Back to Basics

For this issue I am going back to basics. There are many different aspects to financial planning, but there are probably half a dozen basic rules by which one should abide. They will not apply to everyone, but I wouldn’t mind betting that almost everybody could benefit from using at least one of them. Firstly, (and I realise that without the benefit of Dr. Who’s Tardis many of us will struggle with this one) Start Early. The earlier you start saving, the better. Time is your friend. It might not feel like it when you are getting on a bit, but it is! Little bits of savings, over a long time can grow into very useful sums.

Secondly, Clear Debt. If you can, pay off debt wherever you can. Short-term first, then any longer term. For the purposes of this article, I am leaving domestic mortgages out, as it is rare – and fortunate – to be able to pay the mortgage off, much before full-term. There may be exceptions, such as interest-free arrangements, but as a rule, ditch the debt!

The next item tends to apply a little more to families: Protect. Insure your loved ones against the loss of the “breadwinner(s)” and, if possible, the bread that they win. By this I mean that one should ensure that adequate life insurance is in place to cover parents or guardians. No amount of money will take the place of a loved one, but not having great financial burdens at a time of loss makes it a great deal easier to get through the grief and move on. Financial loss is not just caused by the loss of life; incapacity, causing a reduction or complete loss of income, is another issue that should, if possible, be protected against. This is a problem that affects both those with dependants and without. Someone single may feel that they need no protection, but temporary or permanent incapacity might have a devastating effect on their financial wellbeing, to add to the obvious trials of the accident or illness that caused the inability to work in the first instance.

Courtesy of Private Eye
Courtesy of Private Eye

Number three is: Use Tax Reliefs. In general, the Government gives us precious little. Where some tax benefit is available, then use it! Save, using ISAs, and for the longer term, pension plans. Admittedly, Cash ISAs are not producing great returns at the moment, but not much is in the deposit-based environment. Where a term of five years or more is concerned, equity based ISAs come into their own, providing tax-efficient growth and tax-free income. As a result of the changes in pension legislation in recent years, plans have become increasingly flexible, with benefits being available much earlier and in a variety of ways. There was a spate of bad press some while ago but it may be well worth remembering that when speaking of the gentlemen of the press (and possibly, ladies, too) it was often said, “don’t let the truth get in the way of a good story”! There have been bad pension schemes, but by far the majority have been perfectly decent and the best of them have been nothing short of brilliant. You will receive tax-relief on your contributions (subject to certain restrictions) and the growth is almost free of taxation. This aspect ties in with item one, in that the earlier you start, the better the return is likely to be.

Next, Use Trusts. Many years ago, I went to a seminar given by a technical expert on the subject of trusts. He ran an IFA practice and told us that if one of his advisors arranged a policy that was not written under trust there would have to be a good reason why! Trusts ensure that benefits go exactly where intended, as quickly as possible. It is a very involved subject and advice should be sought in most cases.

Lastly, write a Will. This doesn’t have to be an expensive procedure, but it should be a professional job. A badly written Will can do more harm than good. Care should be taken as to who to have as Executors though, as professional fees for acting in this capacity can be eye-wateringly expensive.

My word, I have gone on a bit! I’d best be off. I hope some of the above is of help.

My best wishes for the festive season. See you in the New Year.

David Foot

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