20 tips for good financial planning

To celebrate Ascot Lloyd’s milestone of providing 20 years of expert financial advice to clients, in the most fitting way possible we present 20 tips for successful financial planning.

1. Don’t underestimate how much you’ll need to retire

The State Pension, which you receive at the age of 66 (rising to 67 in 2028) with the amount dependent on your National Insurance record, is a great asset in retirement. But don’t make the mistake of assuming it’s enough to fund the retirement lifestyle you want. Analysis by AJ Bell estimates a single person needs a savings pot of £490,000 to achieve a moderate living standard in retirement and £790,000 to achieve a comfortable retirement.

2. Protect the value of your savings

Having easy access to a cushion of savings equal to three to six months of essential outgoings is sound financial planning but saving all your money in a zero or low interest bank account means your savings are likely to diminish in value due to inflation. Savvy savers establish a robust long-term plan to invest money in assets that grow in value at a faster pace than inflation.

3. There’s no time like the present

While you should never think it’s too late to start building a robust retirement plan, the earlier you start the greater the potential for returns. Compound interest is an incredibly powerful thing – use it to your advantage. The longer you delay saving for retirement, the harder it will be.

4. Pay into a pension

Neglecting to do so is like taking a voluntary pay cut, as it means your employer won’t pay into your pension either. So long as you’re paying at least 5% of your income each month, your employer is legally obliged to pay at least 3%. Some employers offer even more attractive workplace pensions, so make sure you know the details of the scheme available to you.

5. Use it or lose it – ISA and pension allowances

Both ISAs and pensions are excellent saving vehicles as they allow your money to grow within that wrapper without you needing to pay any tax on gains or income. Each tax year (6 April to 5 April) you can invest up to £20,000 into an ISA and up to £60,000 (including employer contributions and government top-ups) into a pension. You can add any unused pension allowances from the previous three tax years to this year’s allowance, but you can’t carry forward any unused allowances for ISAs.

6. Think about your retirement goals

Building up a sufficient retirement pot requires time, sacrifice and a solid plan. Lots of people know they want to retire by a certain age, but far fewer people can answer the question: what will you actually do in retirement? Only once you answer that question, outlining your lifestyle goals, can you understand more accurately how much money you’ll need to achieve that.

7. Use a cash flow modelling tool

Once you’ve nailed down your retirement goals, the next tricky part is figuring out how much you’ll need to live on at various points in the future. A tool, utilised by financial advisers around the world, helps map your financial future. Cash flow modelling provides a detailed picture of your financial situation not just today but forecasted to various points in the future, helping you to answer important questions such as when can I retire, how much do I need to retire, and will my family be financially secure if I pass away or go into care?

8. Understand your risk profile

There is a vitally important dial at the heart of every investment strategy: risk vs return, a constant balancing act between the return you want versus the possibilities of not getting it. Turn the dial of risk down low and there is a smaller chance your investment will fail but your returns will also be smaller. Dial the risk up high and the potential scope of growing your investments is larger but so is the chance of your savings losing value.

9. Invest for the long term

Intrinsically linked to the risk vs return dial is the length of time your money is invested. The longer you're invested, the more you can withstand short-term dips. Dips and recessions are often followed by periods of growth, and missing just a few years of growth can seriously hinder your long-term returns. Trying to time the markets is a fool’s game – it’s time in the market which counts.

10. Diversification is your friend

It may be an overused saying, but it remains a fundamental concept in most successful investment portfolios: don’t put all your eggs in one basket. However certain you feel that investing in a particular company or asset will deliver you high returns, there is always a chance you’re wrong. So long as that chance exists, diversification is a no brainer.

11. Consider consolidating your pensions into one

The more transient nature of work today means people are accumulating multiple pension pots. Hopping from job to job can mean you end up accumulating multiple pension pots, a trend which has risen in prevalence since auto-enrolment in workplace pensions was first introduced in 2012. Consolidating them into one can remove complexity and help achieve better returns.

