Steps in creating a Personal Budget for 2023

When I first started out in the financial services industry, the primary role of a financial broker/adviser was one seen as somebody who basically sells products. One who might help you set up something you need or want like a pension, savings plan or some sort of protection policy. Quite often people would take these products out as they knew on some level they should have them, but they were quite often not completely sure of what the benefits these products would provide them or their family, if needed.

More recently, the role of a Financial Broker/Adviser is migrating to one that’s more about providing information, education and advice on the options for clients and working with the client to come up with a plan to prioritise and make sure they have the correct provisions specific to them and their needs.

Quite often, people approach me to do a financial review because they are in some ways unsure of how much money is coming in and going out, so they are unsure it if there is any room to amend their finances. If there is a combined income of anything greater than €80,000 coming into a household, a full financial review can be extremely enlightening.

One of the worst things in life, is the absence of knowledge on something, so one suggestion I suggest to people is to start the process yourself. Start thinking and discussing your goals in life for the short, medium and long term.

You should then start looking at what’s coming into your household and what’s going out of your household. With the availability of bank apps it is getting easier and easier to track our spending habits so there are less excuses now to keep putting it off. Try and focus on areas you can start to make savings. Simple things like changing utility bills and even reviewing your current mortgage rate can make significant savings.

Set out a plan and try to adjust your habits to fulfil that plan. Review it regularly, at least anytime there are significant changes in your personal and/or financial circumstances. Some people prefer to do it themselves and some prefer to have help with getting this process started, so they come to me for assistance. If you go to https://www.drumgoolebrokerage.ie/planning you can get an idea of the cost of the service and kind of process involved in doing short/medium and long term financial life goals.

Attitude to Risk - not just for investments

"Attitude to risk" is a term often used to describe an investors sentiment to risk/volatility when choosing investments to reach their savings goal. Every person has a different attitude towards risk when it comes to financial gains or losses and there are varied reasons why each person may be uniquely suited to a specific strategy. In general, though, people tend not to associate risk with deciding on life assurance and serious illness cover.

Just as attitude to risk in investments is based on a persons’ individual circumstance, so too is choosing the right amount of life and illness cover. The usual type of questions you get from an investments perspective is “how would you rate the degree of risk you are willing to take in your financial affairs? The optional answers range from “Extremely low risk to “Extremely high risk”. People generally understand that when the value of their investment/pension goes down a lot it may have a significant impact on their lives if it doesn’t recover.

The same question can apply to a person’s health. If you consider your investment value/pot the same thing as your Body/Mind, the financial impact to a loss of either body/mind can be equally damaging. Part of the difference appears to be that most people really do not believe they will ever become unwell or die, the thinking being that this only happens to other people.

I regularly meet with people to do financial reviews with savings into a pension or growing their money as their priority. Quite often they do not consider life, illness or salary protection important, particularly if they are in good health (which ironically is usually the best time to take out these covers). It doesn’t actually matter if you value these covers or not, what matters is what your honest answer is to the question “If I or my partner died or was unable to work for a prolonged period of time, how would our family cope financially?”. If the honest answer is that you would struggle, then the next question has to be “Why would I not review my cover to see if I can protect our family?”.

I was quite shocked recently hearing news of three different people I know, to have suffered either the death of their partners (in their 40s) and one with a terminal illness diagnosis. A sombre but important reminder that we are all vulnerable to illness and death at every stage of our lives.

Head vs. Heart

I recently sat down with a client who was just starting his retirement. He was taking his tax-free lump sum from his pension and the choice he had to make next was to either purchase an Annuity or to re-invest in an ARF (Approved Retirement Fund) with the balance of his pension funds.

• An Annuity is purchased using your pension funds and is a simple retirement payment option that guarantees to pay you a particular amount every month throughout your life in retirement.

• An ARF (Approved Retirement Fund) allows you to remain invested in the market with the ability to control your investment and take a flexible income in retirement.

It was clear after reviewing all his finances, that he did not need to rely on his pension to retain his current lifestyle in retirement (he had other savings separate to the pension). After considering all factors, from a financial perspective it made perfect sense for him to re-invest his funds in an ARF and retain ownership of his pension options, to try grow the pension. He could afford for his pension to effectively go to zero and he would not be significantly impacted. Purely from a financial perspective, the ARF was a more suitable option.

However, my client showed me a folder of all the records he had kept and continued to keep of his pension values. He described how he and his wife felt when their pensions reduced in value. So, I asked him would they continue to feel this anxiety even if there were small fluctuations in their pension values? To which he replied “Yes.”

In the end I advised my client to go with his gut, which was to buy the Annuity. Three months after the transaction, I was speaking with him again and he said he was enjoying his retirement and was really happy he didn’t have to think about the pension anymore. People think they have to re-invest their funds, they have to grow their money but that is not always the case. The right financial decision is not always the right life-balance decision. In this case the choice my client made was the correct one to allow him to enjoy his retired life.

Buying an Annuity at Retirement

What is an Annuity?

An annuity, commonly known as a pension, provides you with security of income for life during your retirement. It is paid monthly into your bank account. It is purchased with some (or all) of the retirement savings you have built up throughout your working life.

An annuity can be an attractive option if:

·         Your pension fund will be your main source of income in retirement

·         Your main priority in retirement is a secure regular income rather than passing on your fund to your dependants

The amount of income you receive depends on the size of your pension fund and the annuity rates in force at the time you purchase your annuity.

What is an Enhanced Annuity?

An enhanced annuity is the same as a standard annuity, except that it takes into account your health status and lifestyle health risks in determining the level of regular income payable to you. With an enhanced annuity you may be entitled to a higher regular income than you would under a standard annuity.

