Life Stages and Financial Products - Essay Example

Life Stages and Financial Products Introduction Life expectancy in the UK is relatively high. Consequently, millions of Britons will live on into their seventies and eighties. Unless a person plans wisely throughout their productive years, it is likely that they may struggle to make ends meet in retirement. Furthermore, poor financial management has adverse implications on quality of life lived during one’s working years. The ideal goal for all individuals is to be financially secure at every stage of life regardless of the ups and downs that occur. This ought to start with an understanding of the different life stages and customisation of financial instruments and products for each stage. Lifecycle of a typical UK individual A financial lifecycle begins with young professional life. At this point, a person will have left university or college and will start their first job; they are normally in their twenties. Some concerns for individuals in this demographic include moving out of their parent’s or roommates houses or learning how to save their money. Most individuals assume that they have a lot of time on their hands and this could prevent them from building a strong portfolio. Failure to start early at this phase could deny one the opportunity of enjoying interests that accrue from time. Additionally, starters may struggle with minimal income, so this could be a challenge. Student debt may also trouble persons in this category as they attempt to cover their living expenses in the process (Koh, 2012). Young people often want to have fun and enjoy the benefit of not being tied down by responsibilities. They may be focusing on climbing the career ladder and getting to know what they really stand for. Perhaps the biggest challenge for young professionals is that they lack information on how to invest. They may be boggled by a plethora of information available on financial security. Some may purchase cars at this stage or do so later. Starting a young family is the next phase. Usually, one will get married and start having children. It may begin in the late twenties or early thirties. At this stage of life, people will need to think of relocating to a bigger house that will accommodate more people. Additionally, concerns about merging two people’s financial lives together may arise. Matters to do with health and education for the young children also need to be addressed. It is often necessary to plan for a rainy day as several dependants are in the picture (This is Money, 2013). Expenses at this time will often rise as children and family members can be quite expensive. Family heads often struggle with the need to meet their daily needs while at the same time make plans for the future. Mortgage expenses are a reality at this point. Accidental injuries may also occur. In addition, one may want to enjoy some luxuries on occasion. Knowing how to cope with these predicaments is essential to remaining financially secure. Budgeting with one another is important in creating financial harmony in the home since incomes and expenses are shared by both partners (Griffins Accountants, 2013). Mid life refers to that stage of life where one has been working and having a family for over a decade. They often have a stable income that they can live on comfortably. Post secondary education may be a reality or could be approaching. It is quite unlikely that one would choose to change their careers when they belong to this category. At this time, one may start to plan for retirement as it is close. Furthermore, mid life members may be concerned about their income levels when that time comes. Most times, individuals in this category are in their forties. Towards the end of this stage, children will have left the home and may be working on their own lives. Therefore, such individuals may have more money on their hands. It is for this reason that they need to plan wisely for the near future. Retirement is the final phase of a person’s financial lifecycle. Here, the individual is no longer working. They often experience challenges with their health and well being. Furthermore, because no income is forthcoming, they may want to think about moving to a smaller house. Inheritance planning is a critical issue as well as it may be taxed and could occur sooner rather than later. Most people at this stage will have plenty of time on their hands and may take a hobby. Learning how to garden, playing golf or travelling around the world may be such objectives. The biggest challenge for most people in this category is how to fund these activities (Wells, 2008). Financial products relevant to each stage Young professionals Young professionals need to have an Individuals Savings Account (ISA). The primary benefit of opening such an account is that no taxes will be charged on interests or benefits accrued. This approach gives individuals greater flexibility to access their money while still giving them an opportunity to build their financial resources. An investor has the option of placing their savings in cash ISA or an investment ISA. However, a 50% limit exists on cash savings while all the savings may be put into investment ISAs. In this regard, the young professional could take advantage of this fact and invest in property, shares or other fixed interest investments (Huston, 2010). These are preferable to cash investments because their potential