Financial Planning in your 40’s

Finances play a critical role in life throughout.  Many decisions are dictated by the state of our finances, so having good financial planning is one of the most effective tools in achieving the life that you truly want.

As we go through life our lifestyles and priorities shift and so do our financial planning requirements.  It is therefore important to align your financial planning to both your stage of life as well as take into account your future plans and current situation.

We are going to focus on looking at typical financial planning priorities for those people in their 40s.  There is a lot of commonality in clients in their 40s.  Broadly speaking, these tend to be people who are married or in serious long-term relationships, usually have children of school-going age, and are at a stage in their career whereby they have reached a level of professional success, giving them the means to prioritise their financial objectives.

Property and Debt – The use of debt plays an important role when it comes to our finances.  Whilst being debt-free is a common goal, I would suggest that it is more important to ensure that you are using debt as effectively as possible.  This would typically mean ensuring that high interest-bearing credit, such as credit cards and unsecured loans are paid off and used minimally.  Most people have a mortgage attached to their main residence and it pays to ensure that this is negotiated at the most effective rate.  In the current low-interest-rate environment having cheap debt backed by a secure asset such as your property is not necessarily a bad thing as long as the cost of borrowing and cash flow burden of repayments are not overly onerous.

School Fees – For many people, the decision about how and where to educate their children is a vital one.  If you opt for private education this is likely to be expensive, especially if this will be applied to multiple children – so needs to be carefully planned for to avoid any potential disruption to their education.  It is good practice to set aside money on a regular basis to cover school fee payments usually in a separate account.

Because the funds need to be available at regular intervals to pay fees, it is important that these funds are not exposed to excess risk or volatility to make sure that funds can be withdrawn at the right time.  These should therefore be held either in a cash-based account or investment that exhibits very low levels of volatility.  Although this invariably means accepting a significantly lower rate of return, the stability and security make this a worthwhile trade-off.

Protection and Insurance Planning – At this stage in life, it is likely that people have significant liabilities, such as mortgages, loans, younger children, and spouses.  For many families death, severe illness or serious disablement would be a catastrophic event both from a family and financial standpoint, stopping any financial planning in its’ tracks.

It is a vital part of the financial planning process to fully understand the cost of not only repaying liabilities, such as mortgages but also the ongoing cost of maintaining living standards for the surviving members of your family should you pass away or be unable to provide.  In many cases, this will include not only ensuring that you have adequate levels of life insurance in place, but that you also consider the use of policies, such as income protection, critical illness, or serious illness policies to ensure that the key risks that you face are adequately protected.  This is an area where professional advice is invaluable in safeguarding your family’s future.

Estate Planning and Wills – Having an up-to-date Will in place is important across all age groups but is particularly important when you are at the stage in life when you are building significant assets and liabilities.  A professionally drafted will ensure that your assets are distributed in accordance with your wishes.

In addition to drafting Wills, it is for many clients also of great value to incorporate the use of trust planning as well.  Effective use of trusts can confer many benefits.  The most important of these is the ring-fencing or protecting of capital for your beneficiaries.  This can be particularly important when you have young children as it ensures that funds are put in place to provide for their upkeep in line with your wishes.  There can also be significant tax benefits in relation to trust planning, especially for more sizeable estates.

One of the most common mistakes that we commonly see is clients who have taken the steps to set up insurance policies without setting up an appropriate trust for the proceeds to pay into.  This is an important step as it ensures protection of assets for the beneficiaries, avoids the insurance proceeds being dragged into probate giving your family faster access to money when they may need it most, as well as providing the potential for tax benefits.

Pensions and Retirement Planning – For many people pensions are not a key priority earlier in life as there is often insufficient income and there are other priorities such as getting on the property ladder, getting married, etc.  For many people, their 40s represent an ideal opportunity to start making serious provision for their retirement whilst still having adequate time to do this in a structured and orderly way.

Pensions represent one of the most tax-efficient savings and investment vehicles you will have during your lifetime and as such should be used to their fullest extent to maximise the benefits to you.  Currently, UK pensions offer full tax relief on contributions made as well as tax-free growth whilst money is held within your pension.  At the onset of retirement, 25% of the pension is available to you as a tax-free lump sum.  These factors can make pensions a very attractive long-term savings vehicle.

One of the most common questions we receive from clients in their 40s is how much they should be paying into their pension.  Clearly, there is no simple easy answer to this as it depends on a wide number of variables.  In order to assist clients in answering this question, we start with a detailed picture of their desired retirement so that we can begin to understand the cost implications and calculate what pension assets will be required to fund this.

We can then calculate what total contributions are required to achieve this whilst maintaining an investment strategy in line with both the client’s risk profile and required rate of return.  This detailed and scientific approach means that realistic goals are set that can be carefully monitored along the way to understand whether they are on target or not.

Investments outside of pensions – Pensions represent a highly attractive and tax-efficient form of long-term investment.  However, they do have their limitations.  There are both annual and lifetime allowances, which can impact higher earners particularly.

Additionally, pensions cannot be accessed before the age of 55 under current legislation and this age is set to increase over the next few years.  This can make pensions unsuitable for capital that you may need to access in the shorter term.  There are a huge range of investment opportunities available and these must be considered carefully taking into account a wide range of factors, such as investment time horizon, need for liquidity, risk profile, targeted returns, and tax status.

By consulting carefully with clients, we can establish a detailed investment strategy covering short, medium, and long term objectives in order to ensure that your financial goals are met at each stage of life.

Maximise Company Benefits – Your 40s can represent a time when you have achieved a level of success within your career which means you have access to a wide range of benefits, particularly if you are employed by a large company.  Increasingly many companies offer a flexible benefits package allowing employees to pick and choose the benefits of most value to them.  This can be a daunting prospect in trying to maximise the value and can be helped by professional planning to incorporate them into their other financial plans.

Maximising Windfalls – Your 40s are a stage in life where financial windfalls have a greater potential to occur.  This could include inheritances from family members, large bonuses via work, or even the ability to exercise options and shares as part of your remuneration package.  Large windfalls of this nature provide an opportunity to drive your financial planning forward if they are used efficiently.  Some of these windfalls also come with significant tax liabilities, although with the right advice some of these tax liabilities can be mitigated.

Often the best use of capital received of this nature can be counterintuitive.  One of the most common reactions we see to clients who receive a large windfall is a desire to repay part, or all, of their mortgage.  In some scenarios, this may well be the best course of action.  However, in a low-interest-rate environment, it can often be a more effective use of capital to establish a medium to longer-term investment that has a good chance of providing a higher rate of return than the interest cost on your mortgage, especially if further windfalls are expected.  This is likely to provide greater value than simply repaying a very low-cost debt.

Conclusion – Everyone’s situation is unique and not all the above examples will apply to everyone just because they are in their 40s.  However, for many, there will be an element of what we have described that will sound and feel just like your own situation.

Foresight has over 20 years’ experience in dealing with people at all stages of their life and have built The Quantum Programme to enable you to get the most out of your financial planning whilst getting on with your life.

If you would like to be financially well-organised and in control of your finances then speak with one of your Wealth Strategists, who will be pleased to explain how we work and how we might be able to benefit your situation.