Everyone, of my clients’ financial situations is unique to them, and yet there are some common financial goals that I am asked about time and time again, along with the question; “can I afford to do this?”
The answer is of course also unique to them, but by answering some questions pertinent to your goal you can find out for yourself what it will take to reach it.
Time is almost always your friend when you address the big financial commitments in life and I would encourage everyone to think ahead as much as they can. There is something very satisfying about having a direction to travel towards, even if that direction might at the outset seem out of reach.
But even if you do approach a goal a little later than may be ideal, it doesn’t mean you can’t get there. My clients are often surprised that their goal is more in-reach than they had expected. Never underestimate how empowering it is to take action for yourself; and doing so can alleviate serious sources of stress.
Below are five questions I’m often asked by clients, alongside my thoughts on what you can do to determine if you can afford them.
1. Should I pay for my children’s university education?
Student loans for post-2012 university goers start to incur interest from day one at a rate of 3% plus the retail prices index (RPI) measure of inflation (notice, not the consumer prices index (CPI) rate of inflation). This currently stands at 6.1%, which is a significant cost.
One would assume that students anticipate earning over £25,000 in future, which is the point at which loans begin to need to be repaid, so if you can afford to pay for your children’s university education then the simple answer is to do so.
There is a school of thought that taking on the loans will allow lessons around money to be taught, and student loans are wiped after 30 years. But there are other ways to teach these life skills. For instance, stop paying for phones, cars, clothes and give your child a budget. This means they will have to manage their own affairs and learn those lessons early.
2. When should I start planning to reduce my inheritance tax bill?
This is a much bigger topic than just reducing the inheritance tax (IHT) bill as you’re dealing with two of society’s greatest taboos; death and money. The key here is to begin with the end in mind. What do you want your legacy to be? Who do you want to benefit? Effective planning flows from this starting point.
When to start planning will depend on your level of assets. A common misconception is that this should be left till later in life, but where you have assets in excess of your own needs then the sooner the better; this topic should then be regularly reviewed, ideally annually.
Due to the changes in death benefits for pensions, you should also consider when you start to take income from your assets. A general rule of thumb would be to fund retirement from assets that form part of your estate before drawing from pensions, which do not. That way you have the potential to reduce your inheritance tax liability.
3. Am I on track to retire successfully?
Firstly, you need to consider what life will look like. Will your expenditure increase or decrease? What does success look like? What age do you want this to happen? Is it a number pertinent to what you want or anchored to your pension scheme retirement date?
Secondly, you should consider the state pension for both yourself and your partner. Go online to Gov.uk/check-state-pension and get a forecast. If you have gaps, then consider making voluntary national insurance contributions (NICs). They tend to be good value.
Quantify what your budget needs to be, what your guaranteed income is, and if there is a short fall. What assets will you use to meet your objectives? How will they be taxed? It is important to look at the net position. You can then start to understand the most effective way to meet your objectives.
4. Should I pay my mortgage off?
There’s something psychologically satisfying about paying off debt and for some this is the right decision.
But considerations here need to be when is the debt to be repaid? If you have an interest-only mortgage, how are you saving to meet the repayment? Will you be able to remortgage?
You might want to consider making overpayments but generally while this might feel good, it might not be the most effective way to use your resources. For example instead of making overpayments it might be better to use excess money to fund pension contributions, which will be tax relieved or may attract additional employer contributions.
5. I am starting a family what do I need to think about?
You need to understand what maternity benefits are on offer from your employer. You need to think about how much time you will have off and how you will meet your expenses if your income reduces. Would you be able to live on less money? Will you be able to return to work part-time? Would your partner like to stay at home? Will the wider family be able to help out financially or with time?
The other component is to think about risk. I realise that culturally it is hard to be thinking about death or illness at the best of times, especially when you are bringing new life into the world. But wills, life cover, and employee benefits should all be reviewed and be in place and fit for purpose.
Anne McClean is a senior chartered and certified financial planner at advisory firm Charles Stanley. She has been awarded a Fellowship of the Personal Finance Society and is an associate member of family law organisation Resolution and a member of STEP, the professional association for practitioners who specialise in family inheritance and succession planning.