Taking The Time
21st August 2018 Henry Fox, Seven Investment Management
Make good use of the time over the summer to give due consideration to retirement and your own financial circumstances.
For me, the summer season regularly prompts the odd wry smile. This is because I hear my clients talking about their time away on holiday and while I’m very happy that my clients are getting away on their well-deserved breaks, I can also often appreciate just how much planning went into it.
It can be ironic because it’s sometimes those same clients who spend days researching and scheduling their weeks away in the sun, when I am struggling to get them to spend even a few minutes on their finances. That time though would set them up for the longest holiday of their lives – retirement.
This is particularly the case with family business owners for a few reasons.
Sometimes there is no delineation between business and family time, given their home and office are at the same address. There’s often no ‘9 till 5’ structure to your day and so when you go to sit at your computer in the evening, even just to check your bank balance, the business can pull you in.
Another reason can simply be that your business is your pension and/or your inheritance. You can easily justify spending time on that, instead of setting out the financial parameters that you yourself are trying to reach. It takes time to answer the difficult questions around retirement, given you’re planning a lifestyle that you’ve yet to define, and that will only be enjoyed at some point after an indeterminate date. Planning what the next phase of business growth could be is more tangible and you’re probably more likely to be enjoying the effects of that planning more immediately.
However, there are also very tangible reasons why you should take some time to review your personal finances.
1)You might miss out on government contributions. Many individuals don’t realise the difference that the tax relief available with pension contributions could make. If you are a higher rate taxpayer, you could gain 40% tax relief on contributions by paying into your or your spouse’s pension.
The initiative cost the exchequer £41bn in the 2016-17 tax year, according to HMRC estimates and is up for debate, but you can contribute still and even backdate payments up to three years if you have been in a registered scheme.
2)Any money invested will benefit from compounding. While investments can go down as well as up to the extent that your original money is affected, money invested at an annualised 7% return (after fees and charges), by way of an example, could double in 10 years. Another example can be shown through the year-in-year-out reinvestment of any bond coupons and share dividends that you would be due, because you hold the underlying investments.
To receive this benefit, you need to select the Accumulating versus the Income version of an investment fund. And while past performance can never be a guide to future returns, it can highlight how our second example has played out. So the FTSE 100 is only 9% above its previous high level that of 30 December 1999. I say ‘only’, because if you had reinvested dividends (and this is not reflected in the index performance), you’d actually be 112% up on that same timeline (as at the time of writing).
3)You would be giving your family another income stream in the future. At its simplest, a pension could give your family another income stream that could enable you to have more than just one household running the business while you hand it on to the next generation e.g. you and one of your children.
Or it can diversify your income, which in turn will support the business whether you’re planning to step aside or not. It also offers a stream of income that’s been able to grow in a very different way to that of your business.
If all this makes sense, but the habit of turning to work and putting off the everyday little financial tasks is too tough to quit, this is where a professional can help. Chances are, particularly if your business is going well, you’ve probably already outsourced some task that you used to do yourself to someone who spends their day focused on that job. Perhaps now is the time to get help for your finances too.
Seven Investment Management LLP is authorised and regulated by the Financial Conduct Authority and the Jersey Financial Services Commission. Member of the London Stock Exchange. Registered office: 55 Bishopsgate, London EC2N 3AS. Registered in England and Wales No. OC378740.