12. Get personal protection cover

There is a one in four chance that one person in a non-smoking couple will develop a serious illness before their retirement age and a one in ten chance that one will die. These chances only increase as you get older. Income protection, life insurance and critical illness cover will ensure your family is protected financially should the worst case happen.

13. Update your cover as your circumstances change

Research by Legal & General for The Mail on Sunday found that more than half of people with personal protection insurance fail to change it in line with milestones such as buying a home, having children, marriage or divorce. These oversights put you at risk of a shortfall should you need to claim in the future, leaving your family vulnerable in the event of ill health or death.

14. Overpay your mortgage only if it makes sense

Most lenders allow you to overpay up to 10% every year, penalty free. If your mortgage rate is around the same or higher than your savings rate, or likely investment return, this can make sense. Overpaying your mortgage doesn’t just mean you’ll be mortgage-free sooner and in the meantime pay interest on a smaller loan, but you also might get a cheaper rate when you next come to remortgage because your loan to value (LTV) is lower. 

15. Don't miss out on the marriage allowance tax break

More than 2.1 million couples currently benefit from the marriage allowance tax break, which allows husbands, wives and civil partners to transfer part of their tax-free personal allowance to their higher-earning partner. However, an estimated 2 million eligible couples are not claiming the benefit, missing out on a tax saving of up to £252 per year.

16. Utilise salary sacrifice to avoid marginal tax traps

Most people know what income tax band they are in, but do you know what your marginal tax rate is? It’s the effective tax you pay on each pound you earn and takes into account the tax reliefs you lose when you enter certain income brackets. For instance, you lose £1 of your £12,570 tax-free personal allowance for every £2 of income above £100,000, meaning the effective tax rate on income between £100,000 and £125,000 in England and Wales is in fact 60%. In Scotland, it's 67.5%. Salary sacrifice schemes allow you to replace taxable salary with non-taxable alternatives, such as pension contributions, EV car leases or childcare vouchers. Reducing your taxable income in this way could help you avoid falling into a marginal tax trap.

17. Think carefully about taking your tax-free lump sum from your pension

The chance to withdraw 25% of your pension as a tax-free lump sum (up to a maximum amount of typically £268,275) is an excellent perk of pensions when planning for retirement, but any decisions should be considered carefully. If you have a good reason to use that money, perhaps to pay off your mortgage, then it could make sense. But if you don't then it can be much more valuable to phase your tax-free cash into drawdown over a long period of time, benefiting from further compounded returns in the tax-free pension wrapper. Remember, pensions are also excluded from your estate for inheritance tax purposes.

18. Get your affairs in order before it’s too late

Nobody wants to think about death, but neglecting to prepare for the worst case can end up costing your loved ones financially and mentally. A will is crucial to ensuring your wishes are carried out after you die and can also help ensure your estate is inherited in the most tax efficient way, protecting your legacy. Thinking about illness or incapacitation is just as unappealing, but failing to put in place a power of attorney to make important decisions should you lose the capacity to do so yourself can create all sorts of issues for you and your loved ones. Creating both a will and a power of attorney is easy, so don't put it off until you’re older just because you’re young and healthy now.

19. Be open with your family members

Depending on the extent of your wealth, inheritance tax can present a considerable liability for your beneficiaries after you die – 40% on the value of your estate above your tax-free threshold. With careful planning in advance, however, there are a number of ways IHT can be mitigated. Talking openly with your family members about money while you are still alive can not only ensure wealth is transferred in the most tax efficient way but can also avoid additional stress on your loved ones when you die.

20. Use real experts

The internet has made it easier than ever for people to manage their own investments, but there is a large amount of misinformation online and articles are also written by people who know nothing about your individual circumstances and objectives. That is why independent financial advisers are more important than ever, creating a bespoke plan for your individual situation with holistic expertise across all aspects of financial planning including tax, legacy, mortgages, protection and investing.

If you want to discuss any of the above, contact your adviser directly or get in touch to book a free callback with our Client Services team.