THERE is no time like the moment when you, as a business or family have no money on a rainy day, that you realise what saving for a rainy day actually means.
Cashflow in a family or business is what ruins us, not the value of our assets.
Similarly, saving in an inefficient way can leave you with a much smaller umbrella for that rainy day!
One of the most defining moments in my life was at an early age when I decided I needed to have six months outgoings in my account to give me freedom of thought. I did that, and then changed to 12 months outgoings to really give myself space.
One of our emotional needs is security. Without security, we can become paralysed in everything we are thinking from a household or business point of view. This reduces our freedom of thought and makes us reactive rather than proactive.
Therefore, in simple financial planning terms we need something in the larder (bank), fridge (savings such as ISA’s etc), and freezer (pension).
The former two assist us with that security of ‘cashflow’. Having a £400,000 house is not relevant when you lose your job or are off work through accident or sickness, and there is no cash to pay the bills.
We become asset rich and cash poor. Unable to pay our way, mortgage, or bills, we fall into difficulties.
The impact of tax, charges and performance on your security and freedom can be quite something.
Let’s take a savings with £100,000 invested for twenty years growing at seven per cent.
Tax-free (an ISA) it grows to £320,713 after a one per cent annual charge. Tax paid (in a tax paying investment) at 20 per cent the return plummets by over £60,000 to £255,402.
That is over 60 per cent of your original investment. An extra 0.2 per cent charge takes that return down a further £10,000.
As for performance. That is indeed an extraordinary number. I have mentioned this in previous columns, but the best global fund had returned in excess of £1m over the 20 years, and the worst had returned £94,640 (lost money).
We can therefore see the difference each of these issues make. Your fridge can therefore look very, very different, particularly if you have a poorly performing, highly charged and tax paying savings plan.
For the fridge, the ISA is the elite plan. We can often think of these investments as being too long term, or being out of reach, or locked in, but this is no longer true.
Ultimately, any adviser will recommend you invest for over five years. The reason for this is that stocks rise and fall, and a five-year period smooths out the potential to minimise these losses.
You can access the money at any time in between, but the market may be lower than your entry so you could lose money if encashed at that lower point.
A further flexibility has arrived in the form of flexible ISAs.
You have an annual allowance of £20,000 per year to place into your ISA. If you put some money in and then decided you need access to say, £10,000 for whatever reason, you withdraw it.
If you then wanted to top that up, you would be unable to as you would have reached your ISA allowance at £20,000.
A flexible ISA allows you the freedom to withdraw and then replace funds during the year without it counting toward your tax-free allowance. Whilst you can only take out of the cash ISA, you can circumnavigate this by selling the stocks into cash then taking the cash out.
Are they widely available? Sadly not. Help to buy ISA’s, Lifetime ISA’s and Junior ISA’s don’t have this flexibility.
There are many mainstream ISAs providers who have yet to offer this option but your Independent Financial Adviser can let you know which are available are most suitable.
They will then assist you in transferring from your current provider to the most suitable option available.
Peter McGahan is chief executive officer of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. For a complimentary conversation on flexible ISAs, please call Darren McKeever on 028 6863 2692 or email info@wwfp.net or visit us at www.wwfp.net.
