People with an adviser are four times more likely than those without to have high levels of financial wellbeing

Just 10% of people who have never had any financial advice are "fortunate to combine healthy finances and a positive money mindset", compared to 44% of those who have an ongoing relationship with a financial adviser

(Source: Aegon Financial Wellbeing Index)

The importance of a strong financial plan

Financial planning may sound very complex. Yet it can be a hugely rewarding undertaking that can transform your quality of life.

The purpose of this guide is to give you an essential grasp of how financial planning works.

We will talk about what it is, the different components that comprise a financial plan and how to keep your plan on course over a lifetime.

You can read down the page, or use the menu on the right to jump straight to the sections you're interested in.

There are links throughout to research and blogs that will provide further reading and lots of hints, tips and ideas.

What is financial planning?

It’s not just about budgeting

Whilst a monthly budget is a key part of your financial plan, effective planning goes further by looking at your long-term goals and specifies how you will get there. This involves examining your current income and establishing how this may increase in the years and decades ahead. Here, we can use known variables such as your possible future career progression pathways, the pay scales they offer and how these may be affected by inflation (the rising cost of living over time).

Financial planning also requires examining your current assets and liabilities - and how these will change as you progress through each of life’s stages. For instance, perhaps right now you own a house (an asset), but still have 20 years left to repay on your mortgage (a liability). By your 50s, you may have this completely repaid. Yet, as you approach retirement, you will be looking at the eventual end to paid employment and the continuation of monthly expenses which need paying. This requires having a strong plan in place to provide a steady income when you retire.

There are other important aspects of financial planning too. One is to identify risks to your income and wealth, both now and in the future - building in contingency plans accordingly. Life assurance, critical illness cover and income protection can protect both you and your dependents against unforeseen eventualities, and enable you to remain on track to meet with your objectives. Estate planning can ensure wealth is passed down efficiently through generations and potential inheritance tax implications can be mitigated  effectively.

Where do you start?

Naturally, you need to begin with identifying your goals. From there, to plot the best course to achieve them, you need to determine your current financial situation.

For instance, a married couple in their early 30s with young children may wish to retire at age 55 one day.

This may seem achievable with very little planning or effort if the couple earns a high household income. After all, the children will likely have left home by the time their parents reach their 50s, and the mortgage should be repaid. Yet how can this married couple ensure a steady income across 30 years of retirement (or more) given today’s high longevity expectations?

To determine whether their goals are realistic, they will need a strong financial plan. In this case, they will need to answer the questions: “How much do I need for retirement ?” and “Are we on track to meet that target?” In your own case, when determining your financial goals it can be helpful to work through a list of criteria to ensure their viability.

In particular, make sure your goal is specific, so you have something clear to work towards (e.g. “I want to retire at age 55”). You should be able to measure your progress over time to meet it, and it is best to have a target attached to it - so you know how much you need for essential, lifestyle and discretionary expenditure.

Assets and liabilities

Assets and liabilities

How do you determine your assets?
How do you determine your liabilities?

Quite simply, make a list of your income and valuable possessions

Whether or not life is comfortable now, it is important not to assume you can simply drift towards your long-term financial goals. Listing your various assets is a good way to take stock of where you are in relation to them. These may include cash, pensions, property and investments.

If you are a business owner or shareholder, think carefully about where these business assets sit in the bigger picture. Are you planning on using any of these to fund retirement in the future? If so, you may benefit from valuation by an experienced professional.

It is also wise to itemise your income streams. For most, this will involve listing your salary - and that of your spouse/partner. It may also mean including retirement income (e.g. pensions), rental income from property investments (e.g. Buy to Lets) and dividends.

You may also want to list possible windfalls and income such as state and company pensions, potential inheritance(s), continuing dividends from your business in retirement or proceeds from a sale. In any case, work with a minimum figure if your income varies - treating any additional amount as a bonus. Be careful to adjust for tax to work out the net figures (your adviser can help with this if needed).

Here, list your expenditure, debt and other costs

Many of life’s costs cannot be helped. These essential expenses should be listed as they stand now to paint a clearer picture of your leftover income. Items here might include rent/mortgage, food, utilities, insurance and costs related to children (e.g. nursery). Some of these costs may be negotiable with careful planning - such as remortgaging to a lower interest rate . Others will change naturally, such as childcare costs as children get older.

