Wealth Planning 101!

Wealth Planning 101!

There is a huge amount of uncertainty in all areas of our lives at the moment including personal finances.

Here we give some tips for reviewing the fundamentals of planning your finances and making sure you have the basics covered.


  1. Emergency funds – keep an appropriate amount in an instantly accessible deposit account to help with unforeseen spending.


Up until very recently investors have enjoyed long term positive investment returns and seen interest rates at historic lows so there has been little incentive to hold on to cash. However, having a nest egg for rainy days is wealth planning 101. You should set aside a sufficient cash reserve before you start investing. We usually start with suggesting a cash reserve equivalent to at least three months spending as a minimum but this will depend on your personal circumstances. Whilst poor interest rates might put you off holding cash, the aim of rainy day savings is to provide easily accessible and secure money when you need it, not to chase rates. If you are looking for a secure place to hold cash National Savings and Investments is backed by HM Treasury and offers a Direct Saver account. You can find the details here https://www.nsandi.com/direct-saver


  1. Reduce unnecessary spending – look at what you spend each month. Are you still paying for a gym subscription that seemed like a good idea at the time? You are likely to save money just by being more aware of your spending patterns.


Perhaps not a job to look forward to but sitting down and looking at where you spend your money can be eye opening. Still paying for a gym you never use? TV subscriptions you don’t watch? Simply totting up the amount spent on coffee and eating out surprises many. It is good financial sense to understand what your outgoings are each month, consider where you could make savings and what money you have left over to top up cash reserves, repay debt or invest.


3. Debt – review any debt and understand the terms of the agreement. Consider overpaying or repaying debt especially expensive arrangements like credit cards.


There is no doubt that society has become more comfortable with debt and that the low cost of borrowing has made it very attractive in recent years. Indeed for investors taking a loan secured against their portfolio can be a very efficient way of raising finance without having to sell investments.


Alongside reviewing spending always review any debt; credit cards, hire purchase agreements, car leases, mortgages, loans. Ensure you understand the terms of the debt including charges, interest rates, options to over pay and early repayment penalties. Focus on repaying expensive debts like credit card spending and make sure you have longer term repayment plans in place, particularly for interest only loans, reviewing them regularly.


  1. Family protection – peace of mind and financial security for you and your loved ones.


This can be a difficult conversation but life assurance is key for protecting those you love. For younger families it can provide the surviving partner with capital to repay a mortgage, pay school fees and to invest and generate an ongoing income. For older clients it is a way to provide a legacy or to ensure the next generation receives money to pay an Inheritance Tax liability meaning the estate doesn’t have to be broken up and assets sold in order to meet the bill.


If you are a business owner, give thought to taking out insurance to protect you and your business if you are unable to work due to illness. On a personal level there are two complimentary types of cover that you can look at; critical illness and income protection. In very simple terms, critical illness provides a lump sum if you are diagnosed with a serious illness whilst income protection is a regular payment that provides replacement income if you are ill and unable to work for a period of time. Employees often receive similar benefits from their employer but it is always worth checking that the cover is sufficient and topping up with a private policy if necessary.


For your business ‘key person’ insurance is well, key! It insures the business against financial loss if a key person dies or are becomes seriously ill and cannot work. The policy is paid for by the business and any pay-out is made to the business rather than you personally.


  1. Tax efficient investment – structure the ownership of investments with care if you want to make the most of tax allowances and exemptions - use them or lose them!


Before considering the various tax allowances and exemptions on offer couples may want to start by reviewing the ownership of their investments. They might want to make sure that where one partner pays no or lower rate tax that their personal Income Tax allowance and basic rate Income Tax band is being optimised by adjusting the ownership of taxable investments. This avoids paying unnecessary tax!


The new 2020/21 tax year has just started and in the headlines is the annual ISA allowance of £20,000 per individual, meaning couples can shelter up to £40,000 each year. ISAs are tax efficient investment accounts – there is no Income or Capital Gains Tax on the money invested and withdrawals are tax free. Improving the tax efficiency of your portfolio is important and helps maximise returns over the long term.


Tax efficiency is not limited to ISA investment. Investors can take the first £2,000 of dividends income tax free, the first £500 of interest for higher rate tax payer’s income tax free and the first £12,300 of portfolio gains[1], that doubles for couples who can each use their exemption.


