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The most common financial planning mistakes new clients make
Zoe Taylor • 23 August 2023
Are you guilty of bad financial habits?
There is often a trigger point for people to seek financial advice, such as an inheritance or divorce.
By this time, clients may have developed some bad financial habits or made mistakes that financial advisers need to identify and put right.
So, what are the most common errors advisers see when taking on new clients?
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Capital Gains Tax (CGT) is a complicated tax that needs careful planning for. It is very easy to fall foul of some of the rules, especially if you are not taking personalised financial advice, especially when selling property.
If you have managed to pay off a mortgage, it’s the perfect time to refocus your objectives and kick start your retirement plans. Ask someone about their life-changing moments and they’ll probably say when they met their partner, the birth of their children, and collecting the keys to your first home. Much less celebrated is the milestone of finally paying off your mortgage, however completing the repayments is a major personal achievement; you may have spent 25 years or more setting aside income, considering interest rates and calculating mortgage deals. And while this landmark may be less romantic than that first date, in many ways it’s no less life-changing. Not only will you own outright what is probably your biggest asset, you also will have access to a sizeable sum each month that previously was earmarked for your lender. And while it might be tempting to use this newfound cash on a holiday or car , it’s a golden opportunity to review your current budget, savings and retirement plans to see if you’re using it most effectively. There’s a good chance when you pay off a mortgage that you’re approaching peak earnings, family expenses may ease as children grow up, and sometimes income is augmented by an inheritance or savings maturing. It’s a perfect time to refocus. However, paying off a mortgage doesn’t always translate into increased saving. The Institute for Fiscal Studies found that when owner-occupiers in their 50s and 60s paid off their mortgage, there was little change in their pension saving – even though they benefited from more than £200 per person on average.* It’s therefore critical to spend time thinking about how best to use those extra hundreds of pounds per month that are freed up by no longer having mortgage payments. The amount per month may seem relatively modest, so it’s easy to allow it to merge into a household budget or day-to-day spending. "Think how powerful that amount could be – and you wouldn’t miss it, as you’ve had to pay the mortgage monthly for the past 25 years anyway." Thinking well ahead As with all financial planning, it’s never too early to start thinking about how to balance paying off your mortgage with saving for retirement. If, for example, you pay off your mortgage at 57 and work until you’re 66, you will have nine years of monthly savings to contribute towards your retirement. And if that retirement is the long, healthy one we all aspire to, those additional funds may be vital. If you are a 50-year-old man of average health today, the Office for National Statistics life expectancy calculator suggests you will live until the age of 84; if you are a 50-year-old woman with the same reasonable health, you are forecast to live until 87.** That would mean there are usually around 20 years after state pension age that will need to be funded – whether you’re just taking life a little easier, starting a brand new business, or fulfilling ambitions for travel, your family or other personal passions. Now consider how the money freed up by paying off your mortgage can have an impact: If you save £500 per month after a mortgage term has expired, this will add up to £60,000 over 10 years – possibly significantly more depending on how it is invested and allowing for tax relief on your contributions’. Decisions that are right for you If you don't know where to start, talking to a financial adviser can help you navigate through the different choices, and ensure your money is working as hard as it can be. Not only will they check up on your short- and long-term savings and spending needs, and the current state of your pensions, ISAs, investments and other assets, an adviser like myself can also look at the most tax-efficient use of the extra money to achieve your retirement goals, for example increasing your pension contributions or making better use of ISA allowances. Or, if you prefer to consider other priorities, expert guidance can help here, too. The Covid-19 Pandemic certainly made many of my clients reassess their priorities and in some cases, accelerate their retirement plans to spend more time with family and friends." Remember that monies freed up after a mortgage is paid off can help with many objectives - some might want to help their children, or to simply enjoy themselves through travel and comfort as they get older. But a balance between these desires, coupled with informed advice will give you the widest choice, and help keep inheritance tax at bay - this is another critical element to remember as you enjoy that warm feeling of truly owning your own home – with no mortgage to pay. The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested. The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances. * How does pension saving change when individuals complete repayment of their mortgage?, Institute for Fiscal Studies, Dec 2020 ** https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/articles/lifeexpectancycalculator/2019-06-07
