Woodruff Financial Planning blog

If you have read our previous post on comprehensive financial planning, you will have seen the basic principles on what makes a comprehensive financial plan. Well, this post aims to give you some reasons why you might want to consider making a financial plan.

Financial planning is about building an objective plan for your financial future.  You should follow these principles to ensure that every aspect of your financial life is covered, and therefore build a solid foundation to meet your goals.

Your goals will depend on your own personal situation and what you want for the future.  For example, you might want to plan for retirement, buy a second home or send your kids to private school.  The list is only limited by your imagination.

This is all based on a common sense approach.  Anyone can do it, you just need to be methodical and objective.

What about financial advice?
Unfortunately, most financial advisers do not offer comprehensive financial planning.  Most of them are glorified sales people.  This is proved by the fact that they usually sell products rather than financial plans.

If your financial adviser starts by talking products he is thinking about himself rather than your future!

Of course, there is a place for products, but only at the end of a comprehensive analysis of the reasons why you need that solution.  What’s more your financial plan might reveal that you do not need further products!

What should be in your plan?
Here are the main areas which need to be covered. There may be other areas, depending on your own circumstances.

Gathering data
You need to think of your plan as a whole because your financial decisions are inter-linked.  For example, if you have an expensive mortgage this may impact on your ability to save for the future.

You will need to get together data on every aspect of your financial situation.

Setting goals
Without an end in mind, it will be difficult to evaluate your progress.  Therefore you should think carefully about what you want your future to look like.  These goals should be measurable.

Income and outgoings
This is fundamental to building your plan.  If you spend less than you earn, you have a chance to affect your financial future.  If you spend more than you earn you will have limited options and could spiral into debt.  Understanding tax is a big part of this.

Assets and liabilities
You need to build up assets to underpin your financial future.  And more importantly you need to build up the right kinds of assets.  The sooner you can be debt free (unless it is the ‘right debt’), the sooner you can be in control.  For planning purposes we ignore certain types of assets.

Emergency funding
Making sure you can cope with short-term crises is vital. We recommend that you set aside 3-6 months worth of outgoings.

Protecting what you’ve got
You should think about what happens if things go wrong. This includes all types of insurance to ensure your lifestyle is defended from catastrophes.  You should also consider making wills and powers of attorney etc.

Paying off debt
Generally, any debt is a barrier to your future prosperity. The sooner you become debt free, the sooner you have control over your future.  Remember that your bank manager includes your mortgage as one of his assets!

Saving for the future and investing wisely
You need to work out how much will be needed to fund your future goals, how much risk this requires, and the effect of external forces such as inflation, charges and future legislation.

Tax
While this should not drive your plan, it is certainly an important part of the equation.  Understanding how tax affects your life should run throughout your plan.

Monitoring your progress
Financial planning should be much like servicing your car.  You wouldn’t spend £20,000 on a new car and then never take it to the garage for a service.  Likewise, you should regularly review your plan to ensure your remain on target to meet your goals.

Of course, your circumstances will also change over time, so your ultimate goals may also need a tweak from time to time.

Conclusion
As you can see, a proper financial plan should be extremely detailed, and will take some work. However, the rewards will really benefit you as you will be back in control of your life.

Today, the Government has announced a commission to examine how the country should fund long term care for the elderly.  At present, this is a major issue since this affects thousands of people, who are often forced to sell their homes to fund care in later life.

The Government commission will look into the basis for this funding for the future, and will examine practical proposals such as a State-backed insurance scheme.  We welcome this commission and feel that it is long overdue, since the issue has been largely ignored for many years.  We feel that most people fail to plan for future care needs, hoping that they will not need care.  The reality is that if care is needed, the results can be financially disastrous for the individuals concerned.  To our mind, one of the best ways to ensure a decent level of care for the elderly is to introduce some sort of State involvement, a bit like the NHS.  Whether this is best funded by a payment by the individual, or by general taxation, is up for debate.

The need for long term care funding is summed up by this quote from the Health Minister, Andrew Lansley:

“By 2026, the number of 85 year olds is projected to double.  In the next 20 years we estimate that 1.7 million more people will have a potential care need than today.  We know that one in five 65 year olds today will need care costing more than £50,000, which could force many to sell family homes.”

See here for more information: http://www.dh.gov.uk/en/MediaCentre/Pressreleases/DH_117636

You may not have heard of qualifying savings plans, as these have become unpopular over the last few years.  These used to be popular with direct sales forces selling expensive with profits plans.  However, they are still available and have come back into focus following the recent changes to tax rates.

What are Qualifying savings plans (QSPs)?
These are savings plans which commit you to a minimum of 10 years savings.  If you save for 7.5 years, or 10 years if the initial term is longer, you will be able to withdraw your savings from the plan without any further tax, even if you are a higher rate tax payer.  The plans also come bundled with life cover.

QSPs have advantages over other products in that you can save a lot of tax when you come to cash in your plan, even if you are still paying higher rate tax.  If you had a general investment account, you would be liable to capital gains tax on the cashing in of the plan.  This is currently 28% for higher rate tax payers, and 18% for basic rate tax payers.  The QSP would avoid this tax quite legitimately, although it would still pay tax on the savings income while invested, normally at around 16-18%, as opposed to up to 40% or 50% with other savings plans. We would assume that you maximise your ISAs, since they are largely tax free, but once you have done that, you could consider QSPs.  QSPs have an advantage over pensions in that you are not constrained over what you do with the capital, and when you withdraw the money, although taking the money early would remove the tax-free status.  You can write the plans into segments so that you can choose to cash some of the plan in early, albeit attracting tax at that point; this gives you the ability to access cash when you need it, and retains the tax-free status of the remaining savings.

