Structure
Rome wasn’t built in a day.
Don’t build a house on sand.
Structures and foundations are pivotal for most things in life and financial planning is no different. It’s common to find a family scenario where one person earns significantly more than the other person. As a household therefore, they might well have an income of say, £150,000, which by most standards, is a substantial income.
However, if they only consider finances from the perspective of the higher earner, there’s a good chance that when they get to ‘the next stage’ of their lives, perhaps retirement, they have a very lop-sided financial position.
It might be useful to consider some client scenarios to provide some context
Client 1
IT consulting business, with one main fee earner, through a limited company.
- Pensions x 2 – both actively funded
- ISAs x 2 – both actively funded
- Corporate investment account x 1
- Remuneration strategy – a mix of salary and dividend
Priority is funding their tax efficient accounts, whilst not paying more income tax than is necessary.
Client 2
Family – two high earners. Seek growth and long term financial flexibility.
- Pension x 1 – actively funded
- One of the couple has a tapered annual allowance
- ISAs x 2 – both actively funded
- Junior ISAs x 3 – all three actively funded
- Venture Capital Trust (VCT) under review
Just because a VCT offers some up-front tax benefits, it does not mean it’s a definitive requirement for their financial plan and hence it is not yet active.
Client 3
Couple – both now retired. Seek a tax efficient, high level of income.
A very high net worth couple – asset rich, but limited liquid resources to fund their income needs.
- Pension x 2 – actively funded
- ISAs x 2 – actively funded
- General Investment Accounts x 2 – actively funded
In this third scenario, the GIAs are the largest part of their portfolio, by value, which is a little unusual, but utilising their annual capital gains tax allowances, as well as annual dividend allowances, this is a very flexible and when planned, tax efficient option.
There are some common features across these scenarios, which is of little surprise, as pensions and ISAs can form the basis of a tax efficient and flexible financial portfolio for most families. In each of the scenarios above, we’re utilising WKM’s in-house discretionary investment management expertise, with a mix of investment portfolios, to help these families build towards their long-term goals.
Structures, when aligned to a financial plan are integral to help ensure the plan delivers. Once the structures are in place, we meet regularly with our clients to review their circumstances and what opportunities there are to take advantage of. Most people will have a finite amount of income and as such, can’t necessarily utilise all their Pension/ISA allowances each year. We therefore need to review, discuss and prioritise the funding strategies.
A common query is whether to fund ISAs or Pensions. There is, however, no simple answer, as they have benefits that suit different situations and outcomes, although they both have a part to play for most people, hence you can see them in all three scenarios above.
If you’re unsure about what accounts you should have, which ones you should fund and whether you should consider consolidating your financial affairs, get in touch and we would be delighted to have a conversation.
Thanks for reading.