To ensure a comfortable retirement, it's important to save as much as possible now. Here's a guide to help you calculate the monthly amount you should set aside. Navigating retirement planning can be complex and challenging, especially when it comes to envisioning the duration and amount of income needed. It's common to feel uncertain about how much to save for retirement, as many people struggle with this aspect of finance. In fact, according to recent research, as many as 77% of people in the UK don’t know either. But one thing’s for sure: it’s unlikely that the state pension you receive from the government will be enough to live on by itself, which means you need to take responsibility for supplementing that income with your own savings. So, if you’re thinking about how to plan for retirement, when to start saving and how much to save, here are the most important things to consider: 1. How long will you need your pension income for? To plan for your retirement, it's important to consider your projected retirement age and life expectancy. This will help you estimate the number of years your pension savings should last. While it's impossible to predict with certainty, there are some helpful facts that can provide a reasonable indication. The average life expectancy at birth in the UK is just over 79 years for males and just over 83 for females. People who’ve already made it to 65 can look forward, on average, to nearly another 19 years if they’re male and just over another 21 years if they’re female, meaning seniors today can expect to live well into their 80s. If you're considering retiring in your mid to late 60s, you should plan on having enough pension income for at least 20 years. This is especially important if you want to retire earlier, as you usually won't be able to rely on your state pension income until you're at least 67. See how long you are likely to live; https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/articles/lifeexpectancycalculator/2019-06-07 2. How much will you need on top of the state pension? To begin planning for your future, it's important to determine the type of lifestyle you aspire to and estimate the necessary funds to maintain it, assuming you remain in good health. While precise calculations require personal analysis, research can provide a rough estimate to guide your planning. According to a Which? survey of 6,300 retired and semi-retired members, the numbers are as follows: A retired couple living a ‘comfortable’ lifestyle will spend about £25,000 (£19,000 for individuals) a year for basics and for luxuries such as eating out, European holidays and hobbies. A more ‘luxurious’ lifestyle, which might include long-haul holidays and a new car every five years, would cost £40,000 a year for couples (£30,000 for individuals). 3. How much will you need in your pension pot? Before you start working it out, don’t forget that you can factor in the state pension you’ll receive, which will make a substantial contribution towards your income needs. The current 2023/24 state pension will give you a little over £10,000 per annum. If you had a pension pot of £169,175, you could use income drawdown, (which is when you keep your money invested and you withdraw a regular income from it) to generate a further income of £11,000 a year, assuming your savings grow by 3% each year. For a more ‘luxurious’ lifestyle, a pension pot of £456,500 could generate income drawdown of £26,000 per annum. 4. How much do you need to save every month to get a pot like that? This will depend on how old you are now and how much you’ve paid into a pension scheme already (if anything). Here are some ballpark figures to get you started; 30-year-olds with no pension savings so far need to put away £276 a month for a ‘comfortable’ lifestyle in retirement, and £741 for a more ‘luxurious’ one. 40-year-olds with no pension savings so far: £384 a month for a ‘comfortable’ lifestyle and £1,030 for ‘luxurious’. 50-year-olds with no pension savings so far: £647 a month for the ‘comfortable’ lifestyle and £1,735 for ‘luxurious’ (or if you already have £100,000 in your pot, topping up a further £278 per month should suffice for a comfortable lifestyle. These figures are based on receiving 20% tax relief on your pension contributions and an assumption that your pension pot will grow by 3% per year after charges. 5. What should you do next? Go online www.gov.uk/check-national-insurance-record to check your national insurance record and identify any gaps. If you are not registered for Government Gateway, you can call 0800 731 0175 to order a BR19 form to check on your state pension entitlement – retirement age, likely amount, and any gaps in your national insurance history. Lost a pension? First, try the tracing service on www.gov.uk/find-pension-contact-details. They have records of over 200,000 workplace and personal pension schemes to try to find the contact details you need. Whether these figures scare you, or make you feel comfortable that you’re on track for the retirement you want, it’s important to remember that everyone’s circumstances are different and therefore it’s always helpful to seek advice from an expert. A good financial adviser will take the time to assess your retirement goals – such as what age you’d like to retire and what kind of lifestyle you’d like to lead – then examine your current finances and work out a realistic plan that will help to get you there. These figures are for illustrative purposes only and based on Which? calculations. The levels and bases of taxation and reliefs from taxation can change at any time. Tax relief is dependent on individual circumstances. References 1. The PLSA/Loughborough University Retirement Living Standards, 2019 (Based on 26 qualitative discussion groups across 13 UK locations, with almost 250 participants from a wide range of socioeconomic and geographic backgrounds.) 