Who should consider a qualifying savings plan?
We would assume that you would maximise your annual ISA allowances (£10,200), but after that…

Savings for high earners
If you pay higher rate income tax, you could consider paying into a QSP, mainly to get your money free of tax at the end of the policy.  Thus, you would save paying capital gains tax of 28% (or 18% as a basic rate tax payer) on the cashing in of your plan.  The plan could be used to fund your retirement, weddings, university or private education costs.

Those reaching their pensions cap
It is becoming more common to reach the limit for pensions contributions.  In the recent budget, the Chancellor announced that they are considering bringing in a limit to contributions of £45,000.  For those contributing over this limit, a QSP could be useful.

Regular bonuses
QSPs can receive annual contributions.  If you receive a regular bonus, the QSP may be a useful tool for you (so long as the bonuses can be realistically predicted).  You can use the plan to shelter your bonuses from tax.

Converting capital
If you receive a lump sum, say from an inheritance, a QSP can be used to convert the capital (which would be taxable at up to 28%) over a number of years into a lower tax QSP.

Life cover
The QSP comes with life cover bundled into the plan.  This can be used as a form of inheritance tax planning, as the cover is usually available with limited medical underwriting, and therefore can work well for older people with pre-existing conditions.  The life cover can be split from the savings element, and gifted into a trust.

Obviously, this is a complicated area, so we recommend that you seek independent advice before taking out such a plan.  Please contact us if you need any advice in this area.

Today, the Office of Fair Trading has announced plans to make cash ISA transfers much easier. This is in response to a complaint by a consumer group.

From 2012, all cash ISA statements will have to show the current interest rate.  At the moment this appears on only 15% of statements.  This change is designed to combat those banks which lure savers in with high rates, only to later amend the rates downwards to a less competitive rate.

The second prong of attack will be to make the process easier to transfer cash ISAs within a reasonable time, so that consumers can transfer their money more easily to a new provider to take advantage of a better ISA rate.  This can be done while keeping the tax-free ISA status, but has been notoriously difficult and slow in the past.  From 2011 providers must ensure that a cash ISA transfer takes no longer than 15 days (currently 23 days).  Of course, this is still too long, but is a step in the right direction.

You should be aware that you can transfer both your cash ISAs and stocks and shares ISAs to a new provider.  You can even transfer cash ISAs to stocks and shares ISAs (but not the other way around).  With the recent rise in capital gains tax for higher rate tax payers, ISAs are a valuable weapon in the legitimate avoidance of tax on your savings. If you would like to review your ISAs, why not contact us?

Here are the main details of the emergency budget, announced today.  We have commented on the implications to your personal finances.

• VAT – rises to 20%
  From January 4th 2011; this will increase the cost of goods;
• Income tax – raising the personal allowance by £1,000 from April
  A gain of up to £170 per year.  Higher rate income tax payers will not benefit from this change.

• Capital gains tax rises – to 28% for higher earners
  Basic rate earners remain at 18%; no return to taper relief or indexation relief.  This does help to keep things simple;
• Tax credits – reducing benefits to those earning over £40,000
  The government seeks to apply these to ‘those with most need.’
• Employer’s National Insurance – threshold to rise
  This means employers will pay slightly less tax

• Corporation tax – reduced
  Large companies cut from 28% to 24% over 4 years, and small companies to 20%
• Bank levy
  No details as yet, although France & Germany agree to follow suit;

• £30 billion reduction in spending by Government departments
• Capital expenditure on Government to remain level
  This should help businesses and employers to retain contracts and work;
• Public sector wages – 2 year pay freeze for those earning over £21,000
  Those below this amount will receive a £250 pay rise each year.
• Public sector pensions – A review into costs and benefits
  These were set to double in cost over 5 years.
• Pensions – phasing out the compulsory retirement age
  This will help with flexible retirement planning, a real necessity to modern lives.
• Pensions – bringing forward the proposed raising of the retirement age
  We will have to retire later than many expected, claiming our State pension later;
• Pensions – no forced annuity purchase at age 75
  This is a good move, since it will promote more flexibility with pensions planning.  Details are set to follow.
• State Pensions – rising in line with earnings, or 2.5% from April 2011
• Child benefit – frozen for 3 years
  The Government has kept the benefit open to all, but reduced the benefit in real terms.
• Disability living allowance – medical required
  It will be harder to claim this benefit
• Housing benefit – lower limits
  There will be restrictions on the amounts payable
• Alcohol and cigarettes – no changes
• Incentives for new business set ups outside of the South East
  1st 10 employees will save on Employer’s National Insurance

It is the first budget of the new Government today.  Throughout the day, we will post updates and reaction to the various announcements.

What could we expect?

Possible tax rises:

• VAT could rise
• Capital gains tax could rise
• Income tax rises have already been announced for higher earners, although it is likely that many low earners will see income tax cease through the raising of the personal allowance
• A levy on the banks
• A rise in cigarette and alcohol duty

Possible cuts:

• Freezing public sector pay and pension benefits
• Cutting Government department budgets, leading to cuts in public services