Five financial resolutions you'll want to keep for 2018
01st January, 2018
At this time of year, many of us start out with lists of New Year's resolutions. We're gung-ho to implement positive changes in various aspects of our lives. And while in reality many of these intentions fall to the wayside, improving our approach to financial planning, and sticking to it, is one thing that should remain at the forefront of our minds.
Here are five steps to ensure your financial plan is on track:
With economic growth back to pre-recession levels many people will find themselves, possibly for the first time in several years, with surplus funds in 2018.
If you have surplus cash of €6,000 per year or €500 per month what is the best option? Should you repay some loans, with interest rates on the rise, or maybe accelerate your pension contributions?
Loans: Firstly bear in mind that the amount of interest you pay on a loan can vary dramatically from less than 1% for tracker mortgages to a staggering 35% for student credit cards. For those holding a €100,000 3.5% variable rate mortgage with 11 years remaining, you could repay the loan four years sooner saving over €7,500 in interest by applying the surplus to loan repayments.
Pensions:The effect of tax-free growth and compounding can double your pension assuming a targeted 6% annual return over 11 years. Contribution of €6,000 per year to a current fund of €100,000 with a 3.5% return (reflecting the current market conditions) could increase your pension by an extra €89,000 to €224,000 over the same period.
- Depending on your circumstances, consider the following options:
- For short-term debt with high interest rates, repay this as soon as possible.
- For medium-term debt with average interest rates, consider a combined strategy of loan repayments and additional pension contributions.
- For long-term debt with low interest rates/tracker mortgage, consider contributing to your pension ahead of repaying your long-term debt.
The rise in asset values may well have increased your risk profile compared to your original mandate. A core principle of investing is that the majority of your returns are driven by your strategic asset allocation over time. In other words how much of your portfolio is in cash, bonds, equities, and alternatives including property during the various investment cycles?
- Sit down with your financial adviser and review your asset allocation compared to your original mandate.
- In conjunction with an update of your financial plan, rebalance your portfolio to ensure that you are not straying into higher risk assets.
- Consider disposing of underperforming or concentrated positions and reinvest in a more diverse portfolio to reduce the risk.
Many investment decisions are taken without thinking about how much tax might be paid over time, both on the return and when the asset passes to the next generation. The tax on investment returns can range from zero (where there are losses or in a pension) to 52% (where you are receiving investment income), with a potential further charge to capital acquisition tax of 33% on passing to the next generation, some points for consideration in conjunction with your financial plan are:
- A pension can offer a zero tax return and is more suitable for income earning assets (bonds and dividend-paying stocks).
- A company can have a 25% rate of tax (40% where a surcharge applies) versus 52% for individuals.
- A family partnership allows assets to grow free of capital acquisition tax (CAT) when set up and operated correctly.
- Individuals can pay capital gains tax at 33% or 0% where losses are carried forward or the annual exemption of €1,270 is used effectively.
- Review your tax return for 2017 with your tax and financial advisers and ask the question: Can you implement some strategies to improve your net return?
- Remember, a contribution of €6,000 into a pension will give a tax refund of €2,400 for marginal rate taxpayers.
The global financial crisis taught us a few harsh lessons about the unpredictability of life, and the New Year is a good time to consider what could happen if the main earners in your family were to suffer from a serious illness or worse.
Review your life assurance cover to ensure it is sufficient to meet your needs in the event of your untimely demise. For example an annual premium of €6,000 could provide approximately €280,000 whole of life cover for your estate for a male non-smoker aged 55, rising to €350,000 for a joint life second death contract both having the same facts, which could make a significant difference to your family to cover:
- Mortgage repayments
- Buy out of shares in your company
- Inheritance tax payments
- Cash fund to meet a shortfall in income for a period
Succession planning is unlikely to feature in the top 10 list of most popular New Year’s resolutions. But as most wealth in Ireland rests with the older generation, it is an extremely relevant topic. You can plan for the transition of wealth by reviewing your own, and your parents’ or children’s circumstances and asking a few basic questions.
- Do I have a Will in place? The intestacy rules could transfer assets other than how you intended.
- Who is getting what assets and are they passing tax efficiently?
- Have I got an Enduring Power of Attorney to prevent me becoming a ward of court in the event that I become incapable of managing my own affairs?
- Ensure that your Will is in place and up to date. You should also consider putting an Enduring Power of Attorney in place to help protect your assets.
- Remember where you are in a position to gift assets during your lifetime, €3,000 can be gifted each year free of CAT to any individual. This can take the form of a couple gifting a total of €6,000 to each child making this a very valuable exemption.
Warning: The information in this article does not purport to be financial advice and does not take into account the investment objectives, knowledge and experience or financial situation of any particular person. You should seek advice in the context of your own personal circumstances prior to making any financial or investment decision from your own independent adviser. This information is based on Davy’s understanding of tax legislation in Ireland and is subject to change without notice. Please note that Davy does not provide tax or legal advice, nor accept liability for it. You should consult your tax adviser for the rules that apply in your own individual circumstances.