Table of contents
1. Check monthly fixed and discretionary expenditure.
2. Calculate total debt (mortgage/credit cards/overdraft).
3. Check the terms of your insurance products.
4. Evaluate investments and pensions.
5. Ensure Wills, lasting powers of attorney and expression of wish details are up to date.
6. Make that gift!

We’ve all had to make huge adjustments in recent weeks, not least spending almost all of our time at home.

From buying groceries and exercising, to how we communicate with family, no facet of life has been left untouched. But with those first few weeks behind us, now could be a great time to review another aspect of life; your finances. After all, if you’re stuck at home, why not use your time profitably? The current confinement affords a unique opportunity to reflect on your longer-term goals and aspirations, and to make sure that you have the financial plans in place to achieve them.

Why act now?

Whether you’re employed or retired, you’re likely to be affected by the response to the pandemic. Lower interest rates on savings and companies cutting their dividend payments could squeeze incomes (and living standards) for retirees. Workers also face uncertainty – many risk being furloughed or becoming unemployed. Others have seen their earnings and profit distributions peter out. Many of our barrister clients, for example, have experienced a reduction or complete halt to their earnings.

So, to ensure you emerge from the crisis in the best possible financial position, here is our short checklist.

1. Check monthly fixed and discretionary expenditure.

Go through your bank and credit card statements for the past 18 months and gauge your approximate annual expenditure. Revisit your direct debits, count up the totals – and don’t forget things like travel, season tickets and subscriptions. If you have a satellite TV subscription, have you asked the provider for a refund to compensate for the lack of live sports? Don’t forget to cancel the gym membership and reclaim your travel season ticket and station parking, if applicable. Claim for that cancelled holiday! And although life should be a little less expensive for most people, it’s important to plan for an increase in living expenses when we return to usual working habits. If your earnings have been reduced, you might have to manage on a smaller budget. If you’re in that situation, it’s worth checking that your cash is liquid and not subject to notice periods. Other matters to consider are reducing regular savings or, if you can afford it, making charitable gifts (see point six).

2. Calculate total debt (mortgage/credit cards/overdraft).

Having assessed your expenditure, consider if you require a mortgage payment holiday. And with interest rates at their lowest-ever levels, you should consider rationalising all of your debt. If you have a mortgage, re-mortgaging is an option – there are some very low rates on offer at present. For example, our recommended mortgage broker mentioned a two-year fixed rate of 1.25%, including an offset facility and a five-year fix at 1.45%.

3. Check the terms of your insurance products.

Begin with financial protection, life cover, critical illness and income protection. Do you have enough cover, and are you paying the right price for it? Think about the level of cover you are paying for. It may be that you may no longer need it, if you now have sufficient assets and income. Then review your general insurance (home, second properties, art assets, etc). Here, the same considerations apply – ensure you’re fully covered, but are not paying for cover you no longer need. We came across a case where a client was still paying, via direct debit, insurance cover for an electrical item at an old address.

4. Evaluate investments and pensions.

When it comes to your investments, re-evaluate how much you can afford to save at the present time. You might want to take advantage of market falls by buying assets when they are cheaper. Assess whether to make contributions to your ISA, lifetime ISA, or junior ISA. Alternatively, you might want to temporarily stop contributions to preserve cashflows. Think about switches and changes in your portfolio to add or reduce risk, depending on your view of market levels, attitude to risk and time horizon. Long-term investors with a capacity for some losses (i.e. where a fall in the portfolio now won’t affect their lifestyle in the short to medium term) could likely add more equity risk to portfolios. And if you’re reconciled to portfolio losses, these can be crystallised for capital gains tax purposes. For example, a fund bought with an initial investment of £100,000 might now be worth £80,000. If sold now, the crystallised loss could be carried forward to offset against future gains.

5. Ensure Wills, lasting powers of attorney and expression of wish details are up to date.

When was the last time you updated your Will, expression of wish form (relating to pension death benefits) and lasting powers of attorney? Now’s the time to review them.  Do you want to update or remove guardians for your children? Have your circumstances (and the people you want to benefit from your estate) changed? If the worst were to happen, would the people closest to you be looked after in the manner you would want? And do they know where to find all of the documentation?

6. Make that gift!

Finally, if you’ve reviewed your income and expenditure, your debt is manageable and your assets are more than sufficient to meet your needs, think about making a gift. Many charities are suffering a drop in receipts, due to the poor finances of some and also because donations are being redirected to NHS and care charities.If you were thinking of favouring a friend or relative with a gift, why not make the transfer now – especially if it is an asset that has recently fallen with the markets. Making such a gift to a trust could be particularly effective planning. The following example explains why. Let’s assume an investment portfolio valued at £400,000 before the covid-19 market volatility now has a value of £300,000. If gifted now, the value of the gift is the present value, despite there being a very good chance that the portfolio could recover its former value. Furthermore, any gift to a trust where the value at the date of the gift is below the current inheritance tax nil rate band (NRB) of £325,000 will not have to pay the 20% tax charge on gifts to trusts that exceed the NRB.

 

To find out more about ensuring those left behind after you have gone can deal with your finances, take a look at our checklist ‘planning for the inevitable’. You can also download our full Inheritance Tax guide.

If you have any questions or would like to discuss any of the information covered in this note, please get in touch.

About The Author

Ian McNally
Ian began his career in Financial Services in 1986 with Willis Faber and has subsequently gained a breadth of ...
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