The personal financial situation of barristers and sole practitioners is often characterised by uncertainty of income, with these flows dependent on the existing workflow and expected future work in the pipeline. This article considers the consequence of this uncertainty on financial planning, and the hurdles that can be overcome in the three main aspects of financial provision within a barrister’s working life; pension planning, investment planning and financial protection.
Lifestyle Cash flow Planning
The first stage following an initial meeting is cash flow forecasting which allows the Financial Planner to create a plan for the future. The barrister and sole practitioner’s income stream is characterised by uncertainty; and lifetime cash flow forecasting is an excellent start in developing a coherent overall strategy, identifying areas for attention while all the time the plan can be used to outline ‘what if?’ scenarios based on an uncertainty of income and of course major life events such as the arrival of a new-born, or indeed an unforeseen inheritance – with the financial implications these bring.
The lifestyle forecast underpins the financial planning work advisors do and brief summaries of the issues raised in pension planning, investment planning and financial protection are outlined below.
Pension planning is not straightforward for Barristers and sole legal practitioners. There is considerable benefit to taking advantage of tax relief on contributions, where contributions ‘soak up’ tax paid in the current tax year, and potentially in previous tax years if available. However, this capital is locked up until age 55, or 57 for younger individuals. It is frequently important to have more accessibility to savings; and because of this a balance must be made between the tax-advantageous position of pension contributions, and the limited accessibility of the pension fund itself. I would suggest in the early years of their careers, the pendulum may be more in favour of investment planning so as still to enjoy compounding effects of returns, in cases where surplus cash is minimal, and therefore only limited advantage can be taken of the tax relief available. At a later date of course, under current legislation, there is accessibility to conventional Personal Pensions/SIPPs, with in most circumstances 25% of this fund being available tax free.
The tax-efficient status of an ISA (Individual Savings Account) is a useful savings vehicle for excess income. The fund can be added to over time and drawn from as necessary ahead of retirement, without any consequences for a barrister/sole practitioner’s tax position. The funds can also be retained until retirement, to provide a supplementary income source when the time comes. The big disadvantage of ISAs over pensions is the limits on contributions (£15,240 currently) with no opportunity to carry forward unused ISA allowances from previous tax years. Contributions are not eligible for tax relief.
The uncertainty surrounding income for barristers and sole legal practitioners carries an inherent problem around putting in place adequate protection for loss of earnings through ill-health. Such plans carry a requirement for accurate and stable earnings information and in line with that, on claim, require the ‘life-assured’ to evidence recent income levels. Fortunately there is increasing awareness of the problems posed in insuring the self-employed, and as a result, recent innovations in new policies in this market facilitate a guaranteed minimum level of income for clients on claim. The appropriate level of cover required ought to be quantified ahead of time, with ISAs often playing an important role in funding the first few months of ill-health. The ISAs provide a means of extending the deferral period on a claim, and therefore all things being equal, facilitate a lower premium costing – critical in making income protection arrangements viable for clients.
There are a number of points at issue and this article provides a mere snapshot of the main ones. The importance of taking advice early on in one’s working career is of great importance and the interplay between the issues at stake and the clarity that lifestyle cash flow planning can bring to these moving forward cannot be underestimated.