Personal Financial Planning - Essay Example

?Personal Financial Planning Everyone has to plan for his better future life. 60 years old Jeff needs to invest his money in such a way that he may get a good return at the time of retirement. The data shows his average annual income of last five years i.e. about ?28000. He has now 5 years of job remaining. The best way to utilize his resources to save the money for his retirement is to invest the amount to get a good return. So that he may have enough money to complete his post-retirement plans. Jeff is also having full National Insurance contributions and has some savings. He has won the lottery ticket prize of ?800,000. Now he has to use the entire amount wisely because he has various plans to be fulfilled. These plans can only be completed by having proper use of the available cash. For that purpose, Jeff needs complete personal financial planning. Now Jeff needs to be very careful to use the money in such a way that he may fulfill his plans after retirement. Obviously he would like to use his money to earn some profit on it. The financial institutions are there to help such people. They offer different rates for the investment of 5-10 years and so on. They have different policies so one should be aware enough to choose his required package of investment according to the rates. He should deposit the amount for annuity and get the reward at the end of fiscal periods. In UK market, the present rate of pension annuity is about 40% and it also varies by institution to institution. So if Jeff starts investing his money for pension annuity then this activity will be fruitful at the time of his retirement. Moreover, statistics shows that there are chances of increase in the annuity rate in coming years. Normally the pension annuity period goes to the age of 75 in UK but mostly people avail the opportunity at the time of retirement i.e. 65. Though some people go for other options to hold their finance or maximize it. That is the remedial measure to adopt such steps during the job to secure the life after retirement. During the job, this may be the best way to save money for future. But there is another fact that if anyone at the age of 65, wants to utilize his annuity amount then there will be surely reduction of 1% in profit. This is the reason people go for other options. More the time will be; more the chances to get higher profit for annuities (Murthi, July 2000). All the people whether they are skillful or not, consider the financial planning a very important thing. With the passage of time people became aware of its importance. It’s not necessary that they have the knowledge to plan perfectly for their selves or not. The thing is that they have vision of the importance of financial planning and they want develop a financial plan for themselves to save their financial resources for the future life. The advice of an expert financial advisor also helps the individual lot. A research study shows that only 13% people are known with the skills of financial planning. Everybody has his own preferred resources to identify the needs to plan for future life (Murphy, 2010). In Jeff’s case, we need to consider the rates of different institutions and compare their rates of annuities. The highest rate of return will be considered. Basically, the rates are linked with the period of time you are investing money for. If the time period is longer, the rate will be higher and vise versa. The investor gets the highest rate in the later years so that is the main purpose of pension annuity. This thing helps the individual to secure their future after retirement. So this will be beneficial for Jeff to invest money in pension annuity and make it more of the original. We can go for fixed annuity. In such annuity, the annuity is sure for some years e.g. we say that we have an annuity for 5 years. So it is the annuity in which number of years is fixed. The financial institution will make the payment at the end of that period. Jeff can get more of this plan. Another option is the Maximum Investment Plan offered by different banks. It is considered as a tax-efficient plan to save your money. But it requires continuous deposits for 10 years or more. You can choose the packages according to your need and bank will give you the lump sum amount with the profit at the end of that period. This package also allows the individual to save money from taxation or other liabilities. Jeff has 5 years left but if he wants to attain more profit and reduce liabilities then this package will be fruitful. The only problem is 10 years continuous investment. It just requires ?50 to start your Maximum Investment Account. This is the minimum per month limit. You can choose your own limit of deposit. The minimum per annum limit is ?250 and the initial term for the account is 10 years. You have choice to extend the period as well. So it is upon you to decide where you want to invest your money. Obviously everyone goes with plans. If you want to avoid the taxation rate then this will be the best available option with little investment to get good profit. For Jeff, it is also a beneficial package. He can avail this opportunity because he just has to pay the little amount on monthly basis. Time is a bit issue but the amount without taxation is also attractive. There is no burden on the depositor to deposit huge amounts regularly. Jeff has also an opportunity to start investing their so that after 5 years of his retirement, he would have another good amount in hand. So he can enjoy more time with his family. Jeff