As a low-maintenance, long-term strategy, it’s easy to lose sight of your financial plan, especially when your goals sit beyond the horizon.
While “out of sight” can sometimes translate to peace of mind, in financial planning, it’s important that you stay on top of your priorities to keep your plan running smoothly.
Each financial planning journey typically comprises five key stages. Discover where you are and what priorities to focus on based on your progress.
Stage One: Laying strong foundations
At the beginning of your financial planning journey, your priority might be to lay strong and immediate foundations before considering your long-term goals.
These can help your plan succeed by reducing the risk of unnecessary costs, like high-interest debt, for example, or by helping you put a financial safety net in place.
Building a strong cash buffer can protect you against emergencies. This might be the cost of repairing your roof, replacing a boiler, or covering fees for a legal dispute if you’re seeking advice following a divorce or sudden inheritance. An emergency fund is usually three to six months’ worth of essential household costs, but this could be more or less depending on personal preference.
Likewise, purchasing protection policies like critical illness cover, life insurance, and income protection can secure your finances against future uncertainty, whether in the form of illness, accidents, or even death.
Read more: Brits are more likely to insure pets than themselves: Have you overlooked your own protection?
This first stage gives you fresh ground to build on as you embark on your plan, ensuring that financial challenges will be less likely to compromise your objectives in the future.
Stage Two: Creating your plan
With strong foundations in place, you can start considering your long-term goals.
Think about what you want your wealth to accomplish. This could be:
- Achieving financial freedom
- Retiring earlier
- Protecting your family
- Leaving behind a financial legacy.
A financial planner can guide you through this process. They can also turn your goals into financial objectives using tools including cashflow modelling, which maps out how much wealth you might need in the future based on different scenarios.
Cashflow modelling can also be used to build the regular savings and investment plan that will help you achieve these goals.
Stage Three: Accumulating wealth
This is the period in which your plan is in motion.
Your savings and investment plan steadily builds wealth through regular contributions, which benefit from compound interest and growth.
An effective tax plan ensures you are taking advantage of available reliefs and tax-efficient thresholds, whether that’s to claim tax relief on your pension contributions or make use of annual ISA subscription limits.
Tax planning could also involve implementing specific tax strategies, like using salary sacrifice to lower your net income and reduce the impact of fiscal drag on your wealth (please note that rules are changing from April 2029, as the National Insurance contributions exemption for pension salary sacrifice will be capped at £2,000 per tax year).
Learn more: How salary sacrifice could help you reach your retirement goals faster
The accumulation stage is often the longest. It’s important that your plan remains adaptable to new rules and regulations that might impact the tax efficiency of your wealth, which your financial planner can monitor.
Likewise, if your personal goals change, it’s important that you revisit your plan to ensure both are aligned.
Stage Four: Spending in retirement
Once you reach retirement (and have likely achieved one of your biggest financial goals), it’s time to start spending your hard-earned wealth.
But problems like tax don’t disappear in retirement. You’ll need to decide how to withdraw your pension tax-efficiently but also in a way that remains aligned with your time frames and attitude to risk.
You have three main options at retirement:
- Drawdown – Regularly withdrawing from your invested pension pot.
- Purchasing an annuity – Receiving guaranteed, fixed income for life or a set period of time.
- A combination of both.
Drawdown gives you flexible access to your pension wealth. You can withdraw large lump sums to cover one-off costs like expensive holidays, home renovations, or new cars, alongside smaller regular withdrawals. However, your wealth is exposed to market movements, which could cause short-term dips, and the responsibility for budgeting rests with you.
On the other hand, by providing a guaranteed income, an annuity provides you with peace of mind that your wealth will last throughout retirement. But your income is also fixed and no longer benefits from investment growth. Regular annuity income can be useful for covering fixed expenses, and budgeting is easier as you know how much you will receive each month.
Using a combination of both means you could access their different benefits. For example, an annuity can help you cover regular costs, while drawdown can help you pay for one-off big-ticket items.
How you withdraw your retirement wealth depends on various factors. Your financial planner can help design your ideal strategy.
Stage Five: Planning beyond your lifetime
If you intend to leave an inheritance, you’ll need an estate plan to decide how your assets are distributed, and how much tax might be payable on them, after you die.
Your financial planner can help you keep track of the total value of your estate based on your savings, investments, and other assets, like property, businesses, and heirlooms. Working in conjunction with a solicitor, they can help you form a plan to distribute your wealth according to your wishes.
An estate plan can help you mitigate the amount of Inheritance Tax (IHT) your estate is likely to pay through strategies such as lifetime gifting. Starting your estate planning early can help you create more tax-efficient wealth for your beneficiaries.
Read more: Planning on leaving an inheritance? The pros and cons of gifting your estate early
Get in touch
For a comprehensive audit of your financial plans, please get in touch or email us at advice@mlifa.co.uk to set up a meeting today.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate cashflow planning and tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
Note that life insurance and financial protection plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.
Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.