Control of your personal economy is vital in protecting against external threats such as redundancy and can also allow you to take advantage of the opportunities that may arise, writes Johnny McNamara.

The current downturn in the global economy has created an environment with an ever-increasing level of threats to all of us. These threats are often outside of your control and therefore, there is little or nothing that you can do to stop them affecting you. However, the degree to which these threats affect you can be limited by taking ownership over the factors that you can control.

Identifying the threats to your personal economy is the first step in taking more control. For example, one of the biggest threats to many people today is the threat of redundancy and given the fact that we cannot control a redundancy, what can be done to manage your finances through this threat?

First things first

The first thing that you can do is to act now and seek to protect yourself against the threat of redundancy. At present, there are policies available that can provide you with a replacement income in the event of involuntary unemployment. There are also products, such as mortgage repayment protection, that can cover your mortgage repayments in the event of redundancy. These products do not pay out indefinitely, but can help you to manage your way through a potential cash-flow crisis in the initial period after redundancy.

Obviously, there is a cost involved in taking out one of these policies, so it is important to identify how this cost may affect your current cash-flow position. That said, this kind of protection can help you get through the initial stages of your redundancy and allow you the financial freedom to plan for the future. In turn, by limiting the immediate effects on your cash-flow, it can give you an opportunity to reassess your career path and may also allow you the opportunity to re-skill for an entirely new career.

Already redundant?

If it’s too late to protect yourself against the threat and you are faced with the reality of redundancy, you need to understand all of the implications this has on your personal economy so that you can adequately plan the road ahead.

The tax treatment of redundancy payment is the first area that you need to manage and control. There are a number of reliefs available to you on a redundancy payment that can help reduce your tax liability. The relief option you choose is not always a straight-forward case of selecting the largest relief, as in some cases you may be waiving your rights to a tax-free lump sum from your pension on retirement. So although you may receive more now, you may be forfeiting a lot more in the future. Therefore, selecting the appropriate relief is vital and it is important that you take independent advice to ensure that the right decision is made.

There is also a further relief called ‘Top Slice’ relief that is available to you in the year of redundancy. Many people tend to overlook this relief due to that fact that you can only claim it at the end of the tax year. In many cases, by not claiming Top Slice relief people can miss out on substantial tax rebates. This is valuable money needed to help you financially following a redundancy and could be lost if you do not know how to claim it back.

Taking control of your pension fund

The next area that must be looked at in the event of redundancy is your pension. If you have been in pensionable employment for a number of years, it is likely that you have built up a substantial pension fund within the company pension scheme. This is a valuable part of your personal economy and it is therefore vital that you make the right decision in relation to this. The event of redundancy can often result in an opportunity for you to take ownership and control of your pension fund. In certain circumstances, it is now possible to take ownership of the fund that you have built up within the company pension. Ownership in this case does not simply mean giving you the ability to choose where your money is invested pre-retirement, but also involves the ownership of the money post-retirement.

In a typical company pension scheme, owning the pension fund post-retirement is not possible as in most cases, you will be forced to buy an annuity or income for life. This involves giving away the fund that you have built to an insurance company who will pay you a certain amount for as long as you live. The key unknown in this equation is how long you are going to live.

If, by taking ownership of the pension fund, you can keep control of the total value of the fund, you now open up new possibilities post-retirement. It also means that you no longer have to give away your fund to a third party, but can now control and manage your asset in retirement.

By taking ownership of your pension fund, you now have the ability to bring another part of your personal economy under tighter control and possibly open up options that would not have previously been available to you. Many times it can be the event of redundancy that opens up this option for you.

You can now see that even the event of a redundancy can present opportunities for you once you manage your finances carefully. The key to managing your finances in any economic environment is to take control and ownership of as many areas as you can. The more areas of your finances that you control and own, the less of a threat the outside factors become.

If you are faced with or worried about redundancy or any other area of your finances, call McNamara & Associates on 01 2309000 to arrange an appointment or visit www.personaleconomy.ie.

