Not only does planning help you look after your future self, it can also provide peace of mind and freedom for you in the present. There are various tools available to help you plan for the future in the different stages of your life.
Do you have enough?
A planning tool that many of our clients find invaluable is cash-flow modelling. Here, we consider every aspect of someone’s financial world, including their goals, and visually map their financial future to pose the question: “Do you have enough?” Are the plans you have in place sufficient or is there more that you can do?
If the plans you have made are sufficient, there is some comfort knowing that you are on track - and you can spend less time worrying and more time enjoying yourself as a result.
If they are not, this is a useful thing to know, as you can take steps to fix this. This might include saving more, cutting down your spending, or changing your investment strategy.
Finally, you may find that you have more than enough to meet your needs, and that the plans that you have in place are more than sufficient. This is obviously a good place to be, but it might mean you could be doing more in the present.
Perhaps you could afford to go on that holiday of a lifetime after all? Maybe you can help a child or grandchild get onto the property ladder? Or make that gift to a loved one during your lifetime? Sometimes too much emphasis is put on the future and you forget to do what you love in the present.
Cash-flow modelling can help identify which of these situations applies to you, giving you a clear picture of your financial position and any action needed.
The earlier you start saving for the future, the sooner you begin to benefit from the magic of compounding returns, dubbed by Albert Einstein as the “eighth wonder of the world”.
What can I do?
Broadly speaking, there are three key life stages where planning for the future is especially important:
- The accumulation stage (building up your assets).
- The decumulation stage (spending your money in retirement).
- Planning for future generations.
Accumulation
The accumulation stage concerns those who are building up their asset base and are still some time away from retiring.
Although it is important to enjoy yourself in this phase, it is also important to keep an eye on the future and begin marshalling your resources.
There are various allowances to help people build their investments, such as the ISA allowance of £20,000 each year or the annual allowance for pension contributions. The earlier you start saving for the future, the sooner you begin to benefit from the magic of compounding returns, dubbed by Albert Einstein as the “eighth wonder of the world”.
Funds in both ISAs and pensions are exempt from capital gains and dividend tax. This means that, if invested sensibly, they can grow to become a valuable nest egg later in life. Put time into planning while in the accumulation stage of your life and you will reap the rewards in the future.
Decumulation
The decumulation stage concerns those who are at retirement, or just about to be. Now that you have diligently built up your investment and pension assets, how best can you build an income withdrawal strategy that takes everything into account, in the most tax-efficient way possible?
A key component of someone’s retirement planning is often their pension assets. Deciding how best to use your pension can be a daunting prospect. The 2015 Pensions Freedoms Act brought a host of ways that you can draw income from your pensions but, paradoxically, the increased number of options available can mean increased levels of stress and worry.
With most money-purchase pensions, you are entitled to take 25% of its value tax free at retirement, known as a pension commencement lump sum. You can also choose to phase the withdrawal over time if it is not immediately needed. The remainder of the pot can be drawn as income and is taxable at your highest marginal rate.
How best to draw your retirement income can have a big effect on your retirement plans, and the more tax-efficient you are in the way that you structure your income strategy, the harder you can make your savings work for you in retirement.
Estate planning
The final key stage of planning is not to do with planning for yourself but planning for future generations. You may have concluded that your investments are more than sufficient to meet your income requirements and that you would like to pass wealth on to the next generation. The next generation may themselves be in the accumulation stage, and you might like to provide them with funds to utilise their ISA or pension allowances and help them in building their own strong financial foundation for the future.
Planning in this regard is often done with an eye on minimising your inheritance tax (IHT) liability. After your available allowances, the IHT tax charge is 40% on your assets. This means that, for some people, HMRC are the largest single beneficiary of their estate.
There are ways in which you can pass wealth to future generations, ranging from using your £3,000 annual gift allowance, to investing in a Business Relief qualifying asset that becomes IHT exempt after two years, to using Trusts so that you can retain some control over the funds.
Planning for future generations at this stage of your life can often be the most rewarding, where you start planning beyond your own lifetime and focus on leaving a legacy.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.
