4 financial planning mistakes and how to avoid them
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Did you know that one-third of Britons admit to making “silly mistakes” with their cash over the last 12 months? These include accidental app purchases on a smartphone, booking tickets and failing to cancel subscriptions.
These mistakes are usually easy to recover from and can provide a valuable learning experience. However, financial planning mistakes (e.g. with your pension) can be much more severe and have a lasting impact.
Below, our Grantham team outlines four common financial planning mistakes we have noticed over the past twelve months. We also include some ideas on how to avoid them.
We hope this content is helpful. If you want to discuss your financial plan with us, please get in touch to arrange a no-obligation financial consultation, at our expense:
01476 855 585
info@casfin.co.uk
#1 Neglecting your estate plan
For many people, inheritance tax (IHT) can seem very far away. Yet you never know what the future may hold. Without an estate plan, your loved ones could be left in trouble.
61% of British adults (31m people) do not have a will. This means that, in the event of their death, their estates (money, possessions etc.) may not be distributed as they would have liked.
Without a will, your estate is dealt with under the UK’s intestacy rules. These can throw up huge disputes which can leave family relationships in tatters.
A case in point is Scarle v Scarle, where two sisters disputed which of their parents died first. Here, it was not clear whether the property was owned as “joint tenants” or “tenants in common”. A properly-crafted will could have avoided the whole problem.
#2 Ignoring protection planning
Did you know that around two-fifths of UK homeowners do not have life insurance? Those with an outstanding mortgage to pay, therefore, risk their surviving loved ones losing their home if the breadwinners die and there is insufficient capital to keep up the monthly repayments.
A life insurance policy can provide a much-needed lump sum to keep your loved ones financially afloat for a time, possibly settling any remaining mortgage debt.
Yet other forms of financial protection can also be forgotten or ignored. A self-employed business owner, for instance, faces financial risk if he gets injured and cannot work for a time. Income protection is a policy that could offer a replacement income while he recovers.
Another option to consider is critical illness cover, which can provide a helpful lump sum if you are diagnosed with a specific condition like a stroke or heart attack.
#3 Late/poor pension planning
Are you currently employed? If so, have you checked your workplace pension recently?
Between March and July 2022, around 10% of UK workers quit their workplace scheme. This appears to be partly driven by today’s rising cost of living pressures.
Opting out is usually a bad idea as you stand to miss out on growth from compound interest, which can translate into £1,000s (even £10,000s) of lost retirement savings over a career.
Others may not have opted out, but their pension strategy is not ideal. Perhaps an individual’s contributions are too low. Or, their investment strategy is too “cautious” or too “high-risk”.
In some cases, there may be better options (e.g. more choice of funds and lower fees) in another scheme. Speaking with a financial planner can help you plan effectively, early on, to help avoid missing out on a better retirement fund at the end of your career.
#4 Neglecting your tax plan
Is your household income working as tax-efficiently as possible?
For instance, suppose a couple live together and are planning on having their first child. Should both parents work part-time and split the childcare? Or, should one person work full-time and the other stay at home?
In this case, one person earns £60,000 and the other £40,000. The first pays the 40% higher rate on £9,729 and the second only pays the 20% basic rate.
Here, it might seem that the best option is for the second person to stay at home for the child’s early years and the first person keeps working full-time. Yet could there be another way?
What if the first person went down to a 4-day working week for a time, pulling their salary down to £50,000? Whilst £9,729 of gross income would be lost, this would take the person out of the 40% higher rate and could save £3,891.60 in tax.
The second person could also work a 4-day week, with their “free” day falling on a different day of the week. This means that the couple only needs to find childcare for three days, not five.
Given that a full-time nursery place for a child under 2 can be £210 per week, this could save £1,000s in professional childcare costs.
Two parents working also means that the household can benefit from two tax-free Personal Allowances. In 2023-24, this allows the couple to earn a combined £25,140 without income tax compared to £12,570 if just one person was working.
This represents another £2,514 tax saving.
The above example is not to say that all parents should follow this model. Rather, it is to help illustrate the complexity of the UK tax system and show how easy it can be to overlook important information when making big decisions about your finances.
Working with an experienced financial adviser can help you gain a clearer understanding of your financial circumstances, crafting a more effective plan to achieve your goals.
Conclusion & invitation
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585
info@casfin.co.uk
