With online platforms providing a wealth of information at the touch of a button, investments are now more accessible for everyone.
However, investments alone do not make a financial plan. A financial plan will look at your situation holistically and provide a clear strategy towards achieving your goals, address any potential risks and get the most out of what is available to you. A good financial adviser can support you, by helping you get started and keeping you on track.
Most people have an idea of their desired lifestyle, but this is often vague and does not correspond to the actions taken.
The first step is to understand exactly what you would like to achieve, such as ensuring that you can afford a comfortable retirement or purchasing a larger property.
Setting a tangible goal allows you to have something real to aim for and track progress against.
You should bear in mind that your goals are not set in stone and can change. However, goals should be written down and include target dates and amounts.
Once you have decided on your goals you should also take time to think about and address any potential risks. Taking the time to address and plan for potential disasters can provide peace of mind and save a great deal of hardship and stress later on.
It is worth dealing with these risks early in the planning process. A financial adviser can help you quantify the risks and implement a strategy for dealing with them, for example:
- An emergency fund that ensures you can cover unexpected bills or periods out of work without going into debt or dipping into your investments. Ideally, this fund should cover a minimum of 3-6 months’ regular expenditure.
- Income protection and critical illness cover, to make life easier if you are unable to work due to illness or disability.
- A Power of Attorney to ensure you have someone you trust ready to make important decisions around your finances and welfare if you become incapacitated.
- Life cover that can pay out a lump sum to your loved ones in the event of your death.
- Writing your Will, so that your estate can be distributed according to your wishes if you die.
When planning towards your goals we must consider that we cannot predict the future. Therefore, we must make some educated guesses in order to create your cashflow plan.
A cashflow plan involves inputting in a series of known figures such as income, expenditure, and your age etc. There are, however, also unknown entities that must be taken into account such as investment returns and life expectancy.
With the unknown figures we must make educated assumptions. It is best to make conservative assumptions, so if you think you will live until age 85, you should extend your cashflow plan to age 100. If you think you will achieve investment returns of 7%, assume 5%. This means that you are more likely to achieve, and even exceed your goals.
A sensible investment plan
Assumptions are useful for planning purposes, but your investments are unlikely to achieve the same return every year. They will fluctuate and may sometimes even lose money.
Investing to achieve your goals can make your decisions much easier. Rather than chasing high returns and following stock tips, you can follow a tried and tested long-term strategy.
A financial adviser can help you create an investment plan which:
- Holds a wide range of assets.
- Is aligned with your goals and your ability to take risks.
- Aims to invest for the long-term.
- Is evidence-based and does not attempt to time the market.
Making the most of tax allowances
Whilst this is not the main purpose of financial planning, there are number of tax allowances and exemptions that can help you to save on tax and save you money. A financial adviser will help you to integrate these advantages into your wider plan.
- Using your annual ISA allowance (currently £20,000) to invest tax free.
- Making the most of capital gains exemption (£12,300 for 2021/2022) to avoid investment gains building up and becoming a tax liability at a later date.
- Structuring your income and assets to maximise your personal, savings and dividend allowances.
- Undertaking joint planning so that spouses make the most efficient use of these allowances.
Pensions are one of the more complex investment options, and many people will accumulate several pensions over their working life.
A financial adviser can help you with your understanding as well as:
- Work out the most appropriate contribution level.
- Make the most of tax relief.
- Use your pension to efficiently extract profits if you own a business.
- Avoid tax penalties by paying too much into your pension.
- Decide on the best provider and investment choice for your pension.
- Structure your benefits tax-efficiently when it is time to retire.
- Establish how your pension should be treated in the event of your death.
Value for money
As well as selecting the most suitable investments, a financial adviser will also consider any existing investments you hold and the companies you hold your money with. This will involve a thorough review of the features, fund choice and charges. An adviser will look at all the options and recommend the most suitable provider for your investments. You may be able to save money, simplify your situation, or improve flexibility by moving some of your investments, or consolidating them on one platform.
A strategy for income
When you are looking at withdrawing funds from your investments and taking an income from them, this is arguably the most crucial time to plan and seek financial advice.
The benefits of this are:
- Analysis can be done so that the withdrawals can be taken from the most efficient assets first. For example, it is usually better to run down cash (leaving an emergency reserve) before you touch your pension.
- Funds can be sold in plenty of time, avoiding the need to encash assets during a market downturn.
- You can take withdrawals from multiple sources to make the most of tax allowances.
- You can avoid triggering unexpected tax liabilities.
- Withdrawals can be planned at a sustainable level.
Leaving a legacy
Whilst making your financial plan you may want to think about what you would like to leave behind for your loved ones. Through conversation with a financial advisor this can be balanced to avoid paying unnecessary tax as well as ensure that you are able to maintain your own lifestyle and future costs.
A financial adviser will consider:
- Lifetime gifts (regular and ad hoc)
- Gifts into Trust
- How your Will interacts with your financial plan
- Any charitable donations you may wish to make
A strong estate plan provides peace of mind and ensures that more of your money goes to your intended recipients.
Staying on track
A financial plan is not a single product that you can use as a roadmap for the rest of your life. As your personal circumstances change you will need to come back and review your plan in order to stay on track.
An ongoing relationship with a financial adviser offers the following benefits:
- Your plan can be adapted as your circumstances change.
- Changes in tax rules and legislation can be taken into account.
- Assumptions can be re-set and adjusted.
- If your plan drifts off-track, catching this early usually means that only small tweaks are needed to correct your course.
- You have someone with whom you can discuss important decisions.
- It can keep you accountable and help maintain good financial habits.
Financial advice can add structure, discipline, and objectivity to your strategy, so you can focus on the things that are more important to you.
Please do not hesitate to contact a member of the team to find out more about financial planning.