Tuesday, 1 April 2014

Financial Planning - 2014 Review


Towards the end of the previous tax year, I set up several Excel worksheets and established a 10-year plan for our savings, investments and pensions.   A bit like the old Soviet Union, I know, although theirs was always a moving five-year plan !

Although we've been saving and investing for many years, it was decided to create a more formal plan to focus our efforts to match our goals, and establish annual targets against which to review the performance each year.  

Like a roadmap to a destination, if you don't where you want to go, or the route you're taking to get there, then it's difficult to know where you are at any point in time, or if and when you've actually arrived.   

Many blog commentators monitor their similar plans at the start of each new year but for several reasons I prefer the end of March, at which time I can also better predict our income tax liabilities for the following year.


The various cash, bonds and share accounts etc were categorised and studied, and a summary worksheet used to add and graph the totals.   All our savings are now in tax-free shelters, both in terms of Capital Gains tax and any additional income tax liabilities, but we might need to also start using the wife's ISA allowance at some time to keep the proceeds of all future deposits free-of-tax.

I'll continue to record the value of all our investments around the end of each month, as I've done for years, so it's quite easy just to pull the end-of-March figures into this new spreadsheet for review against the longer-term targets.

Our 'Grand Plan' was made using what we hope were realistic annual targets.  Included in the mix are estimated and actual inflation figures, and also the annual investment growth we need to achieve the goals.  

Basically, it's intended that the bulk of the growth will initially come from adding fresh money to the pots every year, and we also hope to achieve a >2% average annual real return across all our investments, i.e. after adjusting for inflation.  This may not seem particularly aggressive, but we've been in a low-ish inflationary environment for around five years now, and I don't realistically expect this to continue for the whole duration of the 10-year plan.

The plan was set at 31-Mar-13, and although I've more recently decided to significantly increase the annual contributions to the savings pot, if it's possible of course, I haven't raised the bar by re-basing the forecast - this plan is what I believed was achievable last year from the baseline, and so this is what I'll monitor against.  If we can get there sooner, then so much the better.

Psychologically, I also don't think it's a good idea to set the growth bar extremely high in case you'd get disheartened by seeing the 'actual' line on the graph consistently too far to the right of the 'target' line  !   

The columns in each spreadsheet category include the planned additions to the pot each year, the actual additions we manage to achieve, and the end-of year values in both absolute and real terms.  The real growth figures will be calculated using the Retail Price Index (RPI) published by the UK Office for National Statistics (ONS).

The baseline inflation index figure is 247.6, being the RPI 'all-items' index value at the end of February 2013.  This year's value at the end of February 2014 is 254.2, i.e. an annual inflation of (254.2 - 247.6) / 247.6 = 2.67%.   February was chosen because the data is published around the middle of the following month, and so on the last day of March it's the most recent figure available.

(Note that I don't regard these 'official' inflation government figures as being an accurate reflection of our own increases in living costs, but at least they have the advantage of being reasonably consistent and they're published every month - I've neither the time or the inclination to calculate our own 'personal' rate of inflation - at the present time at least...)

In addition to the many summary graphs I created using actual monetary values, I made two more expressed in percentage terms using the absolute values of both the savings and pension pots at 31-Mar-13, i.e. the 100% baselines, and which I'm happy to share here.

So, the results are in for the first year...


SAVINGS POT 31-Mar-14

So, we seem to be ahead of the game with the savings pot at this first staging post.  This is currently a 42% equity / 37% bond / 21% cash split, although this cash is actually in the ISA pot available for investment when suitable opportunities arise.


SIPP POT 31-Mar-14

Unfortunately, we're behind on the SIPP growth front, although it's hardly noticeable from the scale of the above graph.  

At present, I don't contribute very much new money at all to the SIPP, but I may yet decide to greatly increase contributions for a year or two as I get closer to 55, so I can get the tax relief on the way and then take 25% of the total pot value as a lump-sum to invest elsewhere after I hit that particular milestone.

Anyway, all being well, we'll post the March 2015 results next year ....


1 comment:

  1. BeatTheSeasons4 April 2014 at 09:29

    Another interesting article.

    A couple of comments:

    1. Initially we tended to max my ISA out each year rather than my partner's as I'm more likely to be a higher rate taxpayer so it seemed more of a priority for me to avoid tax. However, I wonder if we might one day see some kind of maximum lifetime allowance or limit on ISAs (or even tax on what is 'unearned income'), in which case it might be a good idea to start equalising the balances now rather than building up a massive fund in just one person's name.

    2. The age at which you can draw on your SIPP is currently under consultation with the suggestion that it will increase to 57 and/or always 10 years below the state pension age.

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