget to factor in additional costs to the things you do too – although the headline cost of a flight to Spain may seem quite reasonable, you also need to take account of other expenses you will incur – such as transport and eating out whilst you are away.

In the past, where you may have been used to two incomes coming in and splitting some of your regular costs with your spouse/civil partner, you perhaps may not have felt the financial pressure of such outgoings. But when coupled with your essential expenditures, you may need to re-think how you manage and go about your spending.

Cash-flow modelling

If you have received a lump sum post-divorce which needs to fund your lifestyle for the foreseeable future, it is vital to properly plan out how this money can be utilised to its full potential for as long a period as possible.

One of the tools we use as financial advisers is cash flow modelling.  Essentially, this involves processing the figures around your current and forecasted wealth, along with income and expenditure, to create a snapshot of your finances both now and in the future. It’s a really useful process to go through with clients as it clearly demonstrates the affordability of their lifestyle – or not, as the case may be.

This process is becoming even more important for clients as life expectancy increases.  It is forecast that nearly one in five people currently living in the UK will reach their 100th birthday, so any pot of money that is invested will now need to last longer than it would have done in generations gone by.

We also take into account inflation because the cost of goods and services generally goes up every year.   For example, if prices increase by 2% each year, over a 20-year time scale the purchasing power of your money reduces by one third.

Sometimes, clients that go through the cashflow modelling process with us receive a short, sharp shock as they realise that if they maintain their current spending habits, their money is going to run out.  However, once a sensible plan has been put in place that balances expenditure with a sustainable portfolio, clients are always left in a much stronger position.

Annual review

Just as things change within an individual’s life and personal circumstances, so too do external factors that can influence the markets. As a result, it can become necessary to review and tweak a financial plan. This is why it’s vital to undertake a review of your financial plan with your adviser on an annual basis. Whether it’s Brexit, a change in Government, or legislation changes, a good financial adviser will discuss these things with clients and how their portfolios may need to be adjusted accordingly.

For example, between 2015 and 2018, the majority of investors experienced a buoyant three years, meaning even after drawing an income out, the purchasing power of their money would have remained due to the overall growth of their investments.

But then we hit the end of 2018 and suddenly there was a nosedive in the markets.  We’re now having to prepare clients for the fact that they may have to pull in the purse strings – it has been what we call a ‘flat year’ with most people being lucky to be level or any form of positive return.

This is where we can show our real value as financial advisers. It’s our job to ensure that clients make informed decisions regarding their money and that it can ultimately help them to achieve their lifestyle and financial goals in both the short and long term.

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