It is back to basics when planning around your clients’ life stages

"We are seeing increased consumer awareness, and more and more clients are questioning the advice they receive from their advisers,” says Raimund Snyders, Executive General Manager for Old Mutual. The best ways for advisers to tackle this problem is to stick to the basics. Snyders reckons that clients find most value when advisers help them to apply the basic principles of financial planning.

Let us consider a client in his or her early to mid 20s, just starting out in a new job. At this stage it is important for your client to gather information from their employer regarding the types of benefits included in their remuneration package.

There are a number of things that both you and the 20-something client should consider:

1. Pension fund contributions: If your client does not have a pension fund, at the very least, they should begin investing in a retirement annuity. The earlier they start investing for their retirement, the more they can benefit from the effect of compound interest. Contributions to retirement funds (such as pension funds and retirement annuities) also have tax benefits.

2. Medical aid membership: Without having an adequate medical aid the costs of medical treatment can be extremely difficult to cover. By becoming a member of a medical aid at a young and healthy stage, the client will avoid late-joiner penalties and waiting periods.

3. Emergency fund: It makes sense to build up emergency savings equivalent to at least three months’ salary. The purpose of these savings is to cover unforeseen expenses that may arise as a result of an emergency.

4. Disability cover: Your client needs to ensure that they have a disability benefit to provide them with an income should they become disabled and unable to work. It is important to check whether disability cover is included in the client’s group life cover (as part of their employee benefit package) to ensure that the client is not over-insured.

Your clients’ requirements change as they enter their 30s. At this age most individuals will need to think about protecting the assets that generate their current and future income. The requirement for "cover” extends to protecting assets such as skills and the ability to earn an income.

1. Severe illness cover: As people get older they are more susceptible to contracting a severe illness. It is beneficial for your clients to take out severe illness cover at a young age, while they are still insurable. Also, the younger your client is, the more affordable his or her premium will be.

2. Death benefit: Your client may be starting a family and moving into a new home. A death benefit will cover your client’s expenses should they pass away unexpectedly – and should also provide enough capital to take care of their loved ones should they not be able to do so.

3. Education saving: Parents want what’s best for their children and know that giving them the right tools to get ahead may ultimately determine their success in life. When it comes to education your clients must consider what they are saving towards (such as school tuition or tertiary education), how long they have to invest and how much they can afford to save. Remember that education inflation is much higher than inflation and usually higher than an annual salary increase too. It is also important to understand that an education policy should include a form of premium protection to fulfil the need for education should something happen to the client. In the event your client is unable to pay the monthly premiums a policy lapse will result in no education savings for his or her children.

There are opportunities in the 40-plus segment too. Perhaps your client is a business owner who has not yet considered a succession plan. "When your self-employed clients are in their 40s it is important for them to consider who will take care of their business once they retire,” says Snyders.

1. Business assurance: A good business continuity plan will help with succession planning in the most tax efficient way. If the business is a partnership or a company, buy-and-sell agreements should be in place, to provide cash in the estate of the partner or shareholder. Other business assurance policies, like "key man” polices could also be considered. In such cases the policy provides cash to the business upon the death of an important employee. It is also important to consider estate planning should the business owner want to donate the business to his or her children. It may be in the business owner’s best interest to have the successor take out life cover on the owner’s life, to enable the successor to purchase the business interest upon the death of the business owner, and to avoid donations tax.

2. Accumulation of wealth: There may be various reasons for short-term savings such as a holiday overseas or a new kitchen, an endowment or unit trusts may be a good short-term option to consider.

3. Invest offshore: Your high net worth clients can use offshore investment vehicles to grow their wealth. Ideally – assuming the portfolio is of an adequate size – they should invest up to 30% of their savings offshore as part of a holistic diversified plan.

4. Retirement fund contributions: Benefits in retirement vehicles do not attract estate duty or capital gains tax, and may be considered as an additional form of creating wealth, while receiving an income tax benefit (within certain parameters).

Your client has saved towards their retirement for many years, and in his or her late 50s to early 60s, will have to tackle the tough task of choosing an annuity that will best provide them with an income to sustain them for the rest of their lives. But research has shown that people are living longer.

Your client may live another 30 years in retirement so it is essential to keep some underlying investments in equities to provide capital growth. It is important to consider your client’s risk profile before investing their living annuity.

A good option is to invest a guaranteed annuity for life for both spouses – and placing any additional retirement capital in a living annuity, where the client chooses the draw down rate. It is however important to ensure that the client does not withdraw more than 5% (as a rule of thumb) to avoid destroying their retirement capital.

"There are so many options when it comes to life staging that there is no one size fits all approach. Make sure that your client selects the right solutions to ensure financial independence, no matter what stage of their life they are in,” concludes Snyders.