Duncan Lawrie Online ▼

Posted on: 30 October 2015 by Omar Iqbal

1. Set your goals

Your goals can be short or long term, small or large, but they all need to be achievable. The first step to putting together a financial plan is to work out what your priorities are. Do you want to retire early? Look after your loved ones if the worst happens? Protect the financial future of your children?

2. Protect yourself and your family

Consider the implications if you or your partner became ill or died. Identify potential shortfalls, how it would impact your family and how you could meet any shortfall in the worst-case scenario. Take into account any insurance cover provided by your employer, such as death in service cover or income protection. 

3. Reduce any debt

Before you start to consider saving, make sure you have a good financial foundation by reducing your liabilities to a manageable level. Although interest rates are at historic low levels, you will certainly be paying more interest on loans, mortgages and credit card balances than you would earn in a traditional savings account. 

4. Create an emergency fund 

A typical emergency cash reserve holding would be between 6 and 12 months' worth of expenditure. However, the actual amount you choose will vary according to your circumstances. I tell my clients that whether it's £1,000 or £1,000,000, the amount should be enough to help them sleep at night without worrying. 

5. Make sure you and your partner have Wills and Powers of Attorney 

Only around 35% of people in the UK make a Will - yet even in the simplest of circumstances, having a Will reduces the time and cost needed to deal with an estate. In more complex cases, a Will, with the help of a specialist financial planner and solicitor, can reduce inheritance tax liabilities and ensure more of your assets are passed to your loved ones. It can also help protect your assets from being used to pay for long-term care. 

6. Use available allowances

At present, you can save £15,240 each year in an Individual Savings Account (ISA), which will currently benefit from tax-free income and growth. The annual ISA allowance may not seem much but over time a couple can build a significant pot of money from which to draw a tax-efficient income in retirement.

You can also contribute up to £40,000 per annum into a pension plan and benefit from tax relief at your highest marginal rate of tax. Any growth and income is also generally free of tax within your pension plan. 

7. Use your pension for estate planning purposes

There have been various changes in the pensions industry over the last few years, including a significant shift in legislation, giving you more flexibility in the way you take benefits and also pass money down to future generations. The changes mean that if someone dies before the age of 75 they can pass down their entire defined contribution pension fund, tax free, as a lump sum to their beneficiaries. After 75 the beneficiaries can take on the pension for themselves, providing a useful income - but subject to income tax at their marginal rate.

Given these changes it would be sensible to review your pension plan with particular reference to who you've chosen as your beneficiaries and whether this needs to be updated. 

8. Don't get caught by the reduced Pension Lifetime Allowance 

The Lifetime Allowance (LTA) was originally introduced in 2006 at £1.5m, as a new way to tax large pension pots. Over the years it rose with inflation, reaching an all-time high of £1.8m in 2012 .

Since then, however, the LTA has been systematically reduced. This year's Budget (in March 2015) marks the third reduction in three years, taking it to a new low of £1m from April 2016. This, coupled with the increased costs of funding retirement, is pushing more and more people into the net. Currently any amounts saved in the pension's regime over and above the LTA could be subject to a tax charge of up to 55%.

The Government plans to bring in some form of protection, allowing individuals to protect the higher £1.25m LTA. If you choose to make use of this protection, you may have to stop contributing to your pension, but not before consulting with your financial planner.

9. Take advantage of dividends

The recent Summer Budget (in July 2015) saw the dividend tax credit being scrapped from the 2016/17 tax year. 

In future all dividend income will be treated as gross (i.e. untaxed) income, and all taxpayers will have a tax-free dividend allowance of £5,000 a year. After this, the rate of tax payable on dividends will depend on the investor's other taxable income. If dividend income takes them from one band into the next, they will pay the higher rate on that portion of income.

To ensure that you minimise tax on dividends it may be prudent to split out any taxable dividend-generating portfolios between you and your spouse, to make sure you make full use of allowances. If you own a private company, it may also be worthwhile considering taking larger dividends in the current tax year before the changes come into force.

10. Arrange regular reviews

Any financial plan needs to be adaptable and flexible. Your circumstances will change over time, so it's important to review your finances regularly to ensure you remain on track to meet your goals.