Under the bonnet: Why a financial MOT should be on your to-do list
Just like your car, your finances need keeping an eye on to ensure everything is running smoothly.
Even if you have a solid financial plan in place, it still needs to be updated from time to time to ensure it reflects any life changes.
Clients of Brewin Dolphin’s financial planning service have their arrangements reviewed at least once a year, while discretionary management clients have their portfolios reviewed every 12 to 18 months – although they are monitored on a daily basis. But for those who have a more hands on role in managing their finances, here are some tips to ensure you keep everything running smoothly.
Rebalance your portfolio
A lot can happen in 12 months and events could mean that your investments need to be revisited. Some might simply not be performing, while others might be doing so well that it could be time to take profits; it is usually wise not to become over-exposed in a particular company or sector.
Overall, however, it is a matter of ensuring that your portfolio still reflects your attitude to risk, your time horizon, and your strategic goals.
Surviving the sandwich generation
Whether it is nursery and childcare costs, school-fees planning, university fees, helping your kids with a house deposit or a first car purchase, it is all a drain on the family finances. At the same time, you might find yourself caring for elderly relatives whose health may be deteriorating. It is an increasingly common demographic phenomenon and has been coined the ‘sandwich generation’.
Although members of this generation may have high incomes, this period provides a host of complex financial challenges that often have to be met simultaneously. The result is one of the most financially squeezed stages of our lives.
Discussing care for ageing relatives can be tricky, and it often helps to have a financial planner meet the whole family so that these emotionally charged issues become easier to discuss. A financial plan to manage the expenses can be one of the most complex, so take advice without delay.
Check your insurance policies
Many people who have previously received some advice may have insurance policies such as income protection, life assurance and critical illness.
Rather than automatically renewing them each year, check that the amount of income you are insuring is still appropriate. Have you had a pay rise? Have you increased your mortgage or have you paid the mortgage off? You might need to increase or decrease your cover accordingly.
Most importantly of all, if you haven’t got life assurance or income protection, ask yourself why. If you are working and have dependants and a mortgage, how will they cope if you die or lose your job? Not having the appropriate financial protection could be a glaring omission in your plans.
Are your retirement savings on track?
One of the most common challenges is building a big enough retirement fund. This could mean topping up your pension as much as you are permitted each year, or switching funds altogether. However, for others, it could be a matter of ensuring the pension fund does not breach the lifetime allowance, currently set at £1,073,100. Anything over this amount can be subject to tax of as much as 55%, so check with an adviser to see if action is necessary.
More commonly, savers need to increase their contributions to maximise tax efficiency and hit their retirement targets. The annual allowance is currently set at £40,000 per year. Many people do not use this allowance in its entirety but in the right circumstances it can be well worth using.
Boost pensions and savings by investing tax-efficiently
There is a huge array of government-sanctioned tax allowances but many have to be actively claimed, requiring assertiveness on your part. Have you used all your ISA allowance? It is currently set at £20,000. Have you opened a Junior ISA for your children? This lets you save up to £9,000 per child in the 2021/22 tax year. Are you using your £12,300 capital gains tax exemption? You can also ensure your loved ones are given a head start by gifting money to them each year, and this has the added effect of reducing your estate when calculating inheritance tax.
Sell the dogs (not Butch, though)
All portfolios accumulate the occasional poor performer. The problem is, investors can become attached to holdings they have owned for some time, and reluctant to sell in the hope they will recover. A dog share can drag down your portfolio so you might need to be ruthless and admit to yourself when a share or fund needs to be ditched.
Having an independent adviser assess your portfolio provides you with an objective analysis of your savings. This can be an extremely invaluable process.
The value of investments, and any income from them, can fall and you may get back less than you invested. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Neither simulated nor actual past performance are reliable indicators of future performance. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness. Opinions expressed in this publication are not necessarily the views held throughout Brewin Dolphin Ltd.