Financial planning: is now the time to review your options?

13 Jan 2021

As thoughts turn to New Year’s resolutions, Simon Bashorun – a director at Investec Wealth & Investment – shares what to look out for when beginning the financial planning process and the issues facing clients in 2021.

While you can argue that the value of good investment advice can be quite easily measured, the value of good financial planning assistance can seem more difficult to quantify.

What is the benefit of financial planning?

The starting point for financial planning is to help you to understand your current financial position and to identify and prioritise your short- and long-term goals. Just going through this process alone is a valuable exercise and it enables individuals, who have perhaps been too busy to consider their own position and the ‘bigger picture’ in any detail, to have a clear picture of where they are, where they are going and how they are going to get there.
 
When it comes to implementing a plan, ensuring your assets are working towards your goals efficiently from a tax perspective is perhaps the most tangible value-add of the financial planning process. It involves making sure that your affairs are structured in a way that minimises ongoing taxation, while being mindful of your objectives for the funds in question.
 
As financial planners we regularly review your affairs so plans can be adapted to changes in your personal situation, the tax and legislative environment and investment markets. It helps you to maintain the discipline of working towards your goals by ensuring, for example, that ISA and pension contributions for your family – and other opportunities that might easily be missed as part of a busy life – are maintained.
 
Opportunities that we could help you with might include a promotion that includes an increased level of income with a complex structure; a change in tax rates or exemptions or the desire to start or exit a business.
 
It is often the case that as net worth increases, so does the complexity of financial affairs and the options that should be considered.
Helping you navigate this complexity and unburdening you of the administration that is still a requirement in many areas of financial services, is a key part our service at Investec Wealth & Investment.
 
An important role of a financial planner has always been that of a financial guide and educator. In recent years, the trend has been for the expansion of this education beyond the primary client relationship. We are often asked to help navigate the challenge of passing wealth between generations. There is often a desire to create a legacy for the family and we are all too familiar with the ability for wealth to dissipate over time. Introducing children at the appropriate time, and in an appropriate way, to the principles of sound financial planning can play a key role in assisting you with what is more formally called a 'family governance strategy’.
 
As with other professions such as law and accountancy, formal planning advice comes with responsibility and accountability and this should provide peace of mind.
 
Several recent studies have attempted to qualify the value of proper planning advice: one such study put the value at the equivalent of a 3% net additional return each year (source: Vanguard Advisor Alpha, November 2014).
 
However, the consequences of not seeking advice are sometimes only evident when it is too late. For example, you may experience an unforeseen cost, inappropriate exposure to risk, larger than expected tax bill, or lack of liquidity at a time it is really needed. The question should really be: can you afford not to explore the opportunities you should be considering now?

What financial planning issues or trends are coming to the fore in 2021?

Given the cost of the UK coronavirus support package, we are mindful of the fact that the Chancellor will potentially be looking to raise funds over the coming years. Therefore, one of the key planning issues facing you in 2021 is the impact that future potential tax increases might have on your situation.
One of the key planning issues facing you in 2021 is the impact that future potential tax increases might have on your situation.
This could mean increases to taxes that the Conservative manifesto pledged to keep unchanged, namely income tax, national insurance contributions and VAT.

 
However, it seems more likely that potential changes will be made to the Capital Gains Tax (CGT) and Inheritance Tax (IHT) regimes. Indeed, there have been consultations on both of these taxes in recent years – the CGT consultation concluding at the end of 2020.
 
Comments in the CGT consultation considered areas such as a reduction in the annual exemption allowance, increasing the rates of CGT itself and the interaction between CGT and IHT. Considerable press coverage was given to the suggestion of aligning CGT rates with income tax rates – something that may not surprise private equity professionals given the changes to carried interest taxation introduced a few years ago.
 
However these capital taxes account for a relatively small proportion of total tax revenue so it is possible that further measures will be considered too.
 
