The pandemic has created some financial planning challenges. Some people have faced an immediate and catastrophic reduction in income, while others have seen market volatility disrupt their long-term savings. Some may find themselves with spare cash as their household expenses have reduced. Whatever your situation, it is an opportune moment to give your finances a health check.
But where to start? Here are five points to consider:
Get a handle on your pension situation
Retirement planning may have its complexities, but at heart it is about working out the type of retirement you want and matching it to the resources you have to achieve it. To work out your current situation, dig out old paperwork and contact your former employers to get up-to-date pension statements. This should help build a picture of the level of income you’re likely to receive and can help identify any gap between your current savings and your retirement expectations.
Consolidating pensions can bring economies of scale and is relatively easy to do. It can also help you ensure your investment strategy makes sense and that you are not taking unnecessary risks. However, beware of pensions containing ‘guarantees’ as these would be lost on transfer.
Look at your other savings
The government provides relatively generous allowances for saving and investment: are you making the most of them? There are currently a range of individual allowances that, used wisely, allow you to shelter some of your income from tax. Subject to your annual income, you may be entitled to the personal allowance of £12,500, the capital gains tax allowance of £12,300, a savings allowance of £1000 and a full £20,000 per year for your ISA (for the tax year 20/21).
Equally, if your spouse isn’t using all their allowances, is it worth looking at whether you can distribute assets more evenly to make the most of both sets of allowances.
Do your savings match your ambitions?
It is important to ask yourself whether this is where you thought you would be. Are you on track to meet your ambitions and goals for later life, be that action and adventure or rest and relaxation? These goals may have changed since the Covid-19 outbreak. Cashflow planning can help you consolidate these thoughts by showing if you are on track and will be able to live the lifestyle you want in retirement.
The recent crisis has been a brutal reminder of why you need to plan for the unexpected. Whatever stage of life you are at, have you ensured there are measures in place to protect your income and/or mortgage if your earnings suddenly disappear? It is always worth having a cash buffer of a few months’ expenses to tide you over if there is disruption to your income.
The same applies if you are already drawing on your pension. It is worth ensuring you have an adequate emergency fund in cash to avoid having to draw down from your pension when markets are low. This gives you the best possible chance of ensuring that you can recover from market lows.
Look at your succession plans
Inheritance tax allowances have become somewhat more generous in recent years due to the introduction of the residential nil rate band but for many people living in the South of England, their house alone will take them over the limit. Take a look at whether inheritance tax is going to take a big chunk away from your beneficiaries when you die. There are straightforward tax planning solutions that can be put in place. The earlier you can start the better.
Recent events have demonstrated more than ever, the value of financial advice. We help thousands of clients to make sure that they are as prepared as they can be for any major life event or disruption. Financial planning is about exactly that – planning. We can help you to see how your finances look in the future and make sure you are in the best position for events like this and to make sure they are just a bump in the road instead of a real catastrophe.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Please remember investment involves risk. The value of investments and the income from them can fall as well as rise and investors may not receive back the original amount invested. Past performance is not a guide to future performance.
Smith & Williamson Investment Management LLP
Authorised and regulated by the Financial Conduct Authority.
Registered in England No. OC 369632. FRN: 580531
Smith & Williamson Investment Management LLP is part of the Tilney Smith & Williamson group.
© Tilney Smith & Williamson Limited 2021
Government and tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. Clients should always seek appropriate advice from their financial adviser before making financial decisions. June 2020, gov.uk.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.