Ian Thomas, Pilot Fiancial Planning
Financial Planning
Financial Planning Week takes place this month between the 21st and 27th November. It’s hardly up there with Red Nose Day in terms of its public profile, admittedly, but it is a timely reminder of the importance of taking control of our finances.
Put simply, financial planning involves working out what’s most important to you and your goals in life. Then, by adding timescales and costs, you can work out how to get where you want to be by planning your finances accordingly. It sounds simple, and to a certain extent it should be, but it’s a sad fact that many people spend more time planning their annual holiday than taking positive steps towards achieving their more profound objectives.
Aside from the individual cost in terms of dreams unfulfilled - or perhaps more prosaically, tax unnecessarily paid - there are other reasons why this matters to us as a society.
The first is that we are all living longer: average life expectancy is increasing by around one year every five years at the moment. On one hand that’s great news, but it also means that we need to think more carefully about how we support our desired lifestyle after we stop working. In the UK, retirement at 65 was defined by The Contributory Pensions Act (1925) when life expectancy at birth was 59 years. Relatively few people lived long enough to draw a pension. A married couple, retiring today aged 65, has a 50% chance of one of them living to 90.
The second issue we face is that the post-war baby boomer generation is now reaching retirement. The following generations are smaller which means that the demographic challenge caused by longer life expectancy will be exacerbated. In 1970 there were over four people in work, for each person in retirement, but by 2050 this ratio will be just over 2:1. Putting it another way, by the time they reach middle age, every child at school today will effectively, through taxation, be supporting a retired couple. This will of course be in addition to paying for their generation’s needs and saving for their own futures.
A third trend is the demise of final salary pensions. This type of gold-plated pension is being rapidly replaced by so-called ‘defined contribution’ pension schemes. Employers have effectively transferred investment and longevity risk to employees, who must now take full responsibility for deciding how much needs to be saved and where this money should best be invested. The figures will vary of course but, at current interest rates, for each £10,000 of (inflation protected) retirement income, a 65 year old man requires a pension fund worth £250,000. For a woman the corresponding figure is even higher. The implications of this are only just beginning to sink in.
And yet things are not a bed of roses for some of today’s retired folk either, with the State Pension barely covering basic living costs. Even those with carefully amassed private savings are being affected by record low interest rates, poor stock market performance and annuity rates which provide less than half of the pension income they did 20 years ago. In this environment, careful financial planning is the key to making the most of a difficult situation. Those who are ‘comfortable’ also need to be thinking about how to take advantage of their good fortune, both for their own and their children’s sake.
Whether we like it or not, financial planning is going to be an increasingly important aspect of all our lives in the future, but not everyone wants – or needs – to pay for professional advice. There are simple measures that we can all take. When matters get a little more complex, however, a professional financial planner can help you define and attain your objectives with less risk and cost than if you tried to do this yourself. They will help you become financially organised and make sure that your assets are properly structured, enabling you to relax about money issues and creating more time for you to focus on what really matters.
You can find out more about financial planning, including how you can help yourself, or find a professional planner at the Institute of Financial Planning’s website: www.financialplanning.org.uk. All financial advice is regulated by the Financial Services Authority – and details of qualified Independent Financial Advisers can also be found online on the FSA Register www.fsa.gov.uk/register/home or at www.Unbiased.co.uk.
Contact Ian Thomas at Pilot Financial Planning:
08453 712 808, ian@pilotfinancialplanning.co.uk
www.pilotfinancialplanning.co.uk
Pilot Financial Planning is authorised and regulated by the FCA. This article is intended to provide helpful information of a general nature and does not constitute financial advice.
First Published November 2011 By The Dart