2. ONS, 'National life tables – life expectancy in the UK: 2017 to 2019', September 2020 3. Which?, 'How much will you need to retire?', November 2020 (based on responses from 6,300 retired and semi-retired couples Which? members in April 2020) Links from this website exist for information only and we accept no responsibility or liability for the information contained on any such sites. The existence of a link to another website does not imply or express endorsement of its provider, products or services by myself. 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Are you looking to quickly revolutionise your finances? Check out these top ten tips that are easy to do yet have huge impact! 1. Review your Priorities The last few years have seen many of us reflect on what is truly important, reassess our goals and forced us to check on our financial resilience. For some, the slower pace of life during lockdown gave a taste of retirement that has spurred them to seriously work on their plan to leave early. Others realised how dependent they are on their ability to earn, and some simply relished time with their family and resolved to work less in the future. Whatever the impact for you, make sure your historic financial plans have adapted to your new goals. Planning can quickly become out of sync if left unreviewed – working towards historic objectives cannot get you in the financial position you now desire. 2. Use them or Lose them Many of the allowances and exemptions that you can use to mitigate tax bills are ‘for a limited time only’! Being a little more organised and seeking what can be done before the end of the tax year can help you get in a much better financial position. From ringfencing savings so they grow free of income & capital gains tax, to putting money away for the kids or gaining tax relief, lots of good can come from making plans before April! 3. How can I pay less tax in my business? The old saying ‘work smarter, not harder’ rings true here. There are all sorts of expenses that can be run through your business that you might be missing, from uniform and use of your home working equipment to pension contributions or relevant life insurance. Getting profits out of your business without paying lots of tax can be made easy for directors using carry forward allowances to get up to £180,000 into your own pension whilst gaining corporation tax relief (so it only costs your company £ 145,800). 4. Is there really a financial penalty for being a woman? Women historically have been behind men in the financial stakes, but with generational changes and the help of auto enrolment schemes, the proportion of women aged over 30 saving for retirement is at an all-time high. 59% of woman and 60% of men are now saving adequately for their retirement (which means saving at least 12% of their income or in a defined benefit scheme). 1 However, with 75% of all part time workers being women (largely due to caring responsibilities) and an annual medium difference in wages between men & women of £10,800 (men earning more), this means women will end up with a £100,000 pension deficit on average over a 44-year career. 55% of men checked how their investments were doing during the pandemic, but only 33% of women did so – women’s risk psychology and lower financial engagement is reflected in their pensions returns which, without advice, fell three times more than men’s. 2 5. Should I use a financial adviser? Recent studies have been investigating the ‘value of advice’ – the value added by and adviser above simple investment returns. They have quantified this as a further 4.08% per annum due to a number of factors, including rebalancing of funds, stopping clients making behavioural mistakes such as disinvesting at low market points, changing legislation, tax planning and management. 3 Around the house I’m happy to do DIY, but I always pay an expert to do the stuff that’s not safe for me to do or that I don’t have time to do. It’s no different with investing – think honestly if you have the time and know-how to choose between different funds, build a portfolio and manage it regularly. The most popular reasons for seeking advice include; To have a sounding board, and share the responsibility of making financial decisions, Fear of missing out on good investment opportunities or specialist advice, Fear of making bad decisions – for example taking on too much risk. Approaching a milestone or event such as retirement, receiving an inheritance, divorce or purchasing a property. 6. How can I protect my income? Building a solid foundation is crucial to ensure that you are resilient, whatever life throws at you. Keeping at least 3 months’ worth of your typical spending aside as an emergency fund brings peace of mind – something that has been highlighted recently during the pandemic. A combination of savings and adequate protection policies can give you a solid base to work from. Sadly, April 2020 saw 83% more life insurance claims (31% Covid-19 deaths, 80% male, average age 64) year on year, and GoFundMe saw a 192% year-on-year rise in the number of pages raising money in the “memorial and funeral” category. 