MANY people's financial planning will have been blown off track during 2008. The major stock market falls in the second half of the year, combined with extreme volatility and global economies facing unprecedented turbulence as they moved into recession, have meant that individuals have been more concerned with not losing what they have than ensuring that future plans are on track.
This is perfectly understandable. Global equity markets have fallen by about a third over the year, although there has been some protection for those investing overseas due to the weakness of sterling. Many investment portfolios have not been adequat
ely diversified, with investors taking more risk than they realised, and so financial planning arrangements, such as retirement planning or providing an income in retirement, have been hit hard.
The new year marks an opportunity to pause for breath and reconsider financial goals and objectives. What is it you want to achieve and what do you need to do to achieve it?
If your financial plans have been affected, then broadly you have two choices: either do nothing or do something. If the former, then you may need to accept some compromise in terms of your life plans. For example, you may have to push back your planned retirement date or survive on a lower income.
If you can commit extra money to your financial planning then this could help to ensure your financial goals remain achievable. However, it is important not to throw good money after bad or take on more risk than you are comfortable with.
You must therefore consider the level of risk you need to take to achieve your financial goals and compare this with the risk you are happy to accept. The most sensible approach for investors is a diversified multi-asset portfolio, which will help to manage investment risk. For example, a typical Towry Law client portfolio will hold 15 different asset classes.
If you are taking income from your savings, you need to decide whether the amount you are taking is sustainable. This again links to investment risk, but many people also take income from deposit accounts, and rates from these have fallen and probably have further to go as the Bank of England continues to cut interest rates.
If you are currently in an unsecured pension (income drawdown) you may now wish to consider buying an annuity with your pension fund. This will provide security and negate any further investment risk, though investment losses will mean you are buying your annuity with a smaller fund and so are likely to get a lower income.
Other investments also need to be reviewed to ensure they are appropriate and tax-efficient. For example, the 2008 Budget changes to capital gains tax all but erased any tax benefits previously offered by investment bonds.
The introduction of a single rate of capital gains tax, coupled with the annual exemption for individuals (currently £9,600), means that a couple can enjoy gains of at least £19,200 each year before they need to pay tax on growth, and even then at only 18%. Contrast this with investment bonds, where all gains are treated as income for tax purposes and are potentially subject to income tax of up to 40%, with no opportunity to shelter growth using an annual exemption.
As a general rule investors should ensure, after using relevant tax-free allowances, that their investments are liable to capital gains tax in preference to income tax. All investors should therefore review their investment bond holdings.
For those with borrowings, including mortgages, these should also be reviewed. Falling interest rates could create opportunities to minimise interest payments.
As we look ahead, the general outlook for 2009 does not look too promising. However, you should ignore pundits' predictions, as most of them will be wrong. You should ensure that short-term sentiment does not dictate long-term financial planning and that your investments remain diversified and tax-efficient. You should also only take advice on an independent fee-only basis, where your adviser will not have a financial incentive to sell you an inappropriate product.
• Andy Cowan is head of private client at Towry Law
