A Beginner’s Guide to Financial Planning

A Beginner’s Guide to Financial Planning

If you’re new to the concept of financial planning then it can be daunting taking the first step of consulting a professional financial planner. However, it does not have to be and here, our Chartered Financial Planner, James Glass, provides some insight into key financial planning concepts and what is involved in the financial planning process.

Financial planning is broadly defined as; an ongoing process to help you make sensible decisions about money that can allow you to achieve your goals in life. It’s not just about buying products such as an ISA or a pension. Successful financial planning should be tailored to the individual’s circumstances and take into account how the elements of an individual’s financial plan fit together.  This is called the “financial planning jigsaw”:

As most individuals have more than one financial objective, it is important that these all piece together in the right way at the right time.  A financial planner will ensure that the different parts of your overall financial plan work well together so you avoid things such as:

  • Failing to have an accessible fund for unforeseen expenditure because you have concentrated solely on maximising your pension contributions when your pension cannot be accessed until age 55 at the earliest.
  • Having any life cover pay directly into your estate because you have not considered the use of a Trust, which could result in a higher Inheritance Tax liability.
  • Structuring your retirement income strategy whilst failing to look at the bigger picture of your potential Inheritance Tax liability.  By utilising other sources of wealth before touching your pension benefits, you may help mitigate your potential Inheritance Tax liability.

Depending on your stage of life you will have differing priorities when it comes to your financial goals and these can broadly fit into the three wealth phases:

  1. Accumulation Phase – Advice on building wealth for medium to long term needs; such as funding your desired lifestyle and saving for planned future events like your retirement.
  2. Decumulation Phase – Advice on spending or gifting wealth; such as school fees planning, meeting retirement income needs, gifting to family members or support with care costs.
  3. Preservation Phase – Advice on preserving wealth, such as undertaking Inheritance Tax planning to mitigate potential Inheritance Tax liabilities or succession planning in terms of a business.

It’s crucial that any financial plan put in place is reviewed on a regular basis so that it can be adapted to take account of changing needs and priorities over time.

When we take on a new client there are five key stages in the financial planning advice process that we follow:

  • Stage 1 – Establish life goals, objectives and current financial circumstances.
  • Stage 2 – Prioritise financial objectives.
  • Stage 3 – Select suitable financial instruments, from the whole of the market, which will enable clients’ to work towards living the life they wish.
  • Stage 4 – Present financial plan to clients’ and implement the financial planning recommendations.
  • Stage 5 – Regularly review the clients’ circumstances and make changes, as appropriate, to ensure new objectives are taken account of and to reflect legislative or tax changes. This would include making use of annual tax efficient investment allowances where appropriate.

We recognise that is not always possible for clients to put in place all of our recommendations at once and as such one of the most fundamental aspects of valuable financial planning is the prioritisation of objectives.  The “PIPSI” (Protection, Income, Pension, Savings, Investments) mnemonic is widely used to help break down the different areas of advice and to help prioritise these:

Order of Priority (PIPSI) Individual Clients Corporate Clients
  • Putting financial protection in place to provide for your loved ones should you die or suffer a life changing illness.
  • Providing businesses with loan protection to ensure the repayment of a loan in the event of the death or critical illness of a key person in the business.
  • Providing dividend protection for shareholders by protecting against the loss of a key person and the associated impact this may have on the business.
  • Providing business owners with financial security to ensure they keep control of their business should one of them die or suffer a life changing illness, whilst also providing the cash to buy-out an owner’s family.
  • Protecting you and your family in the event of the loss of your earnings by helping to avoid financial vulnerability at an already stressful time.
  • Assisting business owners with tax efficient profit extraction.
  • Consolidating your pension arrangements where suitable, to ensure that these are optimising the returns given your risk profile.
  • Assessing and advising on pension contribution levels, helping you to achieve your retirement plans.
  • Advising you on the most tax efficient means through which to access your pension benefits when you do retire.

Please note that building an emergency fund will generally take priority over pension funding, this is noted in the Savings section below.

  • Helping business owners to diversify their financial affairs and to recognise the value of pension planning on top of running a successful business.
  • Improving the tax efficiency of the profit extraction from the business, with employer pension contributions offering Corporation Tax relief.
  • Helping to create your emergency “rainy day” fund in order to provide for a loss of your income on a short term basis.
  • Helping to create your short-term savings plan, carefully balancing investment timeframes with risk requirements.
  • Reviewing the most competitive short term savings accounts on offer in the marketplace.
  • Helping to efficiently use surplus cash accruing within the business.
  • Advising on the risks of retaining high levels of cash within the business, for example the impact on Entrepreneur’s Relief on a sale or Business Property Relief qualifying status on death.
  • Investing lump sums in order to attain levels of capital growth in excess of inflation.
  • Advising on multi-generational investing and the passing down of wealth across generations.
  • Assisting with school fee planning.
  • Mitigation of Inheritance Tax.
  • Helping to create efficient use of surplus cash accruing within the business.
  • Assisting with the long term investment of an owner’s business sale proceeds.

We understand it can be daunting to meet with a financial planner for the first time, but by breaking the process down into the key components it should be easier to deal with one bit at a time. At ASAM, we keep things simple and provide clear, concise financial advice to our clients to help them achieve their goals, whatever these may be. We appreciate that everyone’s circumstance and objectives are different and a “one-size-fits-all” approach does not work.

Please do not hesitate to contact us with any line of enquiry or query by either sending an email to our enquiries email address or contacting any of our Financial Planning team.

This information is obtained from sources considered reliable, but its accuracy and completeness is not guaranteed by Anderson Strathern Asset Management Limited. Neither the information nor any opinions expressed constitute financial advice. Investments can fluctuate in price, value and/or income and may return less than the original amount invested. Past performance is not necessarily a guide to future performance. Anderson Strathern Asset Management Limited is authorised and regulated by the Financial Conduct Authority.