There is often a perception that ‘Independent Financial Advisors’ (IFA’s) are just there to sell life insurance, medical insurance or pension advice. The better ones are actually more focussed on ‘Wealth Management’, and a more holistic whole of life financial planner, helping clients to understand the impact of financial decisions on their long term wealth and ultimately their retirement plans.
This stuff is really unimportant and affects the majority of people in one way or another. For example…
- Do you get an interest only mortgage or a repayment mortgage?
- Is it important to use up your annual ISA allowance?
- Should you strive to put as much as possible into your pension?
- What life insurance do I need at different life stages?
The answer to these, and many more questions, is it depends. It depends on your age, your financial strength, your attitude to risk, your income levels. The job of the IFA or wealth planner is to get enough information to provide the right advice for you.
Let’s just explore a few key issues…
Do you have a repayment mortgage and the option to pay off more if you can afford to, to own your home debt free as soon as possible, or an interest only mortgage where the debt never reduces, and you invest wealth elsewhere to pay it off at a later date?
If you can borrow on a mortgage at say 1.5%, but can invest at say 4.5%, then financially it makes sense not to pay off your mortgage. I.e. If you could pay off £10k, this might be earning you £4,500 which even after higher rate tax is around £2,700, more than enough to cover the £1,500 mortgage interest and grow to pay off the debt later. Effectively your investments are paying the mortgage and generating a surplus.
Mathematically the decision may be simple, but each client’s attitude to risk changes that. What if interest rates change? What if my investment goes bad? What if property prices rise or fall?
Another common question is, “should I put money into pensions?” The financial answer is probably ‘yes’, as this is a great way to save for retirement, with tax relief on contributions and income and capital growth within the fund tax free. But the money is locked away. The age at which you can access the money has been a moving target and is likely to be pushed further away in the future. So if you’re in your 50’s that may be OK, but if you are in your 20’s, then do you want to lock your money away for that long.
There is also a disparity with age with life insurance. Get whole life cover at the age of 20, and the cost per £100k covered will be a fraction of that for a 50 year old. But do you need it if you are single with no dependants? The problem is, when you are 35 and want to protect your family in the event of a death of a parent (either as breadwinner or main carer), you have other financial demands of a young family, and may not see the cost of cover as a priority. But we also see 50 year olds with huge amounts of life insurance when kids are now financially independent, mortgages paid off and enough wealth that it is no longer needed.
Some clients are asking about selling investment property. They sense Capital Gains Tax rules or tax rates on property investment income are set to rise to pay for the pandemic, but also sense that the property market still has some way to go on value increases. Will the benefit of value increases be wiped out by higher tax rates? No one has a crystal ball to know.
As you can see from just these examples, wealth planning is complicated. Issues are unique to each client, future information (tax rates, income levels and investment returns etc.) uncertain, so issues are shades of grey rather than black and white. However, the impact of making the right decisions can mean financial independence, a quality retirement or simply peace of mind that you have the protection you need for those unplanned events.
Why is this relevant now?
The pandemic has impacted all of us, whether focussing your mind on lifestyle choices or the fragility of normal life. It may have impacted on your wealth and incomes, and certainly we have seen both extremes of that across our clients (for some it has been financially devastating, for others it has been the best year ever).
There remains uncertainty in the economy, and depending on who you talk to, we are expecting a fantastic bounce back (as pent up demand is suddenly released) or a 20 year slog to pay off the pandemic debt. Either way, planning and control will be critical.
What should you do?
- Do a wealth plan. What assets do you own and what debts do you have? Whilst you may fear the results, you need to know where you start.
- Review all your spending costs to see which are essential, important or unnecessary. Many will have recurring payments they should cancel (insurance on white goods you no longer own, or a gym membership you don’t use).
- Review all your debts. Is your mortgage the right type and on the right deal? Do you have expensive credit card debt and savings that earn nothing? Do you have furniture/cars/kitchens in finance, and what are the terms?
- Consider your fears. Loss of income from redundancy? No life insurance? No retirement plans. Be clear on what you would like to be able to do.
- Speak with an IFA or wealth planner and get their advice on your options, and the steps you can take to get closer to your goals.
Worse case is that you are between a rock and a hard place and only a winning lottery ticket will change that (in which case make sure you get one!). But for most people a personal finance ‘audit’ will uncover some important issues and some suitable options to help you build and protect your financial future.
If you want to know more about a financial audit, give us a call, or speak directly with your IFA.
THINK PLAN ACT