for growth is quite high. A maximum of £11,520 annually is allowed under this product. Pensions may still be an option for young professionals although this is often not on their priority list. Those who can get a head start on this option will find that their returns will be much higher in the long run. If a company offers reasonable pension schemes, then it may be wise to consider this option as well (This is Money, 2013). Family life Family life members may need to organise weddings, purchase homes and take care of their children. A person at this age needs to have a retirement saving plan. This implies joining the company retirement scheme if applicable. In cases where pension schemes exist, then the employer ought to make contributions on the earner’s behalf. However, this financial product is not just a passive one. The organisation usually invests the money in different ways. Instead of merely accepting the pension scheme as it is, a family head needs to pick solutions that are best suited to their financial objective. Too often than not, people settle for default pay schemes; this may not always yield preferred results. It is best to closely monitor how the pension scheme in one’s organisation works in order to reap the best rewards out of it (Hershey et. al., 2010). In some circumstances, auto enrolment may affect the extent to which members belong to a pension scheme. The National Employees Savings Trust –NEST – is the financial product in which auto enrolment occurs. Auto enrolment refers to those pension schemes in which employers automatically enter their employees so long as they qualify. Qualifications include having a salary of more than 9,440 pounds annually and a maximum of 41,450 as well as being above the age of 22 years. The UK government is implementing auto enrolment gradually among businesses in the country in order to give employers enough room to prepare the need resources. In this scheme, the employer will contribute 2% while the employee ought to contribute 1% of their earnings. However, by 2017, the figures will change to 8% and 3% respectively (McCrea, 2013). At this stage, a family man or woman may also consider taking a risk-based approach to investment. Instead of simply relying on their ISA, they need to consider purchasing shares as well. It is often stated that in the long run, shares will yield greater returns than savings. Since this stage of the lifecycle usually falls in a person’s thirties, then they still have adequate time to wait for returns on their investments. The process of carrying this out is what many in the financial field refer to as equities. Investing in equities allows individuals to enjoy dividends that match the return on investments of those organisations. Capital gain may also occur in the event that the shares bought increase. This implies that the said investor will make a capital gain. One must also be aware of the element of risk. Prices could fall or rise depending on market dynamics. Therefore, preparation for such fluctuations is paramount (Peetz and Buehler, 2013). Collective investments may also be another financial product that family men and women may want to consider. It is an alternative to equities and even less risky because it involves pooling together money from a number of investors in order to create a capital sum. Fund managers will then deal with these funds by investing them in a series of portfolios. Some of them may be shares and stocks. However, because the products bought come from various companies, then investors are shielded from the risks that come with focusing on only one organisation. This is an indirect way of protecting oneself from equities. In family life, it may still be vital to consider some moderately risky financial products. Investment trusts are yet another way in which family life earners can continue to get returns for their investments. Investment trusts are companies found on the London Stock Exchange as exclusive investors of shareholders funds. They often dwell on shares and securities. The benefit of this kind of financial product in the 40s is that one can easily know the value of shares and assets in the trust. This pooling together of resources as well as having a definite time frame could assist in building up one’s returns (Martin, 2007). Regardless of embracing risk, one should not abandon their long term savings portfolio as well. Therefore, the family man still needs to keep building their Individuals Savings Account. It is often advisable to go for a mix of investment ISAs and cash ISAs at this period. This would provide an individual the liquidity needed to meet emergency needs in the event of loss of a job or the switch from one job to another. Investment ISAs would take care of the long term needs. Mid life As mentioned earlier, a person in their forties will usually think about retirement. Therefore, pension schemes and other personal retirement plans will still be the financial products of choice. In order to make them work effectively, any raises or contributions obtained from one’s employers needs to be invested in the retirement scheme. As one carries this out, one needs to plan the income that they expect to have in retirement; this affects the contributions and rates which will take place. Usually, one must come up with the retirement date and then establish the minimum income that will be appropriate for them. Sometimes one may adjust