A broader Wealth Tax is another possibility that has been well covered in the press too. However, with serious questions over implementation and the current Chancellor and Prime Minister not in favour of the option, at least for this parliament, a Wealth Tax could be considered unlikely.
 
Not a pre-Budget period passes without speculation about changes to pension legislation and the various reliefs that apply to the regime – most notably the tax-free cash lump sum and changes to pension tax relief on contributions – with the latter in particular, due for reform.
 
While it is difficult to justify drastically amending strategies to try to anticipate future changes to legislation, the momentum and general appetite for tax increases is such that we advocate the following actions:
 
  • Maximise the use of all relevant allowances and exemptions across the family while these are available
  • Consider bringing forward planning that was intended in the near future that might be affected (e.g. known capital gifts, planned sale of assets)
  • Where there is an investment case for taking capital gains, this should be considered at the current rates
  • When considering the investment of new funds, or the tax consequences of change are minimal, consider diversifying your tax wrappers to build in more flexibility and mitigate a change that negatively impact one area of your finances in particular
A Budget date has been set for 3rd March 2021 and the scope for tax increases at that point will depend on the ongoing impact that the Covid-19 crisis is having on businesses and individuals. At present it seems that any substantial change tax changes will be put off at least until the autumn. However, with change seemingly inevitable in the near future it makes sense to revisit all areas of your financial affairs and consider whether there are steps that you could take now to mitigate any impact.

Man sitting with laptop on his knee

It is often the case that as net worth increases, so does the complexity of financial affairs and the options that should be considered. 

Simon Bashorun, Investec Wealth & Investment

I’m expecting a change in income or a windfall, what steps could I take?

Of course, many changes that affect financial plans are personal and we’re here to help. Many of our clients approach us when there is a liquidity event that they want to leverage for the future. One example is when they are preparing to sell a business, particularly since the introduction of Business Asset Disposal Relief which sees the limit of lifetime gains eligible for a tax rate of 10% reduced to £1m from £10m under Entrepreneurs’ Tax Relief.
 
If you’re an entrepreneur or business owner who is thinking about pre and post-sale planning, the right time to seek advice is as early as possible. This will give you the opportunity to consider strategies that will often not be available after the event. Examples of this early stage planning might be:
 
  • Adjusting shareholdings between family members to increase tax efficiency on exit
  • Enabling increased control and succession planning options in the future by transferring shares into a trust
  • Ensuring basic planning opportunities such as pension contributions which can be made either personally or by the company now are used, as they may not be available post-exit if earned income ceases
When considering a ‘wealth event’ we start with understanding what life is going to look like after it. Through our discussions we would begin to notionally earmark funds for your various objectives. Financial planning can help you to answer the key ‘how much’, ‘can I?’ and ‘what if?’ questions that you may have when plotting your next steps.
 
Alternatively, other clients approach us when they are expecting a change in financial circumstances, perhaps from promotion within banking, private equity or the legal profession. If this applies to you then broadly speaking, the same financial planning steps apply:
 
  • Reviewing the current position to ensure existing planning is relevant and that all opportunities are maximised
  • Considering the ownership of current or future assets between an individual and other family members
  • Basic planning for personal goals such as marriage, home ownership, education costs and retirement
  • Identifying future opportunities that might be of interest, which might include the use of more esoteric tax wrappers and structures
By working with investment, tax and legal specialists where required, we can put in place the structures and strategies that strike the right balance between access to income or capital growth, and tax efficiency, control and flexibility for the future.
 
Of course, every situation is different and it is essential to seek advice for your own circumstances from an experienced financial planning team. In challenging economic times, this is more important than ever and we’re here for any questions you may have.
Disclaimer: This article does not offer advice and the content and information about potential investments and services are designed for general use, and so cannot be considered personal to your circumstances or your financial position.

Our financial planning team is dedicated to helping support Investec Private Clients.

Get in touch with the financial planning team

For financial planning and investment management advice