WOMEN AND FINANCE
There has probably not been a better time for women to take control of their finances. Research* shows that most women have a better grasp of financial products and are more likely to understand the intricacies of the household balance sheet than men.
Even if financial equality has not been fully achieved yet, women are becoming more financially successful and independent than ever. And with that comes both the responsibility and ability to organise and manage their financial futures.
Twenty years ago, only 7% of women earned the same or more as their partner. Today, the figure stands at nearly 25% - and is rising.*
A third of all British women - some 7.2 million - are wholly financially independent with many owning a wide range of savings and investments.* More and more women own their own home. In the 1980’s, less than 10% of mortgages were taken out by a single woman, compared with a quarter today.*
Women are beginning to overtake men as the nation’s top savers as well. Despite often having smaller salaries, they save a higher percentage of their earnings and do so more regularly and with more focus on their savings goals.**
Women, therefore, are at the heart of financial decision making – but there is still some way to go. According to a recent report***, there are still millions of women taking risks with their financial futures by relying on their husbands to fund their retirement.
The report showed that 60% of women do not have a personal pension fund, and with 150,000 divorces a year in the UK, many women could face financial hardship in their old age.
So what are the key issues that women need to consider in planning their financial futures? The main pillars of a wealth management strategy are tax planning, investment, retirement planning, and protection.
Tax Planning
With taxation planning, inheritance tax (IHT) is a growing issue for more and more of us following the rise in property prices this decade. While many people are aware of the existence of IHT planning, few still do anything about their potential liability. And not preparing for IHT is a bit like asking your children and grandchildren to simply sit down and write a large cheque to Her Majesty’s Revenue and Customs (HMRC).
It comes as a very rude awakening to people to discover that a large proportion of their wealth - either in the form of the family home, investments or even old family heirlooms - might actually have to be sold in order to meet the IHT bill on death unless careful planning and provision has been made.
IHT is a time bomb waiting to go off, and financially independent women need to consider three vital courses of action:
- writing a Will which is planned correctly to save the maximum amount of tax
- transfer assets through the prudent use of lifetime gifts
- create an IHT efficient fund to enable beneficiaries of an estate to meet the tax liability without disturbing family wealth.
IHT is taxed at 40% irrespective of the personal circumstances of the heirs. The current nil-rate band, the threshold amount before the tax kicks in, is currently £312,000 for individuals and £624,000 for married couples or civil partnerships. What’s more, HMRC gives only a relatively short time to pay, meaning that a property may have to be sold quickly by a person’s executors in order to make the payment.
While soaring property prices have been bringing the issue of IHT in front of more and more of us than ever before, people do need to remember that the tax applies to all assets, including investments and savings. But there are still many things that people can do to make sure that as much of their estate as possible stays out of the taxman’s grasp. As ever in these matters, it is essential to seek specialist, professional advice.
Investment
It is vital that your money works hard for you so that you can continue to reap the benefits. In planning your approach to investment, you need to determine your attitude to risk from the very outset. For example, to enjoy the prospect of higher returns, you have to accept a higher level of risk.
Risk normally means a combination of two elements. The first is the possibility that you may lose some – or in extreme cases, all – of the money you have put into a particular investment. The second is the risk of volatility – short term fluctuations in value.
Getting the investment right is crucial to future financial wellbeing - but not even the very best investment manager has a crystal ball. Investors often worry that they are investing in the market at the wrong time, but running an investment portfolio on the basis of getting the timing right rarely works.
But what investment managers can do is distinguish between companies that are better managed than others, and in sectors that can be expected to do better as current trends develop. They run their funds and select their holdings on the basis of medium to long-term assessments of business and economic trends.
Once you have decided on a target mix of investments, the best professional investors agree that you should stick to it and ignore rises and falls in the stock market. It is the time in the market that counts, not timing the market. Only two prices matter – the price you buy at and the price you sell at, not what happens in between.
Whether you go in with a lump sum investment or regular contributions – and regular saving is a good habit providing peace of mind – the key is to ensure you get money into funds that will be managed for your benefit over the longer term. And then leave them alone.
Saving regularly leads to fewer worries about investing at the wrong time. Drip feeding into the market is a good way of hedging your bets, removing the uncertainty of putting a large sum of money into the market in one go. Spreading your assets while focussing on long-term returns is generally a recipe for stock market success.
Retirement Planning
If you have not done so already, the time to start planning for retirement is now. Childbirth, marriage, divorce and being widowed have all had a significant impact on the pension accrual of many women. Women’s pensions are affected by the career breaks they take to bring up children or care for elderly relatives.
In addition, women tend to earn less than men, are more likely to work part time, live longer and save less. And with the increase in marriage breakdowns, many more pensioners will be living alone.
With advances in medical science and people living longer, retirement could last a long time. It is conceivable that you could spend more time retired than you did working. And every one of those retirement years has got to be paid for.
As a result, you have to accumulate more during your working life to meet the extra costs of living longer. If you don’t, you risk outliving your savings. You have to find out exactly how much you need in retirement, and understand the cost of delaying taking action.