 Other expenses are more discretionary/lifestyle in nature and may include gifts (e.g. toys for children), tech purchases such as tablets and smartphones, holidays and expensive hobbies like horse riding. If needed, you could reduce these in order to realise your longer-term financial goals or to achieve them sooner.

Liabilities include your mortgage (“good debt” - which is linked to an asset) and personal debts, which can seriously undermine your progress towards your goals if left unattended. Examples of the latter include unpaid credit cards, overdrafts and personal loans. Paying these off sensibly, often starting with those subject to the highest interest rate, can be a huge boost to your financial plan.

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The importance of protection

Lay out a contingency plan to help avoid setbacks towards your goals.

Life is full of unpredictable events and it is important to prepare as best you can. Just as you prepare a contingency plan by taking out travel insurance for a holiday, it is important to think about how your loved ones will be protected if the worst should happen.

Different protection options  exist which may be more or less suitable for you depending on your goals, your financial situation and dependents. Life insurance is often wise since this provides a lump sum to your loved ones if you die within the term, which can help them repay outstanding liabilities and possibly receive additional sums to enable them to maintain their lifestyle or keep afloat until they can make new arrangements -such as finding a new job if they need to.

Critical illness cover may be appropriate to provide a much-needed lump sum if you are diagnosed with a serious condition, such as a major stroke. Income protection exists to provide an ongoing income if you find yourself unable to work due to accident or ill health.

In any case, it will be important to think about drawing up a will and Power of Attorney so that your assets and income can be dealt with appropriately in the event of your premature death, or if you lose mental capacity. Also, consider building up 3-6 months salary in easy-access emergency savings as a financial buffer in case you lose your job, or need to cover a large unexpected expense such as a broken boiler or family emergency.

Cashflow planning

Work out what you need now and in the future

A cashflow plan involves working out how much money you need both now and in the future to sustain your lifestyle, then putting measures in place to ensure these can be sustained over the long term. To help ensure stability in the shorter term (e.g. the next 0-5 years), this means taking away your expenses from your income to check that a healthy gap exists between the two, allowing you to cover variable expenses and account for the rising cost of living should you not receive a pay rise for any reason.

Cashflow planning becomes especially important when figuring out how to sustain a retirement lifestyle. At this time, you will still have monthly expenses (albeit perhaps lower than during your career) but much of your income is likely to derive from one or more pension pots, which will diminish over time if you draw from them. Here, you will need to determine a “safe withdrawal rate” to ensure you do not run out of money before you die. A financial planner can use their experience, knowledge and dedicated software to help you determine this and will consider potential ‘market shocks’ to determine the potential impact on your long-term plans.

Investment

Making investing a priority

Take your savings plan to the next level

We all know that it is good to save, yet some people believe that investing is only for the very wealthy.

This is not the case.

Investing does not need to look like Dragon’s Den, committing a huge sum into a risky startup. Today, there are many ways for ordinary people to invest and build wealth - even if this means just setting aside a few hundred pounds a month towards an ISA, pension or other investment account.

Whatever your financial goal - whether it is to retire comfortably one day or become financially independent in your 50s - you will need wealth to achieve it. Even if you are unsure of your goals, having wealth will open up more options for you in the future. A good investment strategy over the long-term can help you achieve this.

Bringing investing into your financial plan will look different depending on your goals, situation and time horizon. Yet there are some key principles to bear in mind in all cases. These include holding a wide, diverse range of assets to spread out your risk. Avoid trying to “time the market” with clever stock-picking tactics and remember that it is normal for investments to fluctuate in value.

Retirement

Getting ready for retirement

Prepare your finances for “life after work”

You may already be retired. Perhaps it is just around the corner, or feels very far away. In any case, it is never too early to lay a strong financial foundation for your later years.

Retirement looks different for everyone. Some people plan on never retiring, whilst others see themselves taking a “blended” approach - continuing to work or volunteer part-time. Many still envisage stopping paid work entirely, and living off the fruits of their labour.