has option to avail the opportunity of retirement saving plan, which is sponsored by the employer for employee’s benefits. People always try to go for the plan that gives them relief from taxation. For that, Jeff should go for the Traditional IRA plan. This plan will lead him towards lower taxation rates in future. So now, there are several good options for Jeff, but the most recommended is pension annuity plan. He should go for that because he can get 40% plus original at the tie of his retirement. That means if he deposits the amount of annuity ?20,000 so then he will get 40% profit on the original amount i.e. ?20,000. Jeff has won the lottery ticket prize and now he will definitely give some of its share to his children. Kylie is married and she is having 2 children. His son Phil is still a bachelor. Jeff has to consider the needs of his children to give them share from his money. The issue for Kylie is the interest only mortgage of ?170,000. For mortgage, there are different rules and policies in UK. If the matter is regarding to the payment of mortgage, then there are two types of prepayments i.e. monthly prepayment and lump sum prepayments. Both have different ranges in percentage. If you go for monthly prepayment of mortgage, the range will be 0% to 100%. This is basically your monthly mortgage payment. You have choice to make it 100% double. In lump sum prepayment, the range is up to 25%. So the better option would be monthly. During the time period of mortgage payment, people desire to pay the entire mortgage amount as soon as possible. They want to get rid of mortgage issue. As you pay off the mortgage amount regularly, you may not notice the cash flows during that term. If you notice the cash flows, obviously you will want to use that money to pay off your mortgage. Now the Jeff intends to give money to his son and daughter. Kylie will definitely want money to pay off the mortgage. So it is better to give her the amount of mortgage to get rid of it. Jeff should give her the required amount from ?800,000 as her share. As soon as she will pay off mortgage, there will lesser interest rate on the original. Mostly, the people having high or good pay scales do the same thing. The statistics shows that only in 2010, financial institutions received additional mortgage payments from 28% users. So usually people do pay off the mortgage payment to avoid the extra cost. Jeff has to do the same thing. He should pay the same amount to his son as well. The next thing Jeff has planned is to save the amount for his grandchildren’s higher education at universities. They are too young and there is still a long time to go when they will be able to go to universities. Till that time the money must be saved by Jeff. So that when they will grow up, they may get admissions in good universities and their parents may not have any financial problem to deal with their higher educational expenses. If we look upon the current fee structure of universities, it is being increased by The Higher Education Act 2004. Now tuition fee for undergraduate student at university is ?3,000 and other charges. This is because educational institutions need finance to run their operations. The university fees are raised to maintain the high quality of education at international level. It is also expected that the fees of university may increase in future time period depending upon the conditions (© Universities UK, 2010). So Jeff needs to invest the amount for his grandchildren in the bank for a fixed period of time. So that he may get good reward on that and if the fee increases in the future time period, then he may be able to cover the expenses by the amount deposited plus profit on it. Money will be also remaining in safe hands for a longer time. He should deposit about ?200,000 for the purpose of his grandchildren’s higher education. As it is also expected that there might be an increase in university fees in future, so the profit will help the grandfather to deal with those expenses. There are number of other ways for financing the education like, Tuition fee loans, Maintenance loans, Student Scholarships and other ways. But according to the scenario, as he wants to save money for his grandchildren, so he must invest the amount for the safety and growth. Jeff has many other options to invest that money, which he intends to use for higher education of his grandchildren. He can use the option of money market, where fixed term and fixed rate can bring more profit. This option could be fruitful because he does not have any time issues with this portion of money so he can deposit it for a fixed term. The other options are to invest the amount in Personal Saving account, saving for Children Account and others. He will receive a good amount of interest on these accounts as well. That means number of good options are here to invest that educational money where no fear of loss exist. Jeff is already living a very simple life. He and his spouse have decided not to live a luxurious life so there is no special need of special residual saving. But there are ways to reduce the unnecessary expenses like; he can reduce his amount of cigarettes. Quantity of shopping the things like cloths, cosmetics, and other extra items should be reduced. These things may look small but the impact of this residual saving will be bigger in the future time period. If Jeff wants to save money from residual items then he must avoid the luxurious items. He can use the residual waste by recycling it and making use of it. This will also help him a lot in this regard. Amy’s