With daily headlines of falling property prices, stockmarket turmoil and rising energy prices, the need for sound financial planning is paramount. Pro-active tax planning and managing investments are an essential part of laying plans for the future. Unfortunately, the typical partners' approach to their financial planning is a last-minute mad rush accompanied by frustration at a loss of control and the mountains of incomprehensible paperwork. Yet all it takes is the disciplined application of a little common sense to put you back in the driving seat.
By Louis Baker and Phil Smithyes|June 11, 2008 at 08:18 PM
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With daily headlines of falling property prices, stockmarket turmoil and rising energy prices, the need for sound financial planning is paramount. Pro-active tax planning and managing investments are an essential part of laying plans for the future.
Unfortunately, the typical partners’ approach to their financial planning is a last-minute mad rush accompanied by frustration at a loss of control and the mountains of incomprehensible paperwork. Yet all it takes is the disciplined application of a little common sense to put you back in the driving seat.
So, where to start? The two issues that should be of immediate priority for partners are those of making a will and putting in place a package of ‘protection’ insurances to safeguard the financial security of the family. Simply having a policy that pays off your mortgage in the event of death is not sufficient to provide financial peace of mind. Also, for lawyers recently promoted to partnership, the shift to becoming classified as self-employed means that benefits packages which were previously taken for granted now have to be arranged.
Financial security should be a number one priority. It is necessary to think beyond private medical insurance and seriously consider insuring against extreme financial difficulty. The next step is to sit down and establish what investments you already have. Most individuals accumulate various investments without adopting any clear focus or strategy. This can result in assets being duplicated with differing funds often holding the same underlying investments, resulting in increased charges and limited overall diversity.
There are essentially two key components to each investment: firstly, the tax structure of the investment plan (the wrapper); and, secondly, the underlying investment itself (the fund/asset). An advantageous tax wrapper such as an ISA is of little or no value if the underlying investment held within the wrapper is unsuitable or a poor performer.
The other basics are to decide upon the level of risk you are prepared to take and choose the appropriate vehicle or tax wrapper in which to shelter your funds.
When it comes to financial planning for retirement, the issues are the same. How much will you need, in the form of income and liquid capital, and how can your investments be best structured to minimise future liabilities to tax. Pension funds are tax-efficient and provide tax relief on contributions going in, but at the expense of some restrictions and the income in retirement is treated as taxable. Ideally, pension funds should be balanced with other long-term asset holdings to provide some financial flexibility in retirement.
A simple rule of thumb is to use an assumption in today’s terms that your assets will deliver a return of approximately 5%. Therefore, if you need an income of £40,000 per annum in retirement, you will need to accumulate at least £800,000 of capital. By adopting this starting point, you can begin to plan a strategy and manage your own expectations.
It is important to build up various ‘pots’ of capital that can be used to generate this income. Retirement strategies should not be built solely around pension funds but should include an ISA portfolio, cash on deposit, a taxable portfolio of shares and collective investments such as unit trusts, monies held within tax wrappers such as insurance bonds and property investment.
While pensions have historically had a bad press, the reality is that as a higher-rate taxpayer there are very few (if any) alternative investments that can provide you with an instant return of 60% on your net capital.
Individuals should be reviewing their existing policies, investment strategies and funding options to ensure that they take advantage of the extra flexibility that is available under the new pensions regime that came into effect from April 2006. It may be that now is the time to be moving your policies into a self invested personal pension (SIPP) – although a SIPP is not always the ‘holy grail’ of pensions planning as they are only suitable in certain circumstances such as when seeking to employ a more sophisticated investment strategy.
You should now be able to identify the extent to which you have surplus income or capital to invest in riskier investments that offer considerable tax concessions. If entering into these areas, do make sure you understand the product and the risks involved.
Such investments with tax breaks include:
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