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PIPSI: Get your priorities right

Post by Mearns & Company in News

  • Is paying extra into your pension the right thing to do now, or should you protect your family first, if they would be vulnerable if you die or fall seriously ill?
  • If you are planning to pay towards your child’s wedding in the next five years, how should you keep that money safe in the meantime?
  • What would you and your family live on if you were unable to work?

These are all valid questions, but which is the most important? How should you be prioritising your financial planning?

Those of us who have been in the financial advice industry for many years will be familiar with the acronym ‘PIPSI’.

P – Protection

I – Income protection

P – Pensions

S – Savings

I – Investments

This is the order of priority when putting a financial plan in place. Let us look at each area in turn:

Protection – this is the number one priority because if your beneficiaries are not financially secure when you die or become seriously ill, then all your other plans will not succeed. Some older people will not have to worry too much about this area if they have assets built up over many years that can be passed on to their family and no debt. However, younger people such as parents of dependent children will typically have very few assets and a mortgage. Think about what would happen to you and your family if you could not pay the mortgage.

Common financial products include:

  • Mortgage protection
  • Critical illness insurance
  • Family income benefit

From a legal point of view, having a will and power of attorney could also be invaluable if the worst should happen.

Income protection – for those who are not yet retired, it is also important to consider what would happen to you and your family if you were unable to work due to illness or injury. Most employers will offer full pay for a short period, but what happens if you are unable to work beyond this period? Statutory Sick Pay (SSP) in the UK is just £96.35 a week, which will barely scratch the surface when paying your bills. Some employers offer income protection insurance, but if you are self-employed you will need to insure yourself.

Common financial products include:

  • Income protection
  • Critical illness insurance
  • Family income benefit

Pensions – most employees in the UK are now eligible for membership of their workplace pension. Before considering whether to commit any additional money to pensions, the first two protection priorities should be satisfied. While pensions are a tax-efficient way of saving for your retirement, you usually cannot access them until ten years before the state pension age (currently age 55 but rising to 57 in 2028).

Common pensions include:

  • Workplace pensions through your employer
  • Private personal pensions
  • Self-Invested Personal Pensions (SIPP) for more complex needs such as buying a property or investing in unlisted shares

Savings – it is important to have an emergency fund in an easily accessible cash account. This money should be set aside and only used for unexpected circumstances such as an urgent repair bill or redundancy. Any significant planned expenditure in the next five years, such as home improvements, buying a car, or paying for a large holiday or celebration, should also be kept in cash.

Common savings products include:

  • Bank or building society accounts
  • Cash ISAs
  • National Savings & Investments (NS&I) products such as premium bonds

Investments – if you have other long-term goals (over five years), you may be prepared to invest for the potential of capital growth higher than cash account interest rates.

Common savings products include:

  • Investment ISAs
  • Investment bonds
  • General Investment Accounts

This is by no means a finite list of available methods of achieving your personal financial goals but may give you something to think about.

Everyone’s circumstances are different, and I recommend that you get financial advice if you need help with your own financial planning and prioritising to achieve your future life goals.

Neil Lindsay FPFS

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