Five times as strong as steel and the main fabric of bulletproof vests. This post is inspired by the late Stephanie Kwolek, award winning chemist and inventor of Kevlar. It made me think, can I make a bullet proof financial plan for clients that will deflect the bullets and absorb the shocks of our volatile, uncertain, changing and ambiguous world.
Hello, my name's Jill Turner, I love to engage people with financial planning and it was my priveledge to put this presentation together for the Dales and Peak Business Networking Group
Here's 10#Hacks that can be implemented in your financial planning that will definitely make an impact on your lifestyle, beginning with :
1. Reduce uncertainty - underpin your financial goals with life, serious illness cover and income protection.
What will happen to our goals if we fall ill along the journey, we cannot work and our income dries up. " I'm saving, I have money in the bank", I hear you say - but how long will that last? The office of national statistics have published the average household savings as £177 per month. Leaving the money on deposit would take 12 years and nine months to save the average salary of £27,000.
Why not take a small portion of the £177 and buy life assurance or income protection. A 30 year old non smoker can have £13,470 per annum of short term income protection, paid after 13 weeks for up to five years, for £18.94 per month. That will go a long way to keeping the wheels turning.
2. Use a menu of protection benefits
You can buy differing levels of life protection, serious illness cover and income protection. For example if serious illness cover for the full amount of your mortgage borrowing blows your budget, then buy an amount equivalent to one or two years salary, this could be enough to take time out of work or pay for some medication that may not be available on the N.H.S.
Buy what you need, mix and match covers, make sure its index linked and there are guaranteed insurability options - then adapt as you journey on.
3. Make use of the appropriate trusts
Life insurance companies love trusts, it means they know who to pay any claims money to and there's no need to go through the probate process. It also keeps the money outside of your estate, essential if you are using life assurance to cover any inheritance tax bill.
4. Switch to clean share class funds
If you are saving through mutual funds or collectives ( OEICS ) examine a switch to the clean share class version, with no bid offer spread, no exit or entry charges and no kick backs to platforms or wealth managers. This could provide an immediate improvement to your financial planning but beware of incurring a capital gains charge.
An interesting paper was published in the 80's, "Determinants of Portfolio Performance" where 93.6 % of the variations in return on investments were attributed to asset allocation. Getting the right mix of assets and an investment strategy for your purposes, can seriously improve your financial planning outcomes.
6. Don't follow the herd.
There's a rather unsavoury phrase that sticks in my head when it comes to investments, "buy on the sound gunfire" apparently attributed to Nathan Rothschild in the 1800s. It means buy when things are out of favour or having a torrid time. The media is always full of what's doing well, its an easier story but Warren Buffet said, if everyones's talking about it, its time to sell. Sell before the doom mongers move in with greater negative sentiment by which time, its too late. Examine the figures and make decisions on facts.
7. Save little and often
How many times have I heard I can't afford to save, my business or my children are taking me for every penny. Its always easiest to save first rather than wait to the end of your pay period to see what's left. Besides, if you were to save the price of a coffee for five days a week, that would be £50 per month. With an investment return of 5% in a stocks and shares ISA over 10 years it could be at least £7,718. Regular investments can also give a better return through participating in pound cost averaging ( a subject for a future post ).
8. Use your tax allowances.
Most higher rate tax payers aim to be basic or non tax payers in retirement. If you can receive tax relief on your pension contributions at the higher rate of 40% or more when the money goes in and pay tax at the lower rate of 20% when you take your retirement income, its a no brainer to get an immediate uplift on your investment. Tax relief is costing the exchequer billions and in an age when the chancellor wants to bring in as much tax as possible, higher rate tax relief is definitely under threat. There has been a stay of execution with the introduction of the L-ISA. Higher rate tax relief for pension contributions may not be around forever so take advantage while you can, maximise contributions in this current tax year and even go back three years and carry forward any unused annual allowance in those years.
9. Consider blended retirement income solutions
Once upon a time there was a standard cup of instant coffee and fairly similarly there was a standard annuity that gave you an income in retirement in return for giving an insurance company your pension pot.
Then you were told annuities are bad because the insurance companies keep all the money if you die. Then interest rates fell which gave less annuity income in return for your pension pot. Then came drawdown, taking an income straight from the pension pot, which seemed a good idea until volatility entered the investment markets. So what do you do?
