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Financial planning in your twenties, thirties and forties …

This is the first of two articles where we look at ‘financial planning through the decades:’ how your financial planning needs change through the various stages of your life.

Clearly the average client’s planning needs are completely different in their twenties to their fifties and, while it’s true to say there’s no such thing as an ‘average’ client, this short guide will hopefully help to set most people on the right path to a well-planned and prosperous financial future.

In this article we look at financial planning in your twenties, thirties and forties – next month we’ll look at how your financial planning needs change as you move into your fifties and beyond.

In your twenties

For many people their twenties come with one huge financial planning plus – no children. If you’re what used to be known as a DINKY (dual income, no kids) then it makes sense to take advantage of it.

It may not sound much fun to think about a pension as you contemplate nights out and holidays in Ibiza, but making a start on saving for your retirement – even if the contributions are relatively low – will pay huge dividends later on in life. With the vast majority of people now set to retire at 65 or later, money invested in your twenties will have the best part of 40 years to grow and benefit from the tax advantages that pensions enjoy.

It’s also important to start saving for the deposit on your first home. Mortgage lenders have toughened up their lending criteria considerably over the past few years and the more deposit you can put down on your first home, the better mortgage rate you’ll be able to obtain.

If you are saving in your twenties, then make sure that you save tax efficiently by opening an Individual Savings Account (ISA). There’s no point paying tax on your savings when you don’t need to.

Finally, your twenties may be a good time to look to reduce debt. With university students now expecting to graduate with upwards of £30,000 of debt, the time before children and mortgages come along may be a sensible time to try and pay off some debt – and hence ease the burden of future interest charges.

In your thirties

Your thirties can be a tough time financially, especially if starting a family means that one partner isn’t working, or only working part-time. Perhaps the most sensible advice is to try and avoid debt building up in your thirties – but if it is unavoidable, keep an eye on the interest rate you’re paying and try and pay off ‘expensive’ debt (such as credit cards) first.

If you’re in a company pension then your contributions will automatically be deducted from your wages – however, if you’re not in a company scheme, or you’re self-employed, then it is vital that you start to make some pension contributions at this stage in your life.

It’s also a good idea to start working with an independent financial adviser to regularly review your finances – for example, to make sure you have the most competitive mortgage and that your pension is on track to give you the retirement you’ll ultimately want.

Even though your thirties may be difficult financially, it obviously makes sense to try and save a little. As in your twenties, remember to make sure that your savings are invested tax efficiently and don’t be afraid to take a long term view with them.

In your forties

The good news as you enter your forties is that you’ll now be approaching your peak earning years. The chances are that you’ll still have children at home and a mortgage to pay, but now is the time to be increasing your pension and savings contributions and cutting down on debt.

These are the years when good financial planning can make a tremendous difference to your long-term prosperity. It’s not that many years since you were in your twenties – and sadly, it won’t be that long until you’re retiring, so efficient and effective planning becomes ever more important.

Many people start to inherit money in their forties and it might also be the time to start thinking about the potential cost of further education for your children. A lot of clients we speak to simply don’t want their children to graduate with a huge burden of debt, and savings that are made now could help your children significantly.

As we said at the beginning of this article, there are as many ‘right’ answers to financial planning as there are clients, every client is different – but the guidelines above will hold good for most people.

If you’d like to talk to us at any time about your financial planning – irrespective of your age – then don’t hesitate to contact us. 01737 225665 or advice@conceptfp.com

 

building your financial future

Increased Protection Level for Individual Savings

The compensation limit for people who lose money if their bank, building society or credit union goes bust was increased on Friday 31st December 2010, from £50,000 to £85,000.

Compensation will be paid by the Financial Services Compensation Scheme (FSCS) – ‘the compensation fund of last resort for customers of authorised financial services firms’. The new limit is part of a Europe-wide requirement for each country to offer compensation equivalent to 100,000 euros.

The FSCS covers business conducted by firms authorised by the Financial Services Authority (FSA) who said that the new higher limit would cover the “vast majority” of UK savers. European firms (authorised by their home state regulator) that operate in the UK may also be covered.

