January is the time when many of us make resolutions which are designed to protect our health and wellbeing: giving up alcohol for the month, joining a gym, taking up running, or ditching the fried food for something more healthy.
All of that is great, but what about protecting your financial wellbeing? At a time when many people are facing tough economic times, making sure you and your family are financially protected has never been more important.
Fortunately, undertaking a new year’s review of where you might need to be taking measures to safeguard your monetary future is not such an onerous task. A good starting point is to break down your financial life into its component parts – and for many people that will consist of four basic chunks: income, family, health and inheritance.
Income
This is the most basic financial protection, whether you are employed or running your own business. What would happen if you couldn’t work for a period, due to illness or an accident? It doesn’t take very long at all for no income to equal crisis, whether putting your home at risk because you can’t pay the mortgage, running up large debts, or being unable to pay basic household bills.
The cost-of-living crisis means that many people are struggling to pay their day-to-day expenses, let alone save for a rainy day, but the first rule of financial protection is that if you can undertake some do-it-yourself protective measures, you certainly should.
Ideally, people would have three months’ income put aside as an emergency fund, providing a cushion against all but the most serious hiccups to their income. Unlike other savings which might be locked away in long-term investments, your rainy day fund needs to be readily accessible, and guaranteed. So safe havens such as Premium Bonds or NSI accounts are ideal homes for your just-in-case cash.
The second thing to do is check carefully your employment contract. If you fall ill, how long (if at all) will your employer carry on paying your salary? In the very best case scenario, this might be six months at full pay and then six months at half pay; in the worst case, you would have to rely on Statutory Sick Pay, which is currently an underwhelming £99.35 a week – and that’s only for 28 weeks.
If you don’t have the safety net of savings or a generous employer sickness package, then the best solution is an Income Protection Plan. This will provide you with an income if you are unable to work, whether you are employed or self-employed, for the long-term.
You can trim the cost of such a policy by opting only to receive benefits after a stipulated period of being unable to work, typically three or six months. This makes such products ideal for those who have the safety net of a rainy day fund or a period during which their employer will continue to pay their salary.
It is important to understand what is covered; some policies will cover you only if you are unable to work at all (i.e. do any job), whilst others will pay out if you are unable to do your specific job. Getting it right is vital, and taking professional advice can avoid being caught out should the worst happen.
Family
How would your family cope financially if you were to die, or contract a serious long-term illness? This is the question many people start asking themselves at key points in their lives, for example when they first take out a mortgage, or when they start thinking about having children. It is a very relevant question and is the reason that Life Insurance and Critical Illness Insurance exist.
Most people will want cover for a fixed period of time, for example for the duration of their mortgage, or for whatever period they think they will need to support their children (and this is often not just the traditional first 18 years of their lives, now that things like university fees are part of the equation).
For policies designed to pay off a mortgage in the event of death or serious illness, the level of cover can be set to decrease over time (as the amount owed starts to fall), reducing of the cost of cover. Conversely, policies designed to support family and children over, say, a 25 year timetable, need to take into account the effects of inflation and rising costs. For example, when university tuition fees were first introduced exactly 25 years ago, they were £1,000 a year; today they are typically an eye-watering £9,250 a year.
The lesson here is that there is no one-size-fits-all solution and obtaining the right cover for you as an individual is important. Seeking professional assistance could help.
Health
Growing waiting lists in the NHS are making many people think about whether access to private health might be the answer. Waits of four weeks just to see a GP are not uncommon, and there are now over seven million people on NHS hospital waiting lists.
Not only is waiting for treatment stressful and worrying, but for the self-employed particularly, not being able to work while awaiting an operation could have serious financial implications.
As with every aspect of protecting your financial wellbeing, the first solution should always be self-insuring, if that is possible. Putting away a little every month to create your own health insurance fund – which you can call on to pay your way to quick treatment should the need arise – is the best policy.
The alternative route is private health insurance. There are myriad policies available, ranging from basic cover which allows you to access private health if the NHS cannot treat you after a set period, to the gold-plated policies which offer instant access to private healthcare at the hospital of your choice.
Such cover can be expensive – and of course you may be paying for something you ultimately never need – but if prompt access to healthcare when you need it is a priority, relying on the NHS might not be the answer, at least for the foreseeable future.
Inheritance
After a lifetime of working hard to accumulate wealth, most people want to ensure that their family is looked after when they are gone.
The first thing to say here is that it’s vital to have a will, even if your financial affairs appear to be uncomplicated. Dying intestate is a route to significant stress and hassle for those you leave behind, and there is no guarantee that your wishes will be followed unless you have made them crystal clear in a will.
The next thing to think about is inheritance tax.
Everyone has a tax-free allowance of £325,000, and you pass on your allowance to your spouse, so when they die, they can in effect leave £650,000 before inheritance tax kicks in. There is an additional allowance of £175,000 for passing down the family home, although this is tapered off once the estate reaches £2 million.
Those figures sound large, but with property prices having soared in the past few years, even those taking advantage of all those allowances could still see their estate liable to inheritance tax.
It is possible to ensure against the tax liability, but the best bet is to undertake proper inheritance tax planning to protect your family from a big bill when you die. In particular, it is worth considering gifting money while you are still alive. Not only will that reduce the value of your estate when you die (provided you live for seven years following the gift), but your dependants can have the money when they really need it (such as when your children want to buy their first home) – and you get to enjoy seeing your gifts being used.
One final protective measure which needs to be considered as you get older: what happens to your financial affairs if you lose the capacity to manage them? Fortunately, the process of creating a Lasting Power of Attorney is simple and cheap and could ensure that your own interest are protected in later life.
Lovewell Blake Financial Planning can offer advice on all aspects of financial protection to ensure that you have the level which is appropriate for you.