Top 10 queries financial advisers encounter on a daily basis – part two
Welcome back to Part 2 of my series, where I provide information on the top ten most common queries myself and my colleagues encounter as busy financial advisers. Last week I covered Mortgages Protection, Life Assurance and Savings and Investments to name a few. This week we continue with …
6. Pensions …Talking about pensions induces either a sense of a panic is some or boredom in others. When we set aside our panic though, people often find pensions are more interesting than you think.
To put it simply, a pension is a game of two halves. The first half is pre-retirement, and this is where you save as much as you can, for as long as you can and mind it as best you can.
The second half is post-retirement, where you take out your money in a tax efficient way.
Simple as that is there are endless investment options and with sound advice people find the options that suits them, and though dialogue with their adviser should come away with a better understanding their pension. When a fund matches your level of risk aversion and/or tolerance, you can start to think about how you spend your pension in your retirement.
To further help build your pension, tax relief of up to 40% is available on contributions, and the fund then grows tax free until you need it. At retirement you will get 25% of the fund as a tax-free lump sum with the balance being used to fund your retirement. It is worth investing.
7. Cohabiting Couples
Many people still do not know cohabiting couples are effectively strangers for the purpose of inheritance tax. They are neither blood relatives nor married and this means, typically, the most a long term partner can inherit from the other tax-free is €16,250, which in many cases is a fraction of the estate. If you are living with your long term partner, this is something that simply has to be discussed given the ramifications it can have.
8. Income Protection and Specified Illness. What’s the difference?
There’s often confusion about the difference between Income Protection and Specific Illness. You may have one, believing it negates the need for the other, but is some cases you may need both.
Income protection pays out if you can’t work through accident or illness. You must be out of work for a specified amount of time, but it will then pay you up to 75% of your income right up to retirement age or when you return to work. Tax relief of up to 40% is available on the premiums.
Specified Illness (serious illness) on the other hand pays out a tax-free lump sum on diagnosis of a specified illness. Dozens of illnesses are covered but over 85% of all claims are paid out for Heart Attack, Stroke and Cancer. This pay out can be used for any purpose, you can pay bills, clear loans, pay for treatment or take a holiday.
9. Business Insurance
There are various types of business insurance, but I believe these are the three most important, in a nutshell:
1. Death in Service: Cover for an employee’s family in the event of death
2. Key Person: Cover for a company to replace loss of earnings
3. Partners or Directors Insurance: Clears any loans payable on death, helps cover loss of earnings, purchase the shares, source and train a replacement.
10. Extracting wealth
At the end of the day, we all need to know a little bit more about how to pay ourselves more and revenue less.
Many businesses start accidentally, you might spot a gap in the market, or find something you like doing and it starts to earn you money, some start as a side hustle but go on to grow into an established business. At some point your business will start to make money, and you may finally get into a position to pay yourself, but of course your tax bills start rising.
What are your options?
You could think about your salary as a way to manage these high tax bills, but up to 52% of that is on tax the USC and PRSI. You may also be tempted to buy a new car, but BIK means income tax, USC and PRSI on 30% of the value of the car.
Alternatively you could transfer profits into an executive pension plan with no BIK, USC or PRSI, get tax relief on the contribution and a tax-free lump sum of some or all on retirement.
You can invest in almost anything. For example, your pension could buy an investment property for you. Your pension then collects the rent tax free, and at retirement you can transfer the property to an ARF and draw the rent as part of your pension. There is so much up for grabs, just start the conversation with a financial broker.
Final thoughts, asking for advice when you want to buy a specific product is an excellent idea. It is also helpful to have what I refer to as a full financial check-up with an adviser. You can do this at any stage in your life and it benefits most people.
An adviser is there to help you figure out how much achieving these goals will cost and whether what are realistic options. From there, you collaboratively review your current financial situation and look at any policies and investments you may already have and you and your adviser can draw up a financial plan with you and for you.
Remember a rainy day is much more enjoyable if you’ve planned for it.