Financial Planning Advice - Case Study Example

Financial Planning Advice By They have received three offers for their house each with a different moving in date. On the other hand, they have already found an alternative house with a move in time of one month. This means that they have one month before shifting and their house will be empty. a) £193,200, with a moving in date of one month b) £194,000, with a moving in date of two months c) £195,500, with a moving in date of three months The 1st option is the lowest figure and is not the best option since they are in no hurry to move out. The highest figure is 195, 500, however, this has a long waiting period meaning that the house will remain vacant for that duration of time. The best option in this situation is to take the second option that will guarantee the house is occupied after they move out. In this way they can easily get money to be able to finance their other mortgage. 2. Liam owns 10,000 shares in a local distillery. The main aim of shareholders is to get value for their investments and they have to ensure the company operates profitably. However, Liam’s main aim of holding onto the shares is for sentimental value. My advice for him is that if he has no interest in the company, the best option for him would be to sell the shares as soon as possible because if the company is facing financial difficulties, it will directly impact the shareholding of the owners. On the other hand, the distillery can perform profitably if the shareholders are active in the operation of the business (Dutta, 2006). In this case I would request Liam to take a more proactive role in the management of the business. He can use the experience he has to the benefit of the company. This will not only benefit the company but will ensure that the company has profits and 3. The permanent health insurance offer patients medical cover for a variety of illnesses such as mental illnesses and cancer (Jenkin, 2001). The difference with this type of medical cover is that it offers an alternative source of income in case the individual covered cannot work. The critical illness policy on the other hand offers a lump sum payment when the individual cannot work. Given that the mother does not know the amount of time that she will be sick or live for that matter, it means that the 36000 may not be enough to cater for her needs if she is to live for a longer period of time.Given that her situation might improve, the Permanent Health Insurance would have most probably been the better option since it would have guaranteed her a source of income as long as she is alive. Her maintenance will therefore be guaranteed for the rest of her life. 4. Life insurance is important as it provides a cushion that the family can depend on in case of a disaster and none or one of them cannot work. It will guarantee the family a source of income. In the event that one of them or both of them pass on the children will be guaranteed of a certain sum to live on. However, Liam should know that the insurance company will require him to list his hobbies. Given that he has ayatch and his wife likes horse riding, this will most likely increase his premiums and this can be quite expensive for them.School fees are a major burden to parents once the children start attending school. This will require the parents to make huge payment when this time comes. It is therefore necessary for them to prepare for this in advance, by making a monthly contribution towards this expense they are guaranteed of this money when it is required. Another benefit of educational plans is that the money is invested and gains interest over time and this is also beneficial to Liam. Currently, the cost of school fees is over 60000 and this is a burden to most families. The family can invest in various options such as the stock market. This is the best option for people who want to have their investments grow in the long run. However, the disadvantage of this is that the parents will have to pay taxes on the earnings. The other option is for Liam to take advantage of the Individual savings Accounts that have certain tax benefits and are a much better option for saving money. The returns in these investments are tax free although there is a certain limit that can be reached. However, the rate of interest earned on these accounts has greatly reduced over the years with the bank of England offering a rate of 3% or below. 