WHEN it comes to planning for the future, most people tend to focus their attention on just one thing: building as much wealth as they can to see them comfortably through retirement.
This is vital, of course - it goes without saying that if you want to meet all your financial goals, saving money and investing wisely is going to be absolutely fundamental.
However, there is another aspect of financial planing that is just as critical - having a financial road map in place, in the form of a cash-flow plan.
This is important because, as we all know, life does not tend to move in a straight line.
During certain phases – and not just in retirement – we may find ourselves in a position of having to spend more.
At other times, we may be in a position to invest significantly larger sums of cash.
That is why it is vital to take a holistic view of your current assets and future spending requirements to develop a cash-flow plan that will help you map out your fiscal requirements and work out how different scenarios might have an impact those needs.
Not only will a clear cash-flow plan help you to save, and eventually spend, your money in the most tax-efficient manner possible, it will also give you a deeper understanding of what you are working towards.
In order to get started, there are a number of important areas to assess if you are going to come up with the right cash-flow plan.
Where do you want to be in 20 years’ time, for example?
What kind of things will you need to fund during that time?
Are school or university fees for children something you are going to have to consider?
Have you given any thought to maximising your pension and Isa contributions during your peak earnings period? That is something that is particularly important to consider given the radical reduction in pensions contributions allowances in recent years.
Even if you are comfortable that you are going to have sufficient assets to fund your goals, a cash-flow plan will help you make the most of your wealth.
Take, for example, a married couple with various savings pots between them: Isas, a joint Sipp (self-invested personal pension) and a general investment portfolio, with many investment managers involved across the board.
It is likely that a couple in that situation would have sufficient assets to meet their long-term financial goals, even assuming they go on to make a relatively modest rate of annual return on their investments.
The sensible approach for them would be to assess their Sipp investments to see if their pension money is being unnecessarily allocated to high-risk assets.
Why, if they were going to have enough cash to meet their future needs, would they pay the business managing their Sipp an annual fee of 2 per cent if they didn’t need exposure to those kinds of assets?
A cash-flow plan would have identified that their goals were already being met, enabling them to take less risk and pay less in fees too.
This approach can also identify opportunities that you may not have been aware of. For example, a child can contribute up to £2,880 a year to a pension, which then attracts basic rate tax relief.
A grandparent contributing this on the child’s behalf could, in many cases, exempt the gift from their estate for inheritance tax purposes.
If the full allowance is contributed annually until the age of 21, then even with no further contributions, by the time the child reaches retirement age, their pot would have grown to around £2.36m, assuming an annual return rate of 6%.
Even once you have a plan in place, it must be reviewed regularly. For example, you might inherit money, or find that unexpected expenses arise. Circumstances change and with that, plans become outdated. This is particularly important as you move from the accumulation phase of your life – where the primary focus tends to be on building your wealth until you retire – to the utilisation phase, where the focus moves to ensuring you have the cash flow to maintain your standard of living, and perhaps planning for your legacy.
Duncan Gourlay, is head of Scotland at Weatherbys Private Bank.
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