Personal Financial Planning - Essay Example

? Personal financial planning report for Ms Lucy Hargreaves Table of Contents Introduction 4 2) Goals & Objectives 4 2 Immediate Objectives 4 2.2) Long-term Goals 5 3) Current Scenario Analysis 6 3.1) Total Assets Analysis 7 3.2) Total Liabilities Analysis 7 3.3) Income and Expenditure Analysis 8 4) Personal Risk Management & Insurance 9 5) Retirement Planning 10 6) Investment Analysis 11 7) Inheritance Tax 11 8) Insurance Planning 12 9) Summary and Conclusion 12 References 15 Appendices 20 Table 1 – Statement of Income & taxation 20 Table 2 – Statement of Expenditures 21 Table 3 – Statement of Total Assets 21 Table 4 – Statement of Total Liabilities 22 1) Introduction Subsequent to our latest meeting, I have immense pleasure here in to enclose a report that will form the basis of your financial planning. The report aims to analyse your current state of affairs and then based on that the report will construct relevant immediate and long term financial objectives. The report further plans to develop and implement an appropriate action plan so that all objectives are achieved at most optimum utilisation and allocation of scarce resources. Considering the fact that the system is composed of both systematic and unsystematic risks and also that the future is uncertain, it will be logical to make some important assumptions in the report so that the outcomes appear more realistic. The report is sub-divided into separate sections highlighting specific aspects related to financial plan. For your convenience, all calculations are included and confined to the Appendices section of this report to maintain clarity of presentation. The report begins with a summary of your priorities and objectives, followed by an outline of your probable attitude towards risk. Then the report makes an assessment of your current financial situation based on the objectives and assumptions and finally the report concludes with recommendations on how you will be able to achieve your goals. 2) Goals & Objectives 2.1) Immediate Objectives The most apparent immediate objectives are as follows: Protection of your current investments Prioritise financial security for yourself and your family considering the fact that your brother is currently unemployed and lives with your parents Prepare a coherent investment plan for investments in OEIC as the stocks are not performing well currently Protect the capital invested by investing in less risky assets as you have low appetite for risk You are concerned that you might end up paying higher taxes to authorities on your savings and investments and hence you need proper tax planning 2.2) Long-term Goals To save towards a deposit scheme on flat at some time in the near future You are also interested to join a pension scheme so as to achieve financial security even after your retirement (Age UK, 2013) Both your parents are teachers and are planning to retire in 5 years implying that investment in a pension scheme is must for future financial security (Standard Life, 2013) Your father has minor health issues but it would be safe to plan proper health insurance scheme in advance so that during situations of emergencies your family is protected Tax savings from incomes and investments In order to achieve the above mentioned objectives, it is important that the report considers aspects of personal retirement planning, risk management, education funding, mortgage planning, and tax planning. It is also important to remember that financial risk arise from debt obligations and hence a part of saving s and investments must also be channelled towards payment of existing liabilities or debts (like use of credit cards and unsecured debts). 3) Current Scenario Analysis On our first appointment I came to know about the fact that you have already purchased Gilt securities worth ?1,500, shortly after your graduation. The primary reason that you have invested in this type of asset class is that you consider Gilts as less risky investment. It was also given that a couple of years ago you purchased OEIC holdings following a recommendation in newspaper article, which you are concerned about mostly because of its current performance. From the above discussion it is apparent that your attitude towards risk is not aggressive and that you seek financial security for yourself and family by protecting your investments from adverse scenarios. You have also acknowledged that there has been no rational plan behind the purchase of shares. Also, following the death of one of your close relative about 6 months ago, you have inherited ?70,000 