The FSCS was set up mainly to assist private individuals, although smaller businesses are also covered. Larger businesses are generally excluded, although there are some exceptions to this for deposit and insurance claims.

The FSCS protects the following:

? Banks and Building Societies
? Credit Unions
? Insurance
? Home Finance (including mortgage advice)
? Investments
? Pensions
? Endowments

The authorities hope that the revamped FSCS rules, which will be the subject of a publicity campaign in early 2011, will be enough to stop another run on a bank.

As well as offering higher compensation payouts, the new rules aim to give most claimants their money much faster than before – within seven days and the rest within 20 days. Payouts will also no longer be reduced by the amount of money that a saver might also owe their savings institution – for instance by the size of a mortgage or other loan.

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FSCS Website

Protecting Against Short-Term Risk

*Guest Blog by Colin McInnes @ Quartet Capital Partners LLP 

MY ASSET ALLOCATION – PROTECTING AGAINST SHORT-TERM RISK 

It still surprises me the extent to which private client investment firms ignore managing clients’ asset allocations on a dynamic or tactical basis and believe that fund or stock picking is the way to drive performance. To our mind, asset allocation is the biggest driver behind investment performance and is a key component of Quartet Capital’s investment offering. This is where we seek to add value for our clients. 
Currently we are living in a very unstable macro environment. The biggest influences on returns are the extent to which geopolitical factors will influence market sentiment; whether we are entering an inflationary or deflationary environment; and does the recent pullback in global equity markets spell the end of the recovery started several months ago? 

Our view is that we are just going to have to get used to political intervention – be it with Germany limiting short-selling or Europe muddling through the EU banking stress tests. This intervention will inevitably lead to higher levels of volatility as skittish investors focus on the latest news.

In terms of the global economic recovery, we view the data coming through in the UK, Europe and US as worrying and have increased our fears that we may suffer a double-dip recession. We remain concerned that markets are still in a long-term cyclical bear market and view the drop in risk asset prices as a healthy correction to markets that had spiked.

Until global price/earnings ratios are in single digits, we fear more downward lurches. If the economic recovery does gain traction, this market setback may create short-term buying opportunities, primarily in equities although corporate debt also begins to look interesting. Corporate bond spreads have widened but more as a result of government debt prices rallying strongly. Despite the rally in conventional government debt, we have maintained a large exposure.

This has been done for two main reasons. First, we remain fearful of deflation and are in agreement with the Monetary Policy Committee that UK inflation will quickly reverse in the second half of the year. Second, with big macro risks around, government debt has benefited from a flight to safety. To further protect portfolios, we hold a position in physical gold as a form of disaster insurance.

Elsewhere we have little BRIC, Asia or emerging market exposure due to our concerns that these markets are overvalued and offer little upside on a risk-adjusted basis. We also have no exposure to Europe – either currency, debt or equities across our sterling or US dollar accounts. But we are getting more positive about the prospects for Germany due to its large export sector and we might allocate funds there while hedging out currency exposure. In other currencies we maintain a significant exposure to the US dollar and despite the recent rise in sterling, view the dollar as being the lesser of two evils.

In relation to other assets classes, our hedge fund and absolute return positions have held up well and we remain positive on the outlook for volatility-based investment strategies. We hold two ‘special situation’ positions in the UK commercial property sector. We fear that limited upside now exists in the sector but special situations by their nature should not require broad market catalysts to come to fruition. We also hold a position in a ‘busted’ structured product that should produce a gross redemption yield of around 15% over the next 18 months.

Recent launches look uninspiring due to current interest rate levels but decent opportunities exist in the listed secondary market if one can accurately price the underlying constituents of the structure and can get comfortable with counterparty risk.

To conclude, we are pretty worried about short-term risks and have positioned portfolios accordingly.

We hope to be surprised on the upside.

Colin McInnes Bio

 

 Quartet Capital Partners LLP
 

 

 
 

 
 
 


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Tough Times Ahead For Families

The above headline could have easily read “Tough Times Ahead for Everyone” but it is likely that the effects of the austerity budget, and the financial deficit it aims to redress, will be felt more acutely by the younger generations and these effects are likely to last for many years.