There have been a number of innovations in product design since the Taxation of Pensions Act in 2014. Short term annuities are coming back into favour providing secure income for set periods and leaving the remainder of the pension pot untouched or available for income drawdown. Annuities are now available with improved capital guarantees and longer guarantee periods, up to 30 years. There are even hybrid products which combine features of annuities with an income drawdown.
It's no longer all or nothing, a blended solution, mixing income drawdown with some secured income through annuities, could be the caramel machiatto of retirement income planning.
10. Nominate Beneficiaries
Good practice in financial planning has always included a discussion of what is to happen to any remaining pension fund upon the death of the member. The Taxation of Pension Act 2014 has widened out the class of beneficiaries from just dependants to include non dependants and introduced the concepts of nominee and successor beneficiaries. It's important to fill out the nomination forms correctly and consider nominees and successor beneficiaries.
In the course of my work as a financial planner, legislation and politics are always changing. We are living in a VUCA world, volatile, uncertain, changing and ambiguous but these things remain consistent:
These 10#Hacks won't constitute a bullet proof vest on their own and the caveat that this article is for information purposes only and does not constitute advice, applies. But I hope it gives food for thought and if you have any queries about your own position please don't hesitate to get in touch.
Jill Turner : May 2016 http://www.jillturnerassociates.co.uk
Up in smoke - is based on today's recent 60 second presentation to my local business referral group. It came about after reminiscing over my very first "proper" job, running the art department in a social services day centre for people with long term mental health challenges. Cigarettes became a type of currency, with an exchange rate pitched at 10 pence, designed in the main, to be a deterrent to smoking. On a personal level, quitting smoking was probably one of the best things I did and it all got me thinking, if you ever wanted a greater financial incentive to stop smoking, then read on.
Did you know..... that in 2014 the price of a pack of twenty Benson and Hedges is now a staggering £8.87 (according to the Tesco website). For someone who smokes twenty cigarettes a day that's £3,237.55 a year. Bear with me and my financial planning twist but if you gross that up by the basic rate of tax at 20% that will give a £4,406.25 annual pension contribution. For a higher rate tax payer this would become £5,395 per annum.
According to a recent report by a well known nicotine replacement patch manufacturer, the average age for someone quitting smoking is 27. So, imagine if you quit smoking twenty cigarettes a day and instead, the money that would have gone up in smoke was invested into a pension plan. By the age of 55 you could have a fund worth £301,000. This has been calculated based on contributions increasing by 2% per annum, investment growth of 5.4% and factoring in 1% for investment fees. Under current legislation, you could take 25% of that as a tax free lump sum giving £56,250 immediately, leaving the remainder to provide ongoing income. That's all due to change soon but that;s the subject of another blog.
So, for now, if you or anyone you know are trying to quit smoking please give them my contact details as this could be a huge financial incentive. Now, I did say at the beginning this was the basis of a 60 second presentation at a business referral group and not a technical blog, but if this has caught your attention please read on for details of how we can also help you to access the Allen Carr EasyWay to Stop Smoking programme at no charge to you, saving you even more money.
I work closely with Pru Protect, one of the world's leading providers of life insurance, income protection and serious illness cover for my clients. They are the only provider who actively offer incentives and rewards to improve your health. Now that's actually quite sensible of them really because the healthier their policyholders are, the less claims they will pay and in return they will reduce your premiums as you get fitter. Its the only life insurance product that I know where premiums can reduce and stay reduced over the term of the policy.
Pru Protect do this through their Vitality programme, designed to engage you with improving your health and rewarding you. Not only do your premiums go down as you achieve your health targets, you can also benefit with discounts various things including, gym membership, health checks, special offers on bicycles, free cinema tickets and what got me started on this, the free quit smoking course.
Here's the link to the Allen Carr EasyWay to Stop Smoking courtesy of Pru Protect. Yes, you have to be a policyholder but life insurance, income protection or serious illness cover its pretty helpful in its own right and once you've been free of nicotine for twelve months, your premiums will come down in price and you will benefit from non smoker rates, a saving of 30-40% on rates charged to smokers for the extra risk they pose in making a claim on their policy.
Most importantly you will be adding 10 years to your life according to a recent reports from the NHS.
If you want some local motivation in Sheffield we are pleased to recommend Suzy Newson of Train with Suzy.
