Pension & retirement
Stuart White
We all have different financial goals and aspirations in life, yet these goals can often seem out of reach. In today’s complex financial environment, achieving your financial goals may not be that straightforward.
This is where financial planning is essential. Designed to help secure your financial future, a financial plan seeks to identify your financial goals, prioritise them, and then outline the exact steps that you need to take to achieve them.
If your New Year’s resolutions include giving your financial plans an overhaul, here Fairstone Chartered financial planner Stuart White takes a look at how you can create a robust financial plan for 2022 and beyond.
Any goal (let alone financial) without a clear objective is nothing more than a pipe dream, and this couldn’t be more true than when setting financial goals.
Saving and investing can be viewed as nothing more than deferred consumption. Therefore, you need to be crystal clear about why you are doing what you’re doing. This could be planning for your children’s education, your retirement, that dream holiday, or a property purchase.
Once the objective is clear, it’s important to put a monetary value to that goal and the time frame you want to achieve it by. The important point is to list all of your objectives, however small they may be, that you foresee in the future and put a monetary value to them.
It’s good to be an optimistic person, but it’s important to stay grounded. Similarly, while it might be a good thing to keep your financial goals a bit aggressive, being overly unrealistic can impact on your chances of achieving them.
It’s important to keep your goals realistic and your underlying growth assumptions conservative, as it will help you stay the course throughout your journey and give you the best chance of achieving your objectives.
Planning for where you want to get to will involve looking at how much you need to accrue to achieve your goals. The approach towards achieving every financial goal will not be the same, which is why you need to divide your goals into short, medium and long-term time horizons.
As a general rule of thumb, any financial goal which is due within a five-year period should be considered short-term. Medium-term goals are typically based on a five-year to 10-year time horizon, and over 10 years, these goals are classed as long-term.
This division of goals into short, medium and long-term will help in choosing the right saving and investment approach to help you to achieve them. This will involve looking at what capital requirements you expect to have, such as purchasing property, renovations, gifting, as well as considering the later stages of your life and when you’ll eventually retire.
Inflation could be viewed as taxation without legislation. Therefore, you need to carefully account for inflation whenever you are putting a monetary value to a financial goal that is in the future. It’s important to determine a realistic inflation rate assumption when you’re thinking about saving and investing, as it will make a big difference to whether or not you meet your requirements in real terms (after inflation).
In both 2008 and 2011, inflation climbed to over 5%. Combined with low interest rates, this was not good news for savers. As a quick measure, you could use the ‘Rule of 72’ to determine, at a given inflation rate, how long it will take for your money to buy half of what it can buy today.
Simply dividing 72 by an inflation assumption of say 3% indicates non-invested saving would lose half their value within 24 years. Alternatively dividing 72 by the anticipated growth rate indicates the number of years it will take your money to double.
Whilst there are various risks to consider whether you choose to retain your cash in bank savings or invest your resources, for assets that you are considering investing, it is essential to understand the level of investment risk you choose to take. Too much may provide you with sleepless nights during volatile markets which may trigger you to sell an investment and potentially crystallise a loss. Alternatively, too little may be insufficient to allow you to achieve your objective. You may be in the fortunate position that your assets are sufficiently large enough that you do not need to target higher returns and therefore accept the risks of investing to achieve your objectives, but you may choose to do so out of a personal preference to aim for growth above inflation.
Financial Protection plays a vital role in any financial plan as it helps protect you and your family from unexpected events. Ensure you have adequate provision for your family and you to meet ongoing costs and lifestyle expenditure in the event of ill health or death. In addition, putting in place a will and power of attorney will ensure your assets are distributed as per your wishes on death and allow your appointed person to make financial and welfare decisions on your behalf if you lose the capacity to do this for yourself.
With tax rules subject to constant change, it’s essential that you regularly review your own and your family’s tax affairs and plan accordingly. Tax planning affects all facets of your financial affairs. You may be worried about the impact that rises in asset values are having on gifts or Inheritance Tax, how best to dispose of shares in a business, or the most efficient way to pass on your estate.
Utilising your tax allowances and reliefs is an effective way of reducing your tax liability and making considerable savings over a lifetime. When it comes to taxes, there’s one certainty – you’ll pay more tax than you need to unless you plan. The UK tax system is complex, and its legislation often changes. So, it’s more important than ever to make use of the allowances, reliefs, exemptions and favourable rates set by HMRC, particularly if you are in the top tax bracket – making sure you don’t pay any more tax than necessary.
Creating and implementing a comprehensive financial plan will help you develop a clear picture of your current financial situation by reviewing your income, assets and liabilities.
Once combined with your objectives, it will set a clear path on what actions you should consider to give you the best chance of achieving your objectives tax efficiently.
Retirement is a time that many look forward to, where your hard-earned and carefully accrued money should support you as you transition to the next stage of life.
The number of options available at retirement has increased with changes to legislation, which has brought about greater flexibility in how you wish to draw your retirement provision. The decisions you make regarding how you take your benefits may include drawing from different parts of your portfolio of pensions and investments to meet your expenditure needs whilst mitigating taxation.
Beginning your retirement planning early gives you the best chance of making sure you have adequate funds to support your lifestyle. You may have several pension pots with different employers, as well as your own savings to withdraw from.
Financial Planning is an evolving process that should take account of your changing requirements and the evolving legislation. There is little point in setting goals but not monitoring your progress.
Depending on your requirements and circumstances, setting a formal yearly review at the very least will allow you to check you are on track to meeting your objectives as time frames or circumstances change.
Setting clear goals marks the beginning of financial planning to help you achieve your objectives at various life stages. This can provide meaning and direction to the various financial decisions you will take during your lifetime.
The start of a new year is the perfect time to review both your requirements and your existing resources. In addition, consider what changes may be prudent to give you the best chance of achieving your objectives tax efficiently.
There’s no better time to start thinking about financial planning then right now.
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