Next issue… We look at the concept of real ownership within your personal economy.

Johnny McNamara looks at how improving efficiencies in one area of your personal economy can have a dramatic knock-on effect in the other areas of your financial life.

The Celtic Tiger brought with it unprecedented access to credit facilities, which were gladly lapped up by the Irish public. However, the legacy of poor financial planning from this era is now plain to see.

During this boom, many people found themselves owning multiple rental properties without ever examining how these portfolios should be structured to maximise efficiencies in all areas including cash-flow, tax planning, wealth creation and wealth protection. Now that the economic conditions have changed so dramatically in tandem with a tightening of cash-flow, the lack of planning is having a direct impact on how people are managing their own personal economy and possibly limiting chances to generate future wealth.

Take the example of an individual who has found themselves owning multiple rental properties, but who has never taken the time to put appropriate financial planning controls in place. Poor planning may have resulted in a situation where the individual has to use some of their own money to help cover the cost of owning these properties.

Where an individual owns investment properties, these properties should be selffinancing assets. This means that the money receivable (rent) should be greater than the costs associated with owning the property. If the property is not self financing and you have to contribute some of your own money to cover the costs, it becomes highly inefficient as the money that you will be using will most likely be coming from your salary on which tax has already been deducted.

In such a situation you have not only tied up your wealth in an illiquid asset, but have also created a drain on your cash-flow. In most cases, it is possible to create a situation whereby you can improve your cash-flow position through restructuring the finance arrangements and also ensuring that you minimise any tax liability.

If, through appropriate tax and financial planning, the individual in question can create a situation where the rental properties are now self-financing and possibly providing a surplus income, the whole picture changes.

In this situation, you have now freed up your cash-flow, which allows you to use this money to fund other areas of your personal economy and implement plans to generate future wealth. So what should you do to help develop your personal economy now that you have freed up some of your cash-flow? The answer to this will be different for each individual. However, there are a few fundamentals that all people should look at.

Credit card debt and other short-term debt is a burden that most of us are faced with. This debt is very expensive due to the high rates of interest payable and therefore, clearing this debt should be high on your priority list.

Using the money that you have been able to free up, you can now focus your attention on paying off any short-term debt. By clearing this debt as soon as possible, you can help to free up even more cash-flow, which can in turn be used in other areas of your personal economy.

Once you have managed to clear the short-term debt and have been able to free even more cash-flow, you can now look at clearing longer term debt such as the mortgage on your home. Your home is the most important asset that you own, as it provides shelter for you and your family. Therefore, you should look to remove any threat to this security and as such, clearing the mortgage on your family home should also be high on the priority list. By using the improvement in cash-flow to pay off your mortgage early, you will not only increase your security but could also save but could also save thousands in interest repayments.

There is also an element of long-term planning that needs to be implemented as part of any balanced financial plan, and the area of retirement planning should also be addressed. Many people are currently underfunded in their pension arrangements and while this is not a short-term problem, it is important that you look to the future so that you can enjoy retirement.

Freeing up your cash-flow in one area may enable you to increase pension contributions and help to ensure a secure retirement. By contributing to the pension, you can also take advantage of the generous tax reliefs available and therefore increase your efficiency in the area of tax planning.

As mentioned, each individual will require a different plan to suit their needs. However, you will now see the knock-on effects that improving the efficiency in one area of your finances can have on all other areas of your personal economy. You will also see how the improved efficiency can snowball through your personal economy to save money, improve cash-flow and develop your wealth.

This is just an example of how you can develop and grow areas of your personal economy by maximising efficiency in just one area of your finances.

There are many other areas where efficiency can be improved through sound tax and financial planning, resulting in the same opportunities for growth and wealth creation. You can therefore see how vital it is to take a holistic approach to your financial planning in order to maximise efficiencies in all areas of your finances.

For more information or to arrange an appointment, call McNamara & Associates on 01 230 9000.

Next month, we will look at controlling and managing your personal economy in the event of redundancy.