Save thousands by planning ahead

By Sam Barrett Last Update: Thu, 17/12/2009 - 12:01

Life is full of surprises, but while you can’t predict what will happen, you can be financially prepared. Sam Barrett shows how you can plan ahead

Whether it’s a last-minute weekend away, an invitation to the newest restaurant in town or a surprise visit from friends or family, life has a wonderful habit of throwing up unexpected events. But while these surprises often involve unexpected expenses too, there are plenty of key events for which you can plan financially.

It makes sense to be financially prepared for the ‘biggies’ like buying your first home, starting a family or retiring. Having cash ready to hand means you won’t need to borrow so much, so you will save on interest charges. More importantly, it will leave you free to focus on the positive elements, rather than worrying about whether you can afford it all.

Leaving home

The first big financial event most of us will face is leaving home. The sense of independence can be liberating, but it comes with a number of financial responsibilities, such as paying the rent and household bills, as well as finding the cash for food, clothes and entertainment.

Working out a budget is key to dealing successfully with your new-found freedom. List your income and then your expenses, starting with the essentials such as rent, utilities, council tax and food; anything you have left is spending money.

“It only takes a couple of minutes a day to monitor what you’re spending,” says Martin Bamford, chartered financial planner at Informed Choice. “Keep an overview of the bigger picture too. Do you pay for your car insurance annually? Should you save for a holiday?”

He also recommends you leave a bit of room for manoeuvre in your budget: “If every penny is accounted for, there’s no room for error or an unexpected bill.”

Even if money is tight, it’s worth trying to put some aside in case of an emergency. The amount you’ll need to save will vary, but Julie Bayley, independent financial adviser at Keswick IFA, advises: “Think about how long it might take to get another job, and try and save enough to cover this period.”

As well as giving you protection against potential ‘nasties’, your emergency pot could also fund future plans such as buying a car or a mortgage deposit.

Nick O’Shea, director of Canterbury-based IFA Pharon, recommends keeping your emergency pot in savings-style products so you can access it whenever you need to. “Use your cash individual savings account allowances first, then consider other tax-efficient savings vehicles such as NS&I savings certificates,” he says.

Putting money aside in this way could save you hundreds of pounds. For example, if you save £200 a month to buy a car in an ISA paying 3%, you would have £4,952 after two years. On the other hand, according to the AA, if you took out a loan for this amount, you would repay £245.83 a month at an APR of 15.9%.

This would cost you £5,899.92 – that’s £1,099.92 more than if you had saved the cash.

Getting on the property ladder

Getting the keys to your own home represents a major step in life. “It’s worth saving for a decent deposit,” advises Ray Boulger, senior technical manager at John Charcol. “Rates start to increase if you want to borrow more than 75% of the value of a house; you could end up paying a couple of percentage points more on your mortgage.”

Boulger also recommends beefing up your credit rating: “Get on the electoral roll; take out a couple of credit cards and regularly clear them; and keep an old current account open to show your track record.”

Protection is also important, particularly as your home could be at stake. Chris McFarlane, head of protection at LV=, recommends income protection and critical illness cover and life insurance: “Check what you get from your employer first. But the younger you are, the cheaper the premiums.”

For example, a  25-year-old male non-smoker would pay £10.29 a month for income protection at £750 a month, and a 45-year-old non-smoker, £21 a month.

Moving in together

Getting married or moving in with a partner is another stage in life that can benefit from financial planning. One of the most common causes of arguments between couples is money, so it can make for a more harmonious life if you’re upfront about finances from the start.

Just about every financial product is available in a joint version, but it’s not always the best option. “If you have a joint debt, like a mortgage or credit card, both parties are jointly and severally liable for it. If one of you defaults, you’ll both end up with a bad credit record,” warns Boulger.

Another product that can be less advantageous as a joint plan is life insurance. While it’s sensible to take insurance out to ensure your partner is looked after if you should die, it’s often better to take it out on a single life basis.

“A joint policy will be slightly cheaper than two singles, but you’ll only get one payout,” explains Owen Temple, director at Eldon Financial Planning. “This is fine if you’re covering a debt such as a mortgage; otherwise, it’s usually better to take out separate cover.”

Amandeep Gill, a partner at law firm Davenport Lyons, recommends a pre-nuptial or post-nuptial arrangement: “Post-nuptial financial arrangements carry more weight legally, but couples are increasingly taking legal advice on both pre- and post-nuptial arrangements. It helps to set clear expectations and makes people think through the legal consequences of marriage.”

For either arrangement to be accepted by a court, both parties must have first sought independent legal advice. “The cost depends on the amount of work involved, with each arrangement tailored to the needs of the couple,” adds Gill.

Marriage can also bring financial pluses. With two of you sharing the bills, there’s likely to be more spare cash, and it’s prudent to invest some of this for the long term.

“Take advantage of each other’s tax allowances,” says Temple. “If you’re married, capital gains can be passed between spouses to reduce the tax bill. And put savings and investments into the name of the person paying the lower rate of income tax.”

Starting a family

Children are a serious financial commitment; LV= calculates the cost of raising a child to the age of 21 as £194,000. “Start thinking about the financial implications before you have children,” advises O’Shea. “Look at how much maternity pay you would get and start budgeting for any loss of income now.”

