When Should we Seek Advice?

When you realise that a decision you made could have had a better outcome, if only you sought advice. Know the feeling? That sinking feeling is a classic “DIY job” gone wrong. It’s an uncomfortable position to be in, and where possible, you would rather avoid the same happening again.

The aim here is to help you avoid falling into such a position when it comes to personal finances. By providing you with scenarios of what a “DIY job” looks like, you can consider when it might be appropriate to seek advice. With a year’s experience of sitting down with a range of prospective clients as a qualified adviser, all with different needs/wants and financial circumstances, I think it would certainly help you. Call it a summary, if you will.

Shortfalls in your Future Provision

When really trying to make sure your future is secure, a common “DIY job” gone wrong is putting too much, or even too little, into a specific tax wrapper. The classic is putting too little into your pension, meaning that when approaching retirement, you’re somewhat forced to squirrel away as much as possible and maybe even work until the state pension age so that you have some means of retirement income. You might be thinking “yeah that’s fine with me” – but what if the amount you need to put into your pension requires you to reduce your expenditure in those years? Would you forgo your standard of living? Perhaps not so fine after all.

Seeking advice earlier on, let’s say between your 20s to 40s, would help determine the amount you ought to put away each year to avoid falling into this trap. The combination of contributing the right amount, claiming already-paid income tax and compound interest over many years, will mean that your retirement provision will be healthier and your standard of living will remain unaffected.

Being too Risk Averse

What does risk mean to you? Perhaps the concept of your savings falling in value by anything more that 1% is what risk means to you. Or, maybe, you perceive risk as many years of inaction.

The term ‘risk’ in personal finance can be expanded on and within that term lies different forms of risk. What if you were informed that by investing there may be a 35% chance of your savings falling in value over the next 5 years but equally a 65% chance of it appreciating? Would you consider accepting that risk?

How about if you were informed that during the same amount of time the spending power of your savings will fall by 2% each year – which amounts to 10% after 5 years – and that it’s pretty much guaranteed. Would you consider accepting that risk?

The latter is what we call inflation risk and the former investment risk. To mitigate inflation risk we look at investing and to mitigate the possibility of all your investments falling at the same time, we look at diversification across asset classes and geographies. Often it’s the case that people go years, if not decades, investing in assets that don’t suit their time horizon or attitude to risk, consequently missing out on the opportunity to bolster their future provision. Discussions with an adviser will help you have a broader understanding of what risks to be aware of and how to mitigate its different forms – equally, how to benefit from them.

Taking your Pension Benefits too Soon

Not only can taking your pension benefits reduce your pension value and therefore impact your future provision. It also means the amount you can contribute to your pension is significantly limited. As it stands the Annual Allowance is ￡60,000, subject to it being capped by your earnings if below that. Taking pension benefits will automatically, according to legislation, reduce your allowance down to ￡10,000 a year for the remainder of your life. Bit of a problem if you plan to keep on contributing to your pension for a number of years.

The solution? Thoroughly regulated financial advice, which the advice industry has become. There are a multitude of ways you can take your pension income and the extent to which these affect your financial plans depends on how and when to you take it. Since qualifying I have met two people who took their benefits from their pension as soon as it was possible. One planned to carry on working for a further 5 years and so their ability to build more provision was greatly limited, potentially leaving a shortfall in their retirement income. The other planned to move countries and thought the only option was to take some of their pension whilst still in the UK. As it is for most countries, a UK registered pension can provide an income even if the individual is no longer a UK resident. So sadly, this particular person has missed out on years (if not decades) worth of tax-efficient capital growth.

Conclusion

When was the last time you considered financial advice? Was it for a mortgage? Could you have reached that same outcome without the advice? Hopefully these scenarios have helped in some shape or form. A wrong footing somewhere could mean the difference between a successful financial plan and one that needs rescuing.

Persell Ewart & Co Financial Management is an Appointed Representative of and represents only St. James's Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the group's wealth management products and services, more details of which are set out on the group's website www.sjp.co.uk/products.