The new rules on pensions introduced on ‘A’Day (6 April 2006) have introduced a simple, single system making it easier to plan for your retirement. Individuals can now obtain tax relief on 100% of their contribution up to a maximum amount of £235,000 (2008/09), although they can contribute more than this into a tax efficient pension plan if they wish. A Lifetime Allowance has also been introduced which caps the size of an individual’s tax relievable fund at £1.65m in 2008/09, rising to £1.8m in 2010.
Everyone has to save more for their retirement, and having made a retirement plan, you have to commit to it and take action. Your life in retirement is likely to be very different from your working one, both personally and financially. You will probably have lower outgoings. The children will most likely have left home, and most of your long-term debts like the mortgage will probably have been cleared. You do need to take into account, however, that you might want to spend more on leisure activities like travelling and other hobbies.
Pensions have a unique advantage when it comes to investing for your retirement, thanks to the availability of tax relief and the ability to contribute up to 100% of your earnings.
Your contributions to pension plans are fully relievable against your highest marginal rate of Income Tax, and all of the growth in your pension fund is largely free of all UK income and capital gains taxes.
In addition, 25% of your fund can be taken as a lump sum, tax free at any time after the age of 50 (55 from 2010). Any contributions made into your plan by your employer are usually a deductible business expense, and you are not taxed on your employer’s contributions so long as they do not exceed the maximum permissible amount.
The new pensions environment also gives savers more investment freedom. Where previously you could only invest in commercial property in a pension arrangement, you can now use your pension to buy residential property such as holiday homes in the UK and overseas, buy-to-lets and even your main residence. Bringing a buy-to-let portfolio into a pension arrangement provides significantly improved tax planning opportunities, and any rental income and capital gains will be free of tax.
No one likes to face up to the fact that they are getting older and that retirement is fast approaching. Many people have been trying other ways of generating income for retirement – buy-to-let, downsizing, investments like ISA’s – yet it remains clear that not enough people in the UK are putting sufficient sums away to have an adequate retirement income.
Over the past few years, pension planning has not been at the forefront of everybody's minds particularly with changing market conditions and the introduction of stakeholder pensions.
The arrival of A-Day and the radical changes it has brought about to the system has brought pensions to the top of the agenda and created fresh awareness. If you have not sought professional advice beforehand, it is essential you do so now.
Protection
None of us likes to think about suffering a critical illness. And many of us, either as individuals or in many cases as businesses, tend to sweep the thought under the carpet rather than doing something about it.
It is rather like making a Will. People would rather put off thinking about it until later. Yet the effect of doing so can have unthinkable consequences on financial futures and families.
One woman in four and one man in five will suffer a stroke at some stage in their lives, yet nearly 70% of victims survive for at least 12 months.****
A man has a one in four chance of suffering a critical illness before retirement age. For a woman it is one in five.*****
It is all very sobering, and while many people have a real fear that suffering a major illness will have a serious impact on future family finance, a great many still fail to take any positive steps to take cover.
The average age of claimants to St. James’s Place is 45 years old, and in 2004 the company paid out over £7.6m in critical illness claims. The average claim payment was nearly £70,000, and the average life of a policy from inception to claim is about 4½ years.
Having decided to seek protection, the first thing you should do is look at monthly outgoings in order to determine the amount of cover needed. Every eventuality should be covered, from routine monthly expenditure to the possibility of nursing care fees.
St. James’s Place’s comprehensive plans, which protect against 27 different critical illnesses, contain many benefits that are not widely offered across the protection market. For example, if a person suffers a terminal illness and has less than 12 months to live, the person can choose to have the benefit paid out so that affairs can be taken care of before death.
Furthermore, with cover, if major heart surgery is required the money needed to have the operation performed privately will be advanced, meaning NHS Waiting Lists can be avoided.
In addition, where there is a combined life cover with critical illness cover plan, a claimant may be able to ‘buy-back’ life cover when making a critical illness claim. An option can be selected at the outset, allowing policyholders to renew the plan at the end of the initial term, without the need for medical underwriting.
Automatic critical illness cover is provided for children as part of a critical illness plan, and there is the flexibility to respond to changing circumstances, allowing policyholders to increase cover without further underwriting in the face of certain events.
Mortgage payments can be protected should a policyholder be unable to work due to accident or illness, and income replacement benefits keep pace with increases in earnings. Additionally, income replacement plans can be arranged to fit in with contracts of employment.
To receive a free guide covering Wealth Management, Retirement Planning or Inheritance Tax Planning, produced by St. James’s Place Wealth Management, contact Piers Hubbard-Miles of the St. James’s Place Partnership on 01656 783614 or email piers.hubbard-miles@sjpp.co.uk.
Sources
*M&S Money Financial Decision Makers Report 2005
**National Savings & Investments
***Investec Private Bank
****Chest Heart Stroke Association
*****ERC Francona
Date: 22/08/2008
Category: BUSINESS EDITORIAL