It's the money that goes into a pension plan in the earliest years, with the longest time to grow that really makes the difference. Meet my youngest pension clients age four and five.
Thanks to their grandmother, who is paying pension contributions on their behalf, these boys will have a real head start. Whilst they won't be able to access any of the benefits until age 55, if contributions are maintained at the current level there pension funds will be £2,070,000.
They won't have the worry of having to make huge pension contributions in their middle years "to catch up" and there's some great tax advantages to this arrangement too, which benefit the whole family. Let me explain.
Their grandmother, unfortunately widowed, was left financially secure thanks to a number of large life assurance policies and a portfolio of properties generating a secure and increasing income.
As part of the strategy to reduce her estate and ultimately the burden of inheritance tax for the next generation, our grandmother is utilising all the annual gifts and adopting some other strategies. In addition, she is making regular payments as part of her normal expenditure, utilising the fact that third parties can make pension contributions for someone and benefiting from the H.M.R.C. rule that states : " any regular gifts you make out of your after-tax income, not including your capital, are exempt from Inheritance Tax. These gifts will only qualify if you have enough income left after making them to maintain your normal lifestyle and include monthly or other regular payments to someone. "
Now another H.M.R.C. rule allows tax relief on pension contributions at 20% for non earners for gross contributions up to £3,600 per annum. In practical terms, our grandmother can make pension contributions of up to £2,880 for each grandchild, each year. A reduction in her estate of £5,760 each year , without reducing her lifestyle . If this continued for at least twenty years, assuming the property portfolio continued to generate rate this would amount to £115,200 leaving her estate and a potential saving of £46,080 in inheritance tax. Our two grandchildren as recipients of the contributions will be entitled to the tax relief at 20% and will receive £3,600 into their pensions each year. By the age off 55 if the contributions are maintained their funds will be £2,070,000.
Having agreed the framework for the pension contributions part of my work, as a financial planner has been completed. The next stage, that of implementation involved, setting timescales, an assessment of the attitude towards investment risk and capacity for loss. Capacity for loss was an easy one, our grandmother wanted to reduce her estate and therefore could afford to lose the money. However, someone had worked hard for that money and it would be wrong to be complacent, indeed our grandmother has a very cautious attitude and if it made sense she would keep all her money in cash deposits. The boys will be benefiting from the gift of pension contributions, therefore it is their attitude towards risk that we must consider. As they are minors we adopted the risk attitude of their father and given his experience of investments and the timescales involved he felt comfortable with taking an adventurous approach.
With this aspect agreed, it was time to research which included the formulation of an asset allocation, selecting appropriate investments , comparing the annual management charges between different products and platforms before making the final recommendation. The investments also included some ethical investments that although equity based and didn't fit with our grandmother's cautious nature, they did fit in with her ethical outlook so that was an added bonus for her.
Extract from HMRC - IHT Manual
HMRC guidance on IHT exempt gifts
Having a few days away during the school holidays gave me the luxury to read a Sunday paper, goodness knows who has the time to read such a wedge of paper. As I still had my financial planner head on, I turned to the money section first.
There on the back page was an interview with Luisa Zissman, the runner up from the 2013 season of the Apprentice. Whilst she's not the usual suspect that I would expect to be commenting on the UK tax system, her simplification of inheritance tax was both succinct and to the point. Quite right.
The Pharaohs made elaborate efforts to take their wealth to the next world but as Howard Carter and all of us know you can't take it with you. We work hard all our lives in our jobs or businesses hoping that our families will benefit, but if our individual estates are over £325K, the current nil rate band or £650K where a spouse or civil partner is utilising the transferable nil rate band, H.M.R.C. could take 40% of the amount over these figures to Inheritance Tax. Ouch!
It has been said that Inheritance Tax is a voluntary tax and there is a well developed advice sector often targeting the high net worth client but there are some simple steps everyone can take, here's three of them.
Keep it in the family.
The Benefits of using a Financial Planner
Whilst reading the blog articles please be aware of the following:
Welcome to the blog curated by Jill Turner. The pages are not intended to give advice, they are just the real life stories from a real life financial planner and the wonderful people I get to meet.
I want the pages to be engaging, informative and purposeful.
The information contained within this blog is based on our understanding of current government proposals and tax
law, both are liable to change in the future.
Jill Turner is a member of the Personal Financial Society