5. The action of Liam in regard to his retirement contribution is commendable. His earning is 62000 per annum and therefore his contribution towards his retirement is 4960 annually. Given that he has been contributing to this scheme for the last ten years, it will mean that the value of his investment is 49600 pounds. The average rate of retirement is 60, meaning that he still has 22 years in which he will contribute to the scheme. At his retirement, he expects to have paid 158720. He will then receive a pension that is 3 times the value of his contribution which will make his total value upon retirement 476160. This figure is tax free and it will therefore be received in lump. It is also likely to go up due to factors such as annual summary increments along the years although the actual value can be affected by inflation. Upon retirement, an individual is entitled to receive an estimated 5880 annually. At the moment, Irene is not contributing towards her retirement, so at her retirement she will only receive this figure all the state can revise it upwards due to inflation. At the moment, Liam is on the right track in regards to preparing for his retirement. The money that will be available to him upon his retirement will be more than two years’ salary and he will still be able to maintain his lifestyle. The government contribution will also be welcome and can help him offset his bills. Irene on the other hand is in a dangerous position in regards to his future; this is because if she continues with the current trend she will suffer severely after her retirement. Currently, she is earning 26000 annually. Upon retirement, she will be entitled to an estimate of about 5881 from the government. This will not be sufficient to meet her needs which are pegged at the figure that she is currently earning. Her living standards are therefore likely to reduce as she will not be able to maintain her lifestyle. My advice to her would be to join a pension scheme as soon as possible so as to safeguard her future. Contributions towards retirement are usually not taxed; this means they can be used as an alternative form of savings (Katzner, 2008). By increasing the amount of money that they contribute towards their retirement, the couple is likely to reduce their tax liability for the coming years. Therefore the benefits of such a move are not only long term but are also immediate in the form of reduced earnings. 6. There are certain sums of money that are tax exempt. Some of these include the money that Liam will be contributing towards his retirement and the money that is given towards charity. The total salary he earns is 62000. He contributes 8% towards his retirement and 800 towards a foundation. This means that his tax exempt amount in any given year is (800 + 4960= 5760). The income tax rate in the UK is 22%. In regards to his salary, his total tax due will be 12372,8. Irene has a salary of 26,000 and she has no tax exempt payments, her total tax due to her salary is 5720 per annum. Liam has 2000 shares in Rothes Engineering, when he sells half he will get (1000 * 6.25) = 6250. The rate of the capital gains tax in the country is 28% and therefore he will have to pay (28% * 6250) =1750 for the proceeds he will get from this sale. Therefore the total tax liability due to Liam and Irene will be: (12372.8+5720+1750)=19842.8 7. Treasury stocks are a special type of stocks that are issued by the company but this is only on a temporary basis as they can be bought back by the company after certain duration of time. If Irene invested 8000 in this type of stock it means that she was able to buy: 8000/100 = 80 shares in the company, each with a nominal value of 100 The current going price is 114 per share. The gross investment yield is the total returns before she can deduct any taxes or the initial expenses, this is shown below: If she sells her shares today, she can receive (80*114=9120). The net investment yield is the returns to an investment after removal of the expenses and the taxes: Her tax liability will be on the interest earned which will be (28% * 1120=313.6) Therefore her net investment yield is (1120-313.6=806.4) Upon maturity she will receive 4.75% of her investment which is compounded annually: Therefore her total moneys expected (Gross investment yield) would be 11596.37. Her profit in 2022 would be (11596.37-8000=3596.37) Tax liability in 2022 is (28% * 3596.37=1006.98) Her net investment yield in 2022 will be (3596.37 – 1006.98=2589.39) Given both these scenarios, it is better for her to wait until the maturity of the period in 2022 as she will receive a higher rate of return on her investments at that time. 8. There are various types of mortgages in the market. The two main types of mortgages are a low cost endowment policy and a capital and interest repayment mortgage (Chatnani, 2010).Although all of them have a common goal, there are differences that exist between them. A low cost endowment mortgage is a combination of savings and mortgage repayments that have been accumulated through an endowment policy. In this type of plan, the purchase of the policy at lower terms leads to payment of larger sums of money at maturity. The original sum that the contributor is assured of is increased on a gradual basis until at maturity when it will exceed the loan amount. The loan amount remains the same throughout the time of the loan and the total sum assured at the end of the agreement is usually enough to cover it. The sum for this policy is lower than in cases when we would be using the full endowment method, as such, the policy’s value build up is significantly reduced. As such, the net annual cost is also reduced. When this method is used, the higher the tax rate paid by the contributor the lower the interest cost to them. The capital and interest mortgage is commonly referred to as the repayment mortgage. In this type of mortgage, the contributor will be able to make contributions on a monthly basis to cover the cost of capital and interest over a number of years. At the end of this set of years, the property will be passed over to the owners without any other extra expense to them. This method is usually the most efficient since the rate of interest is the same over the number of years and the contributors will not have to pay a higher figure in future due to inflation and other factors that affect the cost of money. 