skill could be very useful in this regard. Generally women are more concerned about savings. So she could use her skills and can save a good portion of money. Jeff has also plans for having a holiday full of entertainment with his whole family in Florida Disneyland just after his retirement from this long job. For that purpose, he is saving the amount in pension annuity and will receive the amount at the time of retirement. The amount left after giving a share to his children and depositing educational money for his grandchildren, he can invest that some where. At the end of the day, he will have much more to spend. The family package for Florida Disneyland is ?548. This is the most economical package and is suitable for Jeff and he will easily afford it. There are kid’s pools, residual villas, clubs, restaurants and many other things to enjoy in this package. If you book your holiday as early as possible, it will be less costly. Jeff will have definitely no problems at that time if he wisely invested the money now. He can enjoy rest of his life by using the money in right manner. Jeff has 5 years left for his retirement. During his last 5 years of professional life, he wants to save money to fulfill his plans by using his savings and the amount of lottery i.e. ?800,000. The personal financial plan for Jeff is completely simple. He has an average of ?28,000 per year so it is expected the same ratio in last 5 years. He could invest the amount in pension annuity to get 40% of profit on the amount being deposited in the account. So that he will have enough money at the time of retirement. The ratio of interest is expected to increase in future so this will be beneficial for him and he can make best use of his money. There are many other options to maximize his return. All what an individual wants from investment is maximum return. The recommended package for Jeff is pension annuity, which is most suitable according to his conditions. The amount he wants to give to his children from the ?800,000 is ?200,000 each child. He also wants to sponsor the higher education of his grandchildren, so the he should reserve an amount of ?150,000 per child. The best way to reserve that amount is to invest that amount in fixed deposit account. There are several options provided in this regard and all are suitable to the conditions. Jeff can also save from residual savings and by cutting short the unnecessary expenses. He can also enjoy the preplanned holiday at Florida Disneyland along with his entire family in a reasonable amount. Still ?100,000 is left after distributing the money to children and reserving the educational money for grandchildren. Jeff should immediately deposit that remaining amount in the bank or any financial institution or should purchase some long term bonds. This could help him in future. Jeff can achieve all what he has planned. He just needs to follow the personal financial planning and use the money wisely. At this time, he might be at the peak of his professional career. This is the real time to save money so that he may enjoy the rest of life after his retirement. To do so, he must take some intelligent decisions regarding his money. References Mamta Murthi, J. Michael Orszag, Peter R. Orszag, July 2000, ‘Annuity Margins in the UK’ viewed on 7 August 2011, http://www.oecd.org/dataoecd/30/61/2402277.pdf David S. Murphy, Scott Yetmar, I 2010, ‘Personal financial planning attitudes: a preliminary study of graduate students’ Management Research Review, Vol. 33 Iss: 8, pp.811 – 817 viewed on 7 August 2011, http://www.emeraldinsight.com/journals.htm?articleid=1875419 Amy Finkelstein, James Poterba, I 2002, ‘Selection Effects in the United Kingdom Individual Annuities Market’ viewed on 7 August 2011, http://econ-www.mit.edu/files/1816 Skandia, Literature library, ‘Maximum Investment Plan’ viewed on 7 August 2011, http://www2.skandia.co.uk/Adviser/Literature-Library/Investments/SLAC-Maximum-Investment-Plan/ FP options, Savings, ‘Financial planning options’ viewed on 7 August 2011, http://www.fpoptions.co.uk/personal-financial-planning/savings-investments/maximum-investment-plans/ Rate hub, ‘Mortgage Prepayment’ viewed on 7 August 2011, http://www.ratehub.ca/mortgage-pre-payment © Universities UK, January 2010, ‘Making it count: how universities are using income from variable fees’ viewed on 7 August 2011, http://www.universitiesuk.ac.uk/Publications/Documents/MakingItCount.pdf Direct.Gov, ‘Education and learning’ viewed on 7 August 2011, http://www.direct.gov.uk/en/EducationAndLearning/UniversityAndHigherEducation/StudentFinance/DG_194804 HSBC, ‘Savings’ viewed on 7 August 2011, http://www.hsbc.co.uk/1/2/personal/savings/more First choice, ‘Florida holidays from ?528’ viewed on 7 August 2011, http://www.firstchoice.co.uk/holidays/florida-holidays/ Moneyfacts.co.uk, Retirement planning, ‘Annuities- Compare Annuity Rates’ viewed on 8 August 2011, http://moneyfacts.co.uk/retirement-planning/compare/annuities/ Annuity Rates UK, ‘Improving your income in retirement’ viewed on 8 August 2011, http://www.myannuityplan.co.uk/prs/?cid=BSM001 Guardian, ‘Mortgage debt dominates monthly income’ viewed on 8 August 2011, http://www.guardian.co.uk/money/2006/oct/03/mortgages.business Co-operative bank, good with money, ‘Fixed term deposit’ viewed on 8 August 2011, http://www.co-operativebank.co.uk/servlet/Satellite/1193206371565,CFSweb/Page/Bank-Savings Prudential, ‘Flexible Retirement Plan’ viewed on 8 August 2011, http://www.pru.co.uk/pensions_annuities/prudential_pensions/flexible_retirement_plan/ Read More