With inflation out pacing wage growth, tax credits being withdrawn, child benefit frozen and the Child Trust Fund abolished, families are becoming progressively worse off.  Undoubtedly the elderly on low incomes will also be hit by higher inflation but it is worth noting that winter fuel payments, free bus passes and free TV licenses have all been retained and that the basic state pension was the only benefit to be increased.

If this was a case of short term pain for long term gain things wouldn’t be so bad but unfortunately the longer term picture looks even less rosy.

The NHS is the only major department whose Budget has been increased and it is reckoned that around 45% of total spending goes to the 16% of the population who are over 65. This is perhaps not surprising, after all, it is inevitable that people will require more medical care towards the end of their lives but this generation are taking out more than they have put in.

To redress this the state pension age has increased, and we are likely to see further increases over the coming years as the working population are forced to contribute to the welfare system for many more years.

The counter argument is that money is now passed down the generations, as increased home ownership provides the next generation with a level of inherited wealth not previously enjoyed.  However, inherited wealth cannot be relied upon as increased longevity and rising long-term care costs force more people to sell or borrow against their homes.

So what can be done?  The key issue to recognise is that while there may be less spare money available, saving for the longer term should not be the first victim of household budget cuts.  Because of the effects of compound growth, a pound not saved now will be far more damaging to your longer-term wealth than a pound not saved in later years.

Money Facts Awards – Good Advice 2010

We are delighted to announce that we are shortlisted in The Good Advice Awards for Best Retirement Adviser.  The awards promote excellence across the financial services industry.  The final decision will be made on the 17th September at a ceremony in London.
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Inheritance Tax – The Forgotten Battleground

Not so long ago Tory promises of an increased nil rate band prompted the then Chancellor, Alistair Darling, to introduce new legislation to effectively double the nil rate band for married couples and those in civil partnerships. Inheritance Tax was an important battleground but, as house price growth went into reverse and stock markets fell, it became less of a vote winner.

With a coalition government, compromise is necessary from the outset and inevitably both sides have to sacrifice manifesto pledges. The good news is that the Liberal Democrat Mansion Tax has not survived; the bad news is that neither has the promised £1million nil rate band. In fact, the nil rate band remains frozen for the next 4 years at £325,000. This means more and more estates will fall back into the Inheritance Tax trap. A £650,000 estate increasing in value by 3% per year (probably less than the rate of inflation) will mean the tax bill faced by beneficiaries will increase by approximatley £150 per week over the next 4 years.

So what can be done?

A few years ago including a trust provision within the Wills of married couples was standard practice since it allowed both spouses to utilise their nil rate bands without jeopardizing the security of the survivor. The introduction of the transferable nil rate band effectively rendered such tax planning redundant but, with a static nil rate band, such planning again has appeal. If assets are hived off to a trust on the first death, any future growth falls outside of the estate of the surviving spouse. By contrast, assets passed directly to the surviving spouse effectively means the survivor inherits an extra Nil Rate Band. If the value of the estate increases by 3% a year and the nil rate band stays static, the trust saves £22,000 in tax over 4 years. Of course, the Inheritance Tax position needs to be balanced against possible increases in income and capital gains tax but these taxes too can be mitigated with good advice.

Having reviewed your Wills to ensure maximum tax efficiency, it is then time to look at further planning which can be undertaken now.

Lifetime planning falls neatly into three strategies: reduce; convert; insure.

Gifts can reduce the value of an estate but of course, tax savings should not be made at the expense of your financial security. Although there are exemptions, large gifts need to be survived by 7 years.

By contrast buying assets which qualify for Business Property Relief or Agricultural Property Relief delivers tax savings after just 2 years but the tax advantages need to be weighed against the investment risks.

If neither of these strategies is practical, the final option is to insure against the liability. This is not a solution but it does at least mean that your beneficiaries have the means to pay the tax bill.

Inheritance Tax is a complex area and one size certainly does not fit all, please take professional advice.