and the low returns earned from this amount received have prompted you to seek financial advice. This implies that you definitely require financial assistance as low returns are not sufficient to achieve financial security. But considering your appetite for risk (which is low), I cannot recommend you to invest the amount into risky assets. There are also issues related to taxes that are bothering you. You are concerned that you might end up paying higher taxes to authorities on your savings and investments. Hence, you need a proper tax saving scheme that will protect your capital investment and also be tax efficient. You also have a brother who lives with the family and is currently unemployed. Hence it is important to cover the expenses of your brother while constructing the financial plan so that there remains sufficient financial security before your brother get another job. 3.1) Total Assets Analysis From the facts provided by you it is apparent that total assets are more than your total liabilities. It was identified that you have saved well accumulating total assets of over ?78,000. Your total bank balance of ?74,250 which includes ?70,000 recently received in form of inheritance and is thus placed in bank account. If we assume that this sum is safely invested in post office or bank then the interest earned on deposit will range somewhere between 1.5%-2.00%. This means that you can easily earn ?75,363.75-?75,735. As you have invested in Gilt/bonds considering it as risk-free investment with nominal value of Gilt is ?1,500, the value realised is ?1,620. The investments in OEIC where you have purchased 250 shares have been found not to perform below expectations (Reuters, 2013). The stocks of United Utilities are currently yielding -0.11%, that is much less than current holding treasury rate of 8% (Bloomberg, 2013). Hence the quoted shares require alternative investment option. The life insurance premium is paid by your employer and the sum assured is 4 times salary or ?7,600. As the frequency of premium is yearly it means that the sum insured would be ?91,200 (?7,600 x 12). 3.2) Total Liabilities Analysis From the facts that you have provided it is clear that your current liabilities include credit card debt which is unsecured and the outstanding amount is ?3,650. If we assume that the bank will charge you an interest of 22% pa, then your outstanding liability due becomes ?4,453 (including ?803 interest payable on outstanding credit). You have also revealed that you have NatWest unsecured personal loan worth ?5,500 outstanding and Next Store Card liabilities worth ?780. The NatWest personal loans between ?1,000 and ?14,950 may be repaid over 5 years at 6.4% (Money, 2013). Hence at the end of 5th year your total outstanding liability would be ?5,852. There has been a fury amongst the mob regarding the 32.5% store card on outstanding debts of customers. If the management keeps their policy unchanged then it is very important to payoff this liability as early as possible (NatWest, 2013). Thus the very basics of financial planning suggest that the investor must set up an emergency fund between 3-6 months of annual income so as to cover contingent liabilities and protect from unforeseen expenditures. Interest repayment of ?1,408.50 (i.e., 253.50+352+802) creates an unnecessary financial expense which further limits the chances of achieving your objectives (Daily Mail, 2013). 3.3) Income and Expenditure Analysis An analysis of your expenditure and income will help to determine the surplus income available for further investment or saving and it will also help you to achieve your long term goals like contribution to pension fund (The Guardian, 2013). Your current expenditures may be represented graphically as follows: From the facts provided by you it is clear that in the previous fiscal you have earned ?35,700 from current employment, income from shares unit trust, gilts etc. You have also suffered a net loss of ?50 from deposits. The total expenditure per year is approximately ?3,350. This means that you have good level of surplus of about ?32,350 that you may invest in fixed income securities like bonds or save in bank to earn interest (Bloomberg, 2013). 