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The Journey – the power of long-term financial planning

As a wealth management consultant, it is my job to help my clients achieve their financial goals. Naturally, there is often an underlying reason or story behind them having those specific financial goals in place. Staying with this theme I thought it was appropriate to share the classic tale of the tortoise and the hare.

The Journey – the power of long-term financial planning
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  • Anthony Rowe
  • November 10, 2021
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If you have not heard this story before then you are in for a treat! If you have, then there are still some great underlying lessons to be learned from this classic Aesop’s fable.

 

By way of an introduction the tortoise, as you can imagine, is slow, humble, and not athletically gifted! The hare on the other hand is confident, arrogant, and the fastest animal in the land. One day the tortoise challenges the hare to a race, and the hare gladly accepts while mocking the tortoise.

 

Both animals head to the start line and as soon as the race starts, off bursts the hare as expected.  Knowing he was miles ahead the hare decides to take a break and accidentally falls asleep. In the meantime, the tortoise continues to move slowly along the course, staying focused on the task at hand, and without stopping wins the race!

 

The moral of the story is that you can be more successful by doing things slowly and steadily as opposed to quickly and carelessly. This applies to many areas of life, but this principle is particularly applicable to financial planning.

 

“Slow and steady wins the race”

 

“Life is a marathon not a sprint”

 

“Rome wasn't built in a day”

 

Whatever other cliches I could squeeze into this article could never be truer than when applied to effective long-term financial planning, because the truth of the matter is for most of us achieving our long-term financial goals immediately or in the very short-term just is not realistic. For this majority, a series of smaller, but well planned and executed steps taken as part of a broader financial plan is how to get there. To add in one more cliché, “there is only one way to eat an elephant: a bite at a time.”

 

Long-term financial planning can be done in several different ways; however, for most people, pensions are the best structure for achieving their goals for a number of reasons such as:

 

  • tax-free investment growth within the pension scheme
  • income tax relief (at your highest marginal rate) on personal contributions made
  • corporation tax relief on employer contributions made
  • ability to invest into the business or loan funds back to the company for expansion
  • a safety net for business owners and diversification away from a financial interest in the business

 

While you cannot travel back in time to age 18 to start contributing, for individuals in a healthy financial position - or perhaps operating their owner managed businesses - it is always best to look at opportunities to develop pension funds as soon as possible.

 

The power of long-term planning and the cost of delay is best understood when looking at some illustrative numbers. This example focuses on an owner managed limited business making employer contributions for which the tax relief is in the form of corporation tax relief.

 

The below have been prepared assuming a retirement age of 65, contributions which do not increase over time and are made as a lump sum during each financial year, and achieve 5% growth per annum net of charges (compounded annually).

 

Start age

Annual contribution (£)

Potential total corporation tax relief (£) *

Net cost of total contributions (£)

Retirement value at 65 (£)

30

12,000

79,800

340,200

1,083,844

35

12,000

68,400

291,600

797,266

40

12,000

57,000

243,000

572,725

45

12,000

45,600

194,400

396,791

50

12,000

34,200

145,800

258,943

 

 

Start age

Annual contribution (£)

Potential total corporation tax relief (£) *

Net cost of total contributions (£)

Retirement value at 65 (£)

30

15,000

99,750

425,250

1,354,805

35

15,000

85,500

364,500

996,583

40

15,000

71,250

303,750

715,906

45

15,000

57,000

243,000

495,989

50

15,000

42,750

182,250

323,678

 

 

Start age

Annual contribution (£)

Potential total corporation tax relief (£) *

Net cost of total contributions (£)

Retirement value at 65 (£)

30

20,000

133,000

567,000

1,806,406

35

20,000

114,000

486,000

1,328,777

40

20,000

95,000

405,000

954,542

45

20,000

76,000

324,000

661,319

50

20,000

57,000

243,000

431,571

 

These figures are for illustrative purposes only, investments can go down as well as up.

 

* Based on current corporation tax rates of 19% (this is due to increase to 25% for the financial year 2023, starting on 1 April 2023. However, companies with profits of £50,000 or less will continue to pay corporation tax at the current rate of 19%. Companies whose taxable profits fall between £50,000 and £250,000 will pay corporation tax at the main rate of 25% but will receive marginal relief which will reduce the effective rate of tax that they pay).

 

The great thing about long term financial planning is that you have so many opportunities where you can look to re-evaluate and adapt your strategy to fit your overall long-term goal.

 

However, long-term financial planning can be seen as even more difficult to effectively execute in the world we live in especially where instant gratification has become an expectation. With companies like Netflix, iTunes, Uber - and even social media - we are accustomed to things happening with a press of a button. Even logging onto online platforms, where individuals can see the daily fluctuations of their investment valuations in real-time, can sometimes be seen as a distraction from the long-term objectives.

 

Long term financial planning requires discipline, it takes focus, be more like the tortoise!

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