Mortgage holidays are widely available – although they’ll add to the overall cost of the loan, they can give you valuable financial breathing space.

Once your baby’s arrived, it makes sense to start saving for their future too. According to The Children’s Mutual, a child born today could be looking at a student debt of £49,900, if tuition fees increase to £7,000 a year. Even if they don’t go to university, the chances are they’ll want help with a mortgage deposit or new car.

All sorts of products are available for these savings, but the government-sponsored, tax-free child trust fund is one of the best places to start. The government kick-starts the fund with a £250 voucher, and tops up with another when the child reaches seven, but you can add up to £1,200 a year yourself.

“I’d go for a stocks and shares CTF rather than a deposit one,” says O’Shea. “You’ve got 18 years, so you should end up with a better return.”

You may also want to invest for your child in your own name, using your ISA allowance where possible, because your children automatically get access to their CTFs when they reach 18 and there’s no guarantee they’ll spend the cash wisely.

Getting divorced

There can be all sorts of reasons for seeking a divorce, but whatever drives you to separate, there are almost always finances to unravel.

A solicitor will help divide any assets such as the house, pension and investments in a way that’s fair to both parties. Your children’s interests will be taken into account and, in most cases, maintenance will be paid to the parent assuming the main responsibility for their care.

Maintenance may also be awarded to one of the ex-partners, especially if they gave up a career to bring up the children.

When it comes to splitting assets, Bamford recommends getting financial advice alongside the legal advice. “Solicitors will often look at the pension in terms of the transfer value, but this isn’t very accurate,” he says. “An IFA will be able to give you a much better understanding of the value of your assets.”

You will also need to separate any joint assets. Remember, both of you are jointly liable for any debt, so you both stand to gain a poor credit record if one of you defaults.

It’s relatively easy to get a bank account, savings plan or credit card transferred into your own name, but you might find it harder with products such as life insurance.  

“If you’ve had a joint life policy, we can offer the option to take the same cover on a single life policy under our guaranteed insurability option,” says McFarlane. “However, it will cost more than you paid for your half of the joint policy.”

Finding a mortgage can be even harder, especially if there wasn’t much equity from the marital home. “It can be like starting all over again,” says Bamford. “But if you sort out your budget, this can help you get back on your feet financially.”

Easing into retirement

One of your key concerns as you approach retirement will probably be the size of your potential income. But with annual contributions capped at whichever is lower, your annual earnings or £245,000, there should be plenty of opportunity to catch up.

“There’s some debate about whether you should put as much as you can into your pension or not,” says Bob Perkins, technical manager at IFA Origen. “You get tax relief at the rate of £20 for every £100 you pay in, with higher-rate relief coming back to you through your self-assessment.

But if you pile all your savings and investments into your pension, you can only get 25% back as tax-free cash and you forfeit the flexibility.”

You should also make sure your pension is secure. “If you’re a few years away from retirement, start switching your pension fund into cash or low-risk investments to protect it from stockmarket falls,” says Perkins. And when you’re in the last year before taking an annuity, he recommends putting it entirely into cash and fixed-interest securities.

It’s also worth checking your partner’s pension provision. “Both of you will get tax allowances in retirement, so if you spread the pension, you’ll receive more untaxed income,” says Temple.

For example, a couple aged 65 and 67 could have a joint income of up to £18,980 without paying a penny in tax, due to their income tax allowances. But if either one of them earns this amount, they’ll pay £1,898 in tax because all their pension income is in one name.

And don’t just take the annuity your pension company offers you. “There’s a wide range of enhanced annuities now, which give you a bit extra for anything from a serious health condition to your postcode, so shop around,” says Temple.

You might also want to consider deferring your state pension. For every five weeks you defer, you gain a 1% increase; if you defer for at least a year you can take the normal rate plus a lump sum equivalent to what you would have got plus interest. “This can work well if you’ve got other income coming in – for example, from a job – where you’d end up paying lots of tax,” says Temple.

Don’t overlook other savings and investments, either, when considering your retirement income. For example, an equity income ISA will produce untaxed income, and you won’t need to worry about capital gains tax if you do cash it in.

Preparing for death

Death is the one great certainty for all of us – but if you’re financially prepared, this will make life a lot easier for those you leave behind. Bamford advises: “Make a will that reflects your wishes, and ensure that the relevant people, who might be your partner, children or solicitor, understand your financial situation.”

You may also want to consider how your death will benefit the taxman. Inheritance tax is payable at the rate of 40% of assets over the nil-rate band (£325,000 in 2009/2010).

“The introduction of the transferable nil-rate band between married couples and civil partners has lessened the problem significantly, but many people are still facing IHT bills,” says Perkins.

However, there are ways you can reduce the bill, including annual exemptions such as a gift of up to £3,000 in any one year and wedding gifts. “Don’t overlook gifts out of your income – as long as they are regular and don’t affect your standard of living, they can be a good way to reduce your estate,” adds Perkins.

If the value of your estate is only dented by these steps, you can set up a trust scheme to ensure your assets go to a loved one without creating an IHT liability, but these are very complex vehicles, so make sure you get financial advice.

You will also need to ensure your partner is left with enough to live on after you die; increasing your savings or taking out life insurance could help bump up their future income.