4) Personal Risk Management & Insurance Your long term objective is to save towards a deposit scheme on flat at some time in the near future. This is not the only long term objective as you would like to join a pension scheme so as to achieve financial security even after your retirement (Standard Life, 2013). But considering your current income and investments you are unsure whether you will be able to achieve both or not. Not to mention your immediate family and dependents, your father is planning to retire in 5 years has minor health issues. Thus, there is requirement for health insurance; considering the worst case scenario any underestimation of health issues might lead to huge cash outflows. However, you mother is a teacher too like your father but does not have any health issues. Thus, only one health policy is sufficient. This will ensure that when she plans to retire in 5 years your family will be able to allocate the sums in pension schemes. From the above discussion it is recommended that it is important for you to set up an emergency fund of at least ?5,000 (which is more than 3 times your current liabilities) from your bank available balances that you will be able to withdraw at any point of time in situations of emergencies. Hence, your immediate action plan should be to contact your debt providers and enquire exact details regarding early payment penalties (if any). 5) Retirement Planning You have mentioned that you would like to save towards a deposit on flat at some time in the near future. You would also wishes to join a pension scheme. A review of house prices suggests that they are likely to fluctuate in the near future. You have many options of investment in deposit such as real estate investment trust, fixed deposit schemes, investment in government fixed income securities, etc. that will be safe investment asset class protecting your capital. But since you don’t have any property to rent, you may also mortgage new property and later pass it to your children. However, this option will create considerable monthly expenditure in form of mortgage repayment. Income Planning - Your income may be increased by reducing your expenditures and utilising your investments and savings in tax efficient methods that will generate modest return and will also likely increase overall wealth. Early retirement planning or contributions to pension schemes will help you to achieve your long term objective of financial security even after retirement. As you have mentioned that you are approximately 32 years old, by early planning income plans you will be able to reduce liabilities significantly. The sum realised may be used to support your family when your parents will retire after 5 years. Hence, it is recommended that you start investing in pension contributions until retirement. An annual sum of ?12,000 will be sufficient and will fetch you ?225,000 at the time of retirement. You may then use the remaining surplus left for purchasing a flat (University of California, 2013, pp.13-17). 6) Investment Analysis You have a total sum of ?74,250 in your bank account including ?70,000 as inheritance income. You have also invested in quoted shares worth ?25,000 which is currently not performing well. Investments in Gilt/bonds will derive ?1,620 from investment. As you have frankly stated that you are concerned about the safety of investments implying that your attitude towards is risk averse. Hence, it is better to restructure your product portfolio be channelling greater portion of investment in low risk investments such as government gilts and bonds. These securities are very safe investment asset class in terms of protection against insolvency and inflation. It is strongly recommended that you redeem the amount invested in quoted shares and redirect the investible sum into cash deposit, bonds and gilts. 7) Inheritance Tax It is recommended that you appoint a professional solicitor to draft a will as soon as possible as you have inherited assets worth ?70,000 from the recent death of one of your relative about six months ago. Inheritance tax is paid on the estate inherited by the beneficiary when someone dies leaving house, gifts, or cash for the beneficiary. It is payable at the rate of 40% over ?325,000 for the tax year 2013-14. In your case it is exempted because ?70,000 is below threshold of ?325,000. However, if you believe threshold might exceed in future, inheritance tax can be avoided by passing the money or property to four children or by gifting it to your spouse or any qualifying charity established in EU. Such gifts are exempted from inheritance tax and hence it will allow you to avoid inheritance tax (HMRC, 2013). 