It is also possible that your vision for your 50s, 60s and beyond may change as you get older. Having a retirement plan - even if you are just starting out in your career - will help ensure you can realise your goals. Practically speaking, for most people this will mean having a sensible pension strategy  in place.

There are different types of pension each with their own rules, pros and cons. Your state pension, for instance, can only be accessed from your state pension age (rising to 67 between 2026 and 2028) and requires at least 10 years of qualifying national insurance contributions. A private pension (by which we mean a money purchase or ‘defined contribution’ pension) can usually be accessed from age 55  (rising to 57 in 2028), but you will need to manage the investments inside it. Income from your state pension currently rises by at least the rate of inflation,but drawing an income from a private pension will not necessarily have this benefit.

You usually pay tax if your pension pots are worth more than the lifetime allowance. This is currently £1,073,100. However, over multiple decades of saving and compound growth, it may be possible to inadvertently exceed this, especially if you are lucky enough to have a final salary (Defined Benefit) pension. These are rarer these days, but some companies do still provide them so you need to check carefully. 

If your total pension fund value reaches £1,073,100 then you may be liable for a tax charge when a ‘Benefit Crystallisation Event’ occurs, i.e. either when some of the fund is drawn, at age 75, or on your death. Your beneficiaries may also need to pay income tax depending whether your death occurs before or after age 75.

You can help avoid problems like this later by planning your estate early on, updating it as you get older and as your wealth grows.

It can help tremendously to seek financial advice about how to manage your pension effectively - especially given that you may accumulate multiple pension pots from lots of jobs across your working life.

"Expert advice provided by professionals delivers real value in improving people’s finances... Evidence also suggests that fostering an ongoing relationship with a financial adviser leads to better financial outcomes. Those who reported receiving advice at both time points in our analysis had nearly 50% higher average pension wealth than those only advised at the start."

'What it’s worth – Revisiting the value of financial advice'

International Longevity Centre UK, November 2019

Tax

Mitigating taxes

Use careful planning to put more money back into your pocket

Everyone should pay their fair share in taxes. Yet it is also true that many people overpay due to poor planning and organisation of their financial affairs.

A strong financial plan will include a tax mitigation strategy - although this should not be the end goal itself. Ideas include making use of your tax relievable pension contributions available (usually up to £40k p.a. but dependent upon earnings), ISA allowance each tax year (£20,000) which lets you generate interest, dividends and capital gains, free from tax.

Another might involve arranging your income so that you benefit from all of your allowances. For instance, a business owner might consider adjusting the split between her salary and dividend income, to reduce an overall tax bill. Here, it can also reduce a tax bill to ensure you are making full use of reliefs open to business assets such as Entrepreneurs’ Relief.

Married couples may also benefit from using their spouse’s unused allowances.

An adviser will be able to set out the different tax allowances available to you, and how to make best use of them for your specific financial circumstances.

Related resources

Your guide to inheritance tax planning

Inheritance tax: what it is, and how to mitigate it

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Preparing wealth for the next generation

Passing down a legacy to your loved ones

Many of us relish the idea of being able to give family members a better life after we are gone. Inheritance tax (IHT), however, is notoriously complex and can inhibit this goal if there is not a clear estate plan integrated into your wider financial plan.

Even younger people can benefit from generational planning . Consider, for instance, that you can pass down the money in your defined contribution pension(s) to your loved ones when you die. However you need to bear in mind the IHT threshold currently in force, and whether your estate will meet or exceed it as an IHT liability may be incurred.

The standard IHT threshold is currently £325,000 and IHT will be charged at 40% on any of your estate above this.

For information, here’s a summary of the IHT thresholds for the past 20 years:

How a financial planner can help

The value of professional insight and guidance

As you can see, financial planning involves bringing together multiple complex areas of wealth and finances. This would be challenging enough to do on your own if the rules, markets and UK economy all stood still. But they do not - and neither does your life. Bringing everything under a coherent set of goals and strategy takes time, expertise and ongoing attention. Here, a financial planner can take on a lot of the legwork for you.

This is not to say that you relinquish control of your finances. Rather, a good financial planner will partner with you in helping you craft a successful course towards your long-term goals. They can also act as a sounding board for your thoughts and worries (e.g. during a market crash), and act as a source of accountability to help ensure you stick to your plan.

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