9. Investments are a good way of saving money, instead of keeping in the bank where the amount of interest earned is small; there are various investment options that can provide a much higher return. Some of these include, Open ended investment companies or monthly savings schemes. An Open ended investment company is one which pools together funds from various investors and invests this money into other companies. The shares of the open ended investment company are usually invested on the stock exchange (Blaug, 2006). The price of these shares is usually based on the value of the underlying assets which the company has invested in. all the buyers in these companies receive the same prices for the shares. If Liam invests all his income in this type of company his value will be dependent on the investments the company makes. When he decides to take out his money, there will be no gain in his investment since the buy and the sell price for these types of investment is the same. An example of these companies is the Skandia Company in the United Kingdom. In a monthly savings scheme, the individual is able to contribute a certain figure at the end of each and every month. There are several advantages to these types of investments the main being that it does not require the individual to have a large capital base. The rates of interest in these accounts are usually higher than other current savings plan and the contributor can get higher returns on their investments (Dean, 2005). These types of investment accounts can run for certain duration of time and the advantage is that the longer the duration of investment the higher the rate of interests that Liam will have to pay. One of the most popular options for saving in this type of investments is the Guaranteed Savings Plan in the United Kingdom. As long as one pays the agreed amount they are assured a return of their investments on the end of their period. The First Direct Regular Saver is the most popular savings scheme in the United Kingdom and it assures the investors of an average of 6% annually. The good thing about these types of investments is that the value of the monthly investment can only increase while gaining interest in the process. 10. Liam and Irene have just bought a new car for £14,500 on hire purchase credit over 5 years at 7.9% per annum. Calculate the APR. The annual percentage rate is the cost of borrowing money during the term of the loan. Using the formula (Gale, 2009) In this case: P- Refers to the monthly payment C- Refers to the initial loan amount E- Refers to all the fees in relation to the loan R – Refers to the interest rate N- Refers to the pay period Using the above formula, the total rate of interest is 3099. Therefore the APR is 1033. 11. Calculate the compound interest on Liam’s mother’s two bank accounts: a. £7,000 deposited at 2.95% over 5 years. b. On a balance of £13,826.81 inclusive of compound interest at 2.35% over 4 years. How much, therefore, is the original capital sum deposited in this case? Calculation of compound interests The formula for calculating compound interests is C= P( 1 + r )n C – This is the final amount after interest has been compounded. P – Refers to the principal amount that is being invested. r – Refers to the annual rate of interest n- The number of years that the money is being invested A). P = 7000, r= 2.95, n= 5years Using the above formula the compound interest is £ 8,095.24 B). In this case we are trying to find P. r = 2.35, n = 45 years, C = £13,826.81 Therefore p= 4690 Bibliography BLAUG, M. (2006).Taxation theory in retrospect. Cambridge, Cambridge University Press. CHATNANI, N. N. (2010). Commodity markets: operations, instruments, and applications. New Delhi, Tata McGraw Hill Education Private Limited. Dean, Joel. (2005). Financial Planning. Englewood Cliffs, N.J.: Prentice-Hall. DUTTA, S. (2006).Introductory economics (micro and macro): a textbook for class XII. New Delhi, New Age International (P) Ltd., Publishers. GALE, D. (2009). The theory of linear accounting.Chicago [u.a.], Univ. of Chicago Press. JENKIN, F. (2001).The graphic representation of the laws of supply and demand and other essays on political economy. London, Percy Lund Humphries. KATZNER, D. W. (2008). Time, ignorance, and uncertainty in economic models. Ann Arbor, Univ. of Michigan Press. LITTLE, D. (2005).On the reliability of financial planning models: essays in the philosophy of economics.Boston [u.a.], Kluwer Acad. Publ. Read More