8) Insurance Planning Although you and your mother do not have any major health issues but you have mentioned that your father has minor health issues. Your current insurance policy is sufficient to cover the issue as the sum insured is four times your salary and the premium is paid by your employer. Although investment in new policy may seem costly but this can also be viewed as affordable and moderate expense considering good health requirement. It is also important to note that private insurance provides up to 2/3rd of policy contribution in the event of critical illness (The Telegraph, 2013). Investment in private insurance policy will ensure same standard of living irrespective of situation of critical illness (Sainsbury, 2013). Hence, by acquiring single life and critical illness cover policies at just ?220 per month will be sufficient. There is also an option to acquire income protection policy for just ?134 per month (HSBC, 2013). You may delay payment for protection of income policy in order to reduce premiums. There is no need to discontinue current policy as the premium is paid by your employer (Barclays, 2013). 9) Summary and Conclusion In summary I would like to mention that considering your current circumstances and resources, you will be able to achieve your immediate and long term objectives with careful planning and regular reviews. The amount that you have inherited is below ?325,000 and hence is not like to be taxable under inheritance tax. You may reinvest a third of ?70,000 in government bonds so that your capital is protected and you also earn regular interest. You are advised to continue your existing life insurance policy as the premium is paid by your employer. You are also expected to receive a sum assured value four times your salary. As your father has minor health issues you may also opt for private insurance that will yield lump sum amount in the form of non-taxable income. You are also advised to exit investment into quoted shares as the performance of United Utilities and Centrica is not very well. The amount realised may be channelled into pension scheme which will ensure long term financial security after retirement with no risk. Since you total income exceeds your total expenditures, you have significant surplus incomes a part of which may be used to pay off your outstanding liabilities worth ?4,453. Many aspects need to be revisited frequently with the ever changing needs, circumstances, priorities, etc. of the client. Not only personal requirements influence financial planning but there are many external factors such as government legislations, investment returns, market volatility, etc. also influence changes in financial planning. Hence, it is recommended that you update your financial plan by reviewing it at least once a year to ensure that in order to achieve financial objectives all necessary amendments are made in response to respective external as well as internal changes. References The Guardian, 2013. 'Simplified' NatWest and RBS accounts leave some savers out of pocket. [Online]. Available at: http://www.theguardian.com/money/2013/jul/15/simplified-natwest-rbs-products-inferior-rates. [Accessed on December 04, 2013]. United Utilities, 2013. Business Overview. [Online]. Available at: http://corporate.unitedutilities.com/default.aspx. [Accessed on December 04, 2013]. Bloomberg, 2013. United Utilities Group PLC. [Online]. Available at: http://www.bloomberg.com/quote/UU+:LN. [Accessed on December 04, 2013]. NatWest, 2013. NatWest Helpful Banking. [Online]. Available at: http://www.natwest.com/personal/loans-ca.ashx. [Accessed on December 04, 2013]. NatWest, 2013. Personal Banking. [Online]. 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Available at: http://www.barclays.co.uk/Insurance/Life/BarclaysLifeInsurancefromAviva/P1242614071729. [Accessed on December 04, 2013]. Standard Life, 2013. Your Pension Wake up Call. [Online]. Available at: http://www.standardlife.co.uk/1/site/uk/home. [Accessed on December 04, 2013]. Sainsbury, 2013. Sainsbury’s Bank: Life Insurance. [Online]. Available at: http://www.sainsburysbank.co.uk/insuring/ins_lifecover_life_skip.shtml. [Accessed on December 04, 2013]. Bloomberg, 2013. Market data: Centrica Plc. [Online]. Available at: http://www.bloomberg.com/quote/CNA:LN. [Accessed on December 04, 2013]. Reuters, 2013. News: Centrica PLC (CNA.L). [Online]. Available at: http://in.reuters.com/finance/stocks/companyNews?symbol=CNA.L. [Accessed on December 04, 2013]. HSBC, 2013. HSBC Life Choices Insurance. [Online]. Available at: http://www.hsbc.co.uk/1/2/insurance/life-illness-income-cover. [Accessed on December 04, 2013]. The Telegraph, 2013. 