- Financial planning
- 4 minute read
Speaking to a financial adviser isn’t necessarily top of most people’s priority lists. But the sooner you get round to it, the sooner you can make sure you’re not missing out on valuable financial planning that could save you money.
Many people who go to speak to a financial adviser already have some basic measures in place to secure their future financial security, say Jonathan Neale, Chartered Financial Planner, and Andy Cumming, Head of Advice, at Close Brothers Asset Management. This could take the form of a cash ISA, for instance, or a workplace pension. These make for a solid foundation on which to build. However, if you have just a few measures in place, you may be lulled into a false sense of security about exactly how prepared your finances are. And a surprising number of people have not yet put thought into their long-term financial plans. These people may be exposing themselves to potentially costly risks.
People come looking for advice on a wide range of topics, from how best to invest an inheritance and planning for income in retirement, to how to pass on money to beneficiaries tax efficiently. We always start by asking what they want to achieve. They are often very surprised by the solutions we can provide, and by what they might have missed out on had they not come in to speak with us. Financial planning is really all about the details – these can be complex, which is why it can really pay to talk to an expert.
Really, planning should start years before retirement, ensuring funds are invested in the most tax-efficient structures, making use of pension contributions, ISA allowances and annual capital-gains tax (CGT) exemptions, to name a few. We can ensure that when in retirement, you will be able to receive your income in as tax-efficient a manner as possible. Below are just a few of the different ways in which we’ve been able to help clients.
Optimising your retirement plan
We recently worked with a client who wanted advice on how to draw income from their pension fund in a tax-efficient manner. We gather every detail about a client’s income, assets, personal status, liabilities, lifestyle and objectives prior to giving advice, and so we were able to identify a number of solutions for them.
Our first step was to guide the client through how to better use CGT and income-tax allowances. They then asked us to take a look at their investment strategy, factoring in their appetite for risk. By applying our knowledge of legitimate personal tax allowances and reliefs, we were able to boost the net income they made from their investments. Finally, we applied our expertise in retirement planning to arrange for them to draw the tax-free element of their pension progressively through retirement, rather than as a one-off lump sum. This both saves money on income tax, and leaves more within the inheritance tax (IHT)-friendly pension wrapper. As well as growing capital, we look to protect it for future beneficiaries, and so we also advised the client on IHT and estate planning. The cumulative result of all of this advice and planning was an increase in the client’s net income, at no greater risk.
Helping business owners plan for the future
Business owners need to think ahead to when they might want to sell their company. With one client, we were aware that while his money was tied up in the business, it benefited from Business Property Relief (meaning it was protected from IHT). Upon the sale of the business, we were able to put a certain amount of money (up to £325,000 )into a trust, which would only be liable for IHT if the client died within seven years. To protect against this, we took out life cover for the potential tax liability during the seven-year period.
There are also investment solutions that can provide IHT relief after two years – however, due to the high-risk nature of these services, expert financial advice should be obtained. Because we worked with the client in advance of him deciding to sell his company, we were able to provide timely advice that saved him money in the long term.
Avoiding IHT pitfalls in your will
Finally, we have seen several clients whose wills contained a phrase which could have had serious IHT implications. If a client has set up a discretionary trust in their will, directing that half of their house (or the cash made from selling it) should be held in trust for their beneficiaries, these may be listed as children and grandchildren, but importantly, also include the words “and anyone else”. Unfortunately, these three words would mean they were then unable to benefit from the “residential nil-rate band”, an IHT allowance phased in from 2017 onwards. This is an extra allowance on top of the standard IHT nil rate band allowance, which applies where someone passes property, or proceeds from a property sale, on to direct descendants.
Yet the significant phrase here is “to direct descendants” – if the client’s will specifies other beneficiaries beyond these, the property value would not be eligible for the additional allowance. By alerting a client to this, and arranging for the necessary changes, we can potentially save them up to £120,000 in IHT.
These are just a few examples of the ways in which we can and have helped clients avoid costly financial pitfalls. It’s painstaking work, which requires a detailed grasp of each client’s individual situation and all the relevant regulations.
But the peace of mind which results makes an expert financial review invaluable.
Tax benefits depend on your own individual circumstances and are subject to change. Your capital is at risk. Investments can go down as well as up. This article should not be construed as advice.
This article was first published in The Week, June 2019.