2 Income protection has come into the spotlight also, with many of us having had a stark reminder of how much we depend on our ability to work and earn to support ourselves and our families. 7. Should I repay my debt? Often our biggest lifetime purchases are property, and the length of time the debt is spread over means even tiny interest rate change can have huge effects. Look to take advantage of the current decades low interest rates and consider fixing low rates in for peace of mind. Prioritise expensive debts that need repaying, such as credit cards and unsecured loans, even if it’s just reducing the amount outstanding. In years gone by, people have tended to receive inheritances while they were still raising their own families and buying homes, helping reduce debt early and allowing payments to be redirected to other financial goals like investments and pensions. However, with older generations increasingly expected to live into their 80s and even 90s, recent years have produced a shift – and one that poses a real challenge for women in the so-called ‘sandwich generation’ - those raising children and caring for ageing parents at the same time. Now, the financial boost arrives later in life, with the average age of inheritance lying between 55 and 64. This means we are all more responsible and need to be more financially astute and independent than ever before. 8. Have I been a victim of Fraud? 2020 saw lots of financial fraud attempts, particularly with unregulated investments, pension ‘liberation’ schemes, wine investments and cryptocurrency scams. Typically, with legitimate firms and investments, you will be covered by the financial ombudsman or the financial services compensation scheme (FSCS) – but unauthorised firms or firms stealing a legitimate companies name when cold calling are not. You can check the FCA Warning List for firms to avoid (there are over 600 of them). This list isn’t exhaustive however, although generally speaking if you get a cold call about your pension or an investment opportunity, the safest thing to do is hang up - it’s illegal and probably a scam. Even if it’s not a scam, you may also be targeted for unregulated investments, which don’t offer the same protections – such as gold, wine, UK forestry, development land or hotels. Fraudsters can be articulate and financially knowledgeable, with credible websites, testimonials and materials that are hard to distinguish from the real thing. Unrealistic returns, flattery and time pressure are all warning signs - if it sounds too good to be true, it probably is. Check out https://www.fca.org.uk/scamsmart for loads of help and advice. 9. What can I do if I can’t find my pension? The Association of British Insurers (ABI) estimates that more than 1.6 million pension plans, worth £19.4 billion are currently lost or unclaimed. That amounts to an average of £13,000 per plan. 1 According to the Pensions and Lifetime Savings Association, a single person will need £10,200 a year to achieve the minimum living standard, £20,200 a year for moderate, and £33,000 a year for comfortable – so finding lost pots can be a big help. 4 With your national insurance number, the names and addresses of your previous employers, and some help from the government’s Pension Tracing Service, you should be able to find out everything you need to know. See www.gov.uk/find-pension-contact-details for more information. When you’re on top of what you’ve got, you might also want to consider consolidating older pension plans into one to make things easier to manage. 10. Lessons to learn from the Pandemic Stay positive. Don’t let your short-term memory cloud your long-term judgement. Be optimistic. You have a better chance of success if you are hopeful of the outcome and will make more positive decisions along the way. “When you are a pessimist and the bad thing happens, you live it twice,” Amos Tversky Dream big! Set your ambitions high and you’ll have a better chance of a great outcome. It’s much more satisfying to reach 75% of a challenging goal than 100% of an easy one. Diversify. You can’t control market ups and downs, but you can do something to help control how much your investments are affected by them. Different types of investments behave in different ways at different times. So, if you’re investing in only one or two kinds, you could be exposing yourself to quite a degree of risk. Making sure that your money is spread across different types of investments and geographical locations - called diversification – could mean that the overall value of your investments is less likely to fall as dramatically than if you were just invested in one or two kinds. Mighty oaks grow from little acorns grow. Small regular contributions soon add up – between growth and compound interest the value can quickly build so don’t be conscious of seeking advice just because ‘wealth management’ doesn’t seem quite the right phrase to use right now! References 1 Women and Retirement 2020 Standard Life 2 Living a financially resilient life in the UK beyond Covid-19 – CII IWF 3 https://russellinvestments.com/Publications/US/Document/2017_Value_of_Advisor_study.pdf 4 https://www.plsa.co.uk/Press-Centre/Press-Releases/Article/PLSA-launches-Retirement-Living-Standards The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.