their pension fund depending on their financial decisions after retirement. If annuity funds are part of them, then it may be necessary to make the investment less risky at this stage. People in the midlife cycle ought to minimise risk equities and place their money in secure cash investments. It would be devastating for a potential retiree to lose most of their life savings just before they retire due to a stock market crash. Capital Investments bonds for ten year periods or more could be considered as well. This means investing in government bonds, corporate bonds or other assets which are deemed to be relatively secure. The investor can also enjoy the benefit of deferring one’s tax liability. This allows individuals to withdraw small amounts from the portfolio (of up to 5%) without any tax liability (McCrea, 2013). Since fund managers are in charge, it is likely that effective and secure outcomes will result. The Self Invested Personal Pension (SIPP) is one of the financial products that may be considered at this state. This option enables pension investors to focus on maximising their respective funds. Persons who select this option will often have accumulated large sums of money that are sizeable enough to create sufficient outcomes. Various SIPP alternatives are out there in the market, it is up to the investor to look for the ones that are relatively cheap and will reap the greatest value for them. Retirement The most predominant financial product at this phase is annuity funds. This involves giving a lump sum to a service provider. Thereafter, service providers will then make regular payments to the retiree for the rest of their lives. In order to get the most out of this arrangement, it is critical for one to get independent financial advice (Gitman, 2013). Failure to do one’s homework prior to signing up to an annuity can trap someone in an arrangement that limits their flexibility. A competitive annuity rate may not always accord consumers with the right flexibility needed to enjoy their retirement. Therefore, a person ought to strike a balance between their need to receive high rates with the ability to access the funds when needed. Some categories of retirees are more eligible to higher rates than others. For instance, people with illnesses are entitled to higher annuity rates than those without predominant sicknesses. Therefore, persons may want to negotiate. Inheritance planning is also critical at retirement. Inherited property is subject to a 40% tax over its current limit. In order to overcome these obstacles, a retiree may think of gifting the property to their heirs. Even when left with a spouse, one may have to plan ahead in order to provide loved ones with as much value of the property as possible. Inheritance management is another financial product that should be considered by retirees (Remund, 2010). Conclusion Persons who enjoy safe and comfortable lives are those who start early. A young professional needs to open an ISA and do some investment in this form. The family person needs to introduce elements of risk in their portfolio through equities. This may yield higher returns in the long term than savings accounts. Several options are available like shares and trusts. However as earners get older and near retirement, then focus should be on the more secure investments like the pension fund. Therefore proper financial management is a product of the right balance between time availability and risk. References Gitman, L., 2013. Personal financial planning. London: Gitman Griffins Accountants, 2013. The key stages of financial planning. [online] Available at: http://www.griffins.co.uk/assets/GriffinsAccountants-TheKeyStagesOfFinancialPlanning.pdf [Accessed 29 January 2013] Hershey, D. and Henkens, K., and Dalen, H., 2010. Aging and financial planning for retirement: Interdisciplinary influences viewed through a cross cultural lens. International Journal of Aging and Human Development, 70(1), pp. 1-38. Huston, S., 2010. Measuring financial literacy. Journal of Consumer Affairs, 44, pp. 296-316. Koh, B., 2012. Personal financial planning. London: Financial Times Press. Lusardi. A. and Mitchell, O., 2011. Financial literacy and planning: implications for retirement well being. [online] Available at: www.nber.org/papers/w17078 [Accessed 29 January 2013] Martin, C., 2007. Developing a personal financial program. Journal of College Teaching and Learning, 11(4), pp. 55-59. McCrea, 2013. Life stages: Where are you in life? [online] Available at: http://www.mccreafs.co.uk/life-stages.html [Accessed 29 January 2013] Peetz, J. and Buehler, R., 2013. Different goals, different predictions: Accuracy and bias in financial planning for events and time periods. Journal of Applied Social Psychology, 43(5), pp. 1079-1088. Remund, D., 2010. Financial literacy explicated: The case for a clearer definition in an increasingly complex economy. Journal of Consumer Affairs, 44(2), pp. 276-295. This is Money, 2013. How to plan for a richer retirement: A guide for savers in their 20s, 30s, 40s, 50s or 60s. [online] Available at: http://www.thisismoney.co.uk/money/pensions/article-1695630/How-plan-richer-retirement.html [Accessed 29 January 2013] Wells, J., 2008. Beyond financial inclusion. [online] Available at: http://www.ageuk.org.uk/documents/en-gb/for-professionals/research/beyond%20financial%20inclusion%20(2008)_pro.pdf?dtrk=true [Accessed 29 January 2013] Read More