Where medical conditions may go against you when applying for some life policies, with an Enhanced Annuity having an underlying medical condition may lead to you possibly getting a better deal or more favourable terms. Cancer, heart or neurological conditions, diabetes, stroke or some lifestyle factor such as smoking are just some examples. Life expectancy is also one of the main dictating considerations in calculating annuity rate risk and this unique annuity addresses that issue.

What sort of medical information will I need to provide?

In general, the more detailed the information you can give, the more likely it is that you will receive an offer of an enhancement.

Some of the details required are:

1. Your weight and height

2. Your smoking history (past and present)

3. Any medication you are on (it’s best to have the names and dosages ready)

4. Full history of any medical conditions or incidents in your past

I want to also provide a pension for my spouse/civil partner; how does that work?

The medical history for both you and your partner will be assessed and quoted based on your joint medical history. The annuity may be enhanced if either of you have a medical history, which means the extra income applies to both of you. If you both have a medical history, the enhancement will be respectively bigger. A doctor must be able to verify the information provided in respect of your dependant.

Case Study – Sell or Stay Put?

I recently received an enquiry from a couple who were interested in conducting a review of their finances. They were very aware of their current situation but wanted to see what the financial future would look like in two different scenarios. They have a rental property and a home property, both with active mortgages.

Their aim was to see what the future would look like financially if they

1.    Kept the rental property, continue to use the rent to pay the mortgage and eventually have the rental income as a profit in later years

or

2.    To sell the rental property and use the proceeds to clear both mortgages.

The couple inputted their incoming and outgoing funds through our secure online financial planning portal, along with their savings / assets / liabilities and their objectives. As part of their objectives, they had also hoped to factor in starting a pension plan and to continue regular savings.

There were pros and cons to both keeping and selling the rental property but, I was able to show the various outcomes using the graphs in our planning system to show how life would look financially up to retirement age and into later years, depending on which choice they made.

In their feedback, they said that being able to see this information and to see its impact it would have on their lives, helped them to make the correct decision for now and into the future. They can also fulfil the additional objectives that they originally listed and know that they will be financially secure.

Since I first began providing this financial planning service, I have seen that no two people’s situation is identical. The system and the process can be used for many different purposes and outcomes but at the end of the day, it is providing people with peace of mind and confidence in their decisions.

There is a once-off fee and a simple three step process to get started, should you wish to carry out a financial review. Following this, you decide what step to take next. This process will, at the very least, be an education to anybody who has no short or long-term financial strategy for retirement or savings needs.

It’s Not Too Late…

Are you over 50 and thinking it’s too late to save into a pension?

Never fear…although it’s regularly said that the time to start a pension is yesterday, it is not too late to start in your 50’s. For some, it is a time in life when there may be less expenses and perhaps more disposable income. The picture of life in retirement is going to look different for everyone, but it’s worth thinking about what lifestyle you would like when you retire and what income would allow you to live comfortably in that lifestyle.

Starting a pension at 50 with an aim to retire at 66 would give you 16 years to grow your pot. One major advantage is the ability to contribute 30% of your income while receiving tax-relief should you wish. This rate increases to 35% between the age of 55 and 59 and is up to 40% from age 60 onwards.

In Ireland, there is a contributory state pension of around €13,000 a year (The Pension Authority, 2021) which doesn’t kick in until you turn 66. The amount you receive as a state pension will depend on your number of Pay Related Social Insurance [PRSI] contributions. Do you think you could retire and get by on €253.30 per week? If not, now is the time to act.

Usually as we get closer to retirement, we have more disposable income for multiple reasons. Children no longer financially relying on us, mortgages and loans paid off and our salary has hopefully increased significantly. What a lot of people do not realise, is that they can probably afford to contribute more to their pension than they may think.

If you are on the higher rate of tax and invest/save €192,000 into a pension during the 16 year term above, you would receive €76,800 in tax-relief. So, it will cost you €115,200 (€600 per month net cost to you) to have €192,000 in a pension before you even factor in any potential growth.

At a very conservative rate of 3%, this could leave you with a pension pot of €245,000. That would give you a cash lump sum of €61,250 for your retirement party and you could easily drawdown an annual salary of €9,100 (or more if you wanted) on top of that to supersize the state pension.

Protect Your Salary

The main purpose of Wage Protector is to provide a regular income if you are unable to work for a period of time due to an accident or illness. It works when you cannot.

Who may it be suitable for?

Wage Protector is aimed more towards manual occupations such as construction workers, electricians, plumbers, mechanical engineers and the self-employed. These occupations may be classed as higher risk occupation categories meaning traditional Income Protection may be more expensive. Wage Protector is the more affordable alternative to Income Protection.

How is your benefit paid?

The income is paid from the provider directly to you, after tax, USC and any other relevant deductions.

How does it work?

It replaces 75% of your earnings for 24 months. To continue to claim after this time, a functional assessment test must be carried out to qualify for further benefit payments. The product is divided into two types of cover as follows.

Transitional cover

• Starting after your chosen deferred period, this pays you a replacement income if you’re unable to do your own job for 24 months.

• It gives you the chance to get back on your feet or prepare for an alternative job.

• Depending on the circumstances, after 24 months, you may be entitled to full disability cover.

Disability cover

• This applies if you’re unable to return to work due to significant illness or injury and you lose earnings because of it.

• You must pass a functional assessment test to qualify for this cover. This is a simple, easy-to-understand set of physical and mental ability tests.

You can claim tax relief on the premiums you pay at your marginal rate of tax.

*Sample quote from Aviva May 2022