  1. Pensions – start planning for the retirement you want as soon as possible.


It might seem like a long way off but to enjoy the retirement you want it is important to start planning as soon as possible. If you are an employee start with your workplace pension scheme; check the level of contributions being paid and whether your employer will increase their contribution if you contribute too. You may also be able to sacrifice some or all of your bonus into your pension.


If you run your own limited company the company can make a pension contribution on your behalf. This has tax advantages for the business because the contribution is an allowable business expense and can be offset against your company’s corporation tax bill. If it is a family business you might even consider setting up a small group pension scheme to include key family members or other senior business partners.


Many people underestimate their life expectancy; a man aged 65 today will live on average until age 85 but has a 1 in 10 chance of reaching 96. A woman will live on average to 87 and has a 1 in 10 chance of reaching 98. Your retirement plan should consider the level of income you need in retirement, the assets available (pension and other investments) and test whether the desired level of income can be sustained over the long term. If there is a shortfall this should be discussed and a plan made to fund the shortfall or reduce the desired amount of income.


The State Pension will ordinarily provide part of the income you need in retirement. If you don’t know what your State Pension might be you can request a forecast online at https://www.gov.uk/government/publications/application-for-a-state-pension-statement this will give you information about the amount of State Pension you’ll receive based on the current rules and help your adviser have a conversation about addressing any gaps in your National Insurance record if relevant.


  1. Are your living expenses comfortable – can you afford to reduce your income?


The impact of the Coronavirus and concerns over domestic and global economic stability has led to heightened levels of volatility in financial markets. At Brown Shipley our house view is that volatility is short term and a recovery is expected but the strength and timing of that recovery is uncertain. In the meantime portfolio values have fallen. In addition, to shore up balance sheets and protect future financial security many companies are now announcing cuts to dividends or cancelling them completely.


Many investors draw an income from their investments or pension. However, the impact on portfolio values including pensions, ISAs and general investment accounts, is likely to be exacerbated by drawing down income. This is because to draw the same level of income portfolio managers are having to sell more investment units. When markets start to recover investors are left with fewer units to take advantage of the recovery. If you have other sources of income or are able to reduce your expenses accordingly consider reducing the income you draw or indeed ‘turning it off’ until markets and investment values start to stabilise.


  1. Have a plan – what does a richer life mean to you? Bring life and family goals together with your finances and create a wealth plan.


In the midst of the current crisis and the impact of extreme short term volatility on investments, it is important to remember your long term objectives and strategy. Having an overall wealth plan brings all of your goals together, helps you focus on what can be achieved now and what you need to plan for.


An effective way to bring your wealth plan to life is to have a lifetime cash flow. A cash flow plan will help by bringing all of your assets, liabilities, income and expenditure together like a personal balance sheet. It looks at your current position and the achievability of future goals. It considers the sustainability of income, capacity for saving, personal tax efficiency, the affordability of gifts and the impact of investment returns and market volatility.


A cash flow is interactive so you can be involved in building and modifying the plan with the wealth planner. It is important to review cash flow plans regularly, particularly when your personal circumstances change.


If you have any questions, please contact your usual Brown Shipley adviser.


Rebecca Williams

Client Director


[1] Assuming the exemption is not used to offset profits elsewhere.

Non-Independent Research

The information contained in this article is defined as non-independent research because it has not been prepared in accordance with the legal requirements designed to promote the independence of investment research, including any prohibition on dealing ahead of the dissemination of this information.

How to Use this Information

This article contains general information only and is not intended to constitute financial or other professional advice or a recommendation that any recipient of this information should make any particular investment decision. Always consult a suitably qualified financial advisor on any specific financial matter or problem that you have.

Except insofar as liability under any statute cannot be excluded, neither Brown Shipley nor any employee or associate of them accepts any liability (whether arising in contract, tort, negligence or otherwise) for any error or omission in this article or for any resulting loss or damage whether direct, indirect, consequential or otherwise suffered by the recipient of this article.

Investment Risk

Investing in stocks either directly or indirectly carries investment risk. The value of equity based investments may go down as well as up over time due to factors such as, market volatility, interest rates, and general economic conditions.