'My ?62 a month became a life-saver'. [Online]. Available at: http://www.telegraph.co.uk/finance/personalfinance/insurance/criticalillness/10355373/Critical-illness-cover-My-62-a-month-became-a-life-saver.html. [Accessed on December 04, 2013]. Age UK, 2013. Pension calculator - planning for your retirement. [Online]. Available at: https://www.ageuk.org.uk/money-matters/pensions/pension-calculator/. [Accessed on December 04, 2013]. Gov UK, 2013. Plan your retirement income. [Online]. Available at: https://www.gov.uk/plan-retirement-income. [Accessed on December 04, 2013]. Pension Advisory Service, 2013. Online planners. [Online]. Available at: http://www.pensionsadvisoryservice.org.uk/online-planners. [Accessed on December 04, 2013]. The Guardian, 2013. Retirement planning. [Online]. Available at: http://www.theguardian.com/money/retirement-planning. [Accessed on December 04, 2013]. Fidelity, 2013. What retirement do you want?. [Online]. Available at: https://www.fidelity.co.uk/investor/pensions/retirement-planning/planning-tool.page. [Accessed on December 04, 2013]. HSBC, 2013. Planning Your Retirement. [Online]. Available at: https://financialplanning.hsbc.co.uk/tool/808/retirement-planner. [Accessed on December 04, 2013]. Prudential, 2013. Flexible Retirement Plan (with SIPP options). [Online]. Available at: http://www.pru.co.uk/pensions_annuities/prudential_pensions/flexible_retirement_plan/. [Accessed on December 04, 2013]. Cornell University, 2013. Pre-Retirement Planning. [Online]. Available at: https://www.hr.cornell.edu/benefits/retirement/preretirement_planning.html. [Accessed on December 04, 2013]. University of Minnesota, 2013. Retirement Savings Plans. [Online]. Available at: http://www1.umn.edu/ohr/benefits/retiresave/. [Accessed on December 04, 2013]. University of Kentucky, 2013. UK Cooperative Extension Service: Retirement Planning. [Pdf]. Available at: http://www2.ca.uky.edu/agc/pubs/fcs5/fcs5437/fcs5437.pdf. [Accessed on December 04, 2013]. University of California, 2013. Retirement Handbook. [Pdf]. Available at: http://atyourservice.ucop.edu/forms_pubs/misc/retirebook.pdf. [Accessed on December 04, 2013]. HMRC, 2013. Inheritance Tax. [Online]. Available at: http://www.hmrc.gov.uk/inheritancetax/. [Accessed on December 04, 2013]. Gov, 2013. Inheritance Tax. [Online]. Available at: https://www.gov.uk/inheritance-tax. [Accessed on December 04, 2013]. The Guardian, 2013. Inheritance tax – how much, how you pay it, and how to reduce it. [Online]. Available at: http://www.theguardian.com/money/2013/feb/04/inheritance-tax-how-much-how-pay-reduce. [Accessed on December 04, 2013]. Money Saving Expert, 2013. Inheritance Tax (IHT). [Online]. Available at: http://www.moneysavingexpert.com/family/inheritance-tax-planning-iht. [Accessed on December 04, 2013]. The Telegraph, 2013. Telegraph Inheritance Tax Service. [Online]. Available at: http://www.telegraph.co.uk/financialservices/legal-and-tax-advice/inheritance-tax-service/. [Accessed on December 04, 2013]. The Telegraph, 2013. 10 legal tips for avoiding UK inheritance tax. [Online]. Available at: http://www.telegraph.co.uk/finance/personalfinance/expat-money/8094031/10-legal-tips-for-avoiding-UK-inheritance-tax.html. [Accessed on December 04, 2013]. BBC, 2013. Tax avoidance: Individuals' common schemes. [Online]. Available at: http://www.bbc.co.uk/news/business-17665780. [Accessed on December 04, 2013]. PWC, 2013. United Kingdom: Indirect taxes. [Online]. Available at: http://www.pwc.co.uk/tax/indirect-taxes.jhtml. [Accessed on December 04, 2013]. Appendices Table 1 – Statement of Income & taxation Income & taxation   Per month (?) Per year (?) Earned income   35,700 Income from deposits (net) Less than ?50   Income from gilts etc (net)   96 Income from shares, unit trusts etc   315 Rents etc Not applicable   Other investment income n/a   Pensions or annuities n/a   State benefits n/a   Total monetary income 35,700 411 Taxable benefits     Total annual income 35,700 411 Tax allowances Single person’s allowance   Table 2 – Statement of Expenditures   Per month (?) Per year (?) Food 280   Clothes 110   Miscellaneous   1,250 Car loan repayment 250   Rent & Council Tax 900   Travel, motoring expenses 240   Socialising 130   Gifts, birthdays   500 Holidays   1,800 Utilities 80   Gym membership 62   Loan interest 80   Total 2,132 3,550 Table 3 – Statement of Total Assets Total Assets Residence None Other property n/a Bank accounts ?74,250 Building Society accounts None Gilts, bonds etc ? 1,620 Life assurance ? 7,600 ISA’s None Unit trusts None Investment trusts/OEIC’s current market value per share 253.70 Quoted shares (market value per share) 499.45 Unquoted shares None Table 4 – Statement of Total Liabilities Liabilities Nature of Loan Secured/unsecured Amount Credit card Unsecured ?3,650 NatWest personal loan Unsecured ?5,500 Next store card Unsecured ?780 Read More