Financial planning when you are affected by cancer
Many of us find planning our finances difficult beyond putting a bit of money aside for emergencies and buying a home. A cancer diagnosis can have a big and unwelcome impact on your household’s finances.
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These are the four main steps to financial planning.
You may feel confident working through these steps yourself. If not, you can get help with some or all of them by contacting a financial adviser.
There are different types of adviser. All of them will consider your individual situation. Since the start of 2013, they will all charge a fee for the advice they give you.
Some financial advisers focus on specific products - for example, pensions - or are tied to particular companies. These advisers offer what is termed ‘restricted advice’.
Others are independent - known as independent financial advisers (IFAs). They have no ties to financial product providers and must offer advice on all types of product that could potentially suit your needs, considering all providers on the market.
Restricted advice may be cheaper than going to an IFA, but you need to consider what type of restriction you’re happy to accept.
For example, suppose you’re already sure you want a particular type of product. You might then be comfortable with an adviser who is restricted to that type, but who still considers all the providers and so can find you the best deal for that product.
You could speak to family and friends to see if they can recommend a financial adviser. Alternatively, contact Unbiased Ltd or the Institute of Financial Planning, or search for a financial adviser online on the findanadviser.org website. You should check that a firm or individual is authorised to carry out regulated activities - in other words, legally permitted to provide the type of service they offer. To do this, contact the Financial Conduct Authority (see below), previously called the Financial Services Authority.
You can also get information from the Money Advice Service, which is an independent body set up by the government. It runs a free financial health check service, gives general information about all types of financial matters and points people to sources of more detailed help. Visit the Money Advice Service website or call 0300 500 5000.
See our sources of advice for financial issues for contact details of other helpful organisations and websites.
Step A: Identifying your financial needs
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For most people, basic financial needs in order of priority are to:
get your debts under control
have an emergency fund
save for retirement
ensure your family’s financial security
be able to finance a loss of earnings
buy your own home
make other plans, such as saving for holidays or your children’s future needs, or borrowing for home alterations.
Your financial needs may change if you’re living with cancer, so your priorities may not be in the same order as listed above.
Getting your debts under control
Paying off debts may become more difficult if your income drops and you have extra expenses. Where possible, you should keep up the repayments. But if you can’t, talk to your lenders early.
When dealing with debt, it’s important to:
Take action early - denying the problem only makes debt worse.
Avoid taking on more debt.
Be wary of switching to a cheaper loan if it’s secured against your home - you could lose your home if you don’t keep up the new repayments.
Check the terms and conditions carefully before returning goods bought on hire purchase (a contract where you pay the money back over time), as you may have to pay extra charges.
Prioritise urgent debts such as mortgage payments, rent and rent arrears (unpaid rent), council tax and utility bills.
Communicate honestly with your creditors - they’re not looking to punish people who can’t pay, only those who could pay but try to avoid it. Your creditors may be willing to negotiate easier payments if you explain your situation.
Having an emergency fund
An emergency fund is money you can easily access to cover expenses if the unexpected happens. For example, you may have some emergency money in an instant access account. If you’re a taxpayer, consider one that is tax free, such as an independent savings account (ISA). See below for more details.
If you would find it hard to manage financially during a period off work because of illness or unemployment, aim to have a fund equal to at least three months’ income.
For many households, cancer causes a drop in income and extra expenses. So this may be the time to use any emergency fund you already have. Plan to rebuild the fund as soon as your income recovers.
Being able to finance a loss of earnings
An important part of any financial plan is deciding how you would manage financially if your income dropped because of illness, job loss, or caring for a new baby or disabled relative, for example. Depending on what forward-planning you have been able to do, you might be able to:
access your occupational sick pay or insurance from work
claim state benefits
claim on any insurance policies you have
use your emergency fund or other savings.
Ensuring your family’s financial security
If anyone is financially dependent on you or if you share household expenses with someone else, you may need to think about how they would cope if you were to become ill or die. The state and your employer, if you have one, may provide some help. To top this up, consider taking out life insurance. It’s also a good idea to keep your will up-to-date.
If you have, or have had, cancer, you may find it difficult to get life insurance. So it’s important to keep up any cover you already have. If you belong to a pension scheme through your workplace (by 2018 this will apply to nearly all employees), it might include some life cover. If life insurance isn’t an option, consider building up extra savings and investments instead.
Saving for retirement
You may be surprised by how much you need to save for a comfortable retirement and how little the state will provide. Ideally, you should start early and save regularly throughout your working years. Since October 2012, employers have started to automatically enrol their employees into a workplace pension scheme. By 2018, this will apply to nearly all employees. You can opt out if you want to, but compulsory contributions from your employer and tax relief double your savings, so think carefully before deciding not to join.
Living with cancer may mean time off work both for you and anyone who is caring for you. This could disrupt your retirement saving and may mean taking a pension early.
For an estimate of the pension you may get from any pension contributions you make or have made, you can check your annual pension statement from your pensions provider.
Or you can use the calculator on the Money Advice Service website. For a forecast of your state pension, visit gov.uk or call 0845 3000 168.
For information, see our section about managing your savings and investments.
This is retirement pension paid by the State. You qualify by paying national insurance contributions while in work or being credited with contributions while out of work.
Basic state pension
This is the main part of the state pension that nearly everyone can get. For each qualifying year that you have built up, you will get some basic state pension. You may be able to increase your state pension if you don’t have enough qualifying years. To check how much state pension you may receive, get a state pension statement from gov.uk or call 0845 3000 168.
Occupational or company pension
This is retirement pension from a scheme run by or on behalf of your employer who must contribute to the scheme. Your employer might arrange for you to belong to a multi-employer scheme, such as the National Employment Savings Trust (NEST).
This is retirement pension that’s usually offered by insurance companies. A personal pension may be offered through your workplace, or you might arrange it yourself. If you are covered by the automatic enrolment rules (and in some other circumstances), your employer must contribute to it.
If you have lost the details of an old pension scheme, the Pension Tracing Service may be able to help you find the contact details. Visit gov.uk or call 0845 6002 537.
For more information about pensions, contact The Pensions Advisory Service or call 0845 601 2923.
Buying your own home
Buying your first home usually involves saving for a deposit and borrowing with a mortgage. If living with cancer means you’re experiencing a drop in your income and extra expenses, you may have to put any plans for buying a home on hold.
If you already have a mortgage, keeping up the repayments will be a top priority.
Step B: Identifying what resources you have
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Meeting your financial needs often means building up savings, making loan repayments, investing a lump sum or buying insurance. You need money to do this, which may come from existing savings or products, but will usually come from the income you have left after you have paid all your bills and other essentials. Preparing a budget will help you check what resources you have.
If you’re living with cancer, you may be trying to cope with a drop in income or extra expenses. Our section about managing money day-to-day has some ideas for maximising your income and reducing spending. They may help you make the most of your resources to meet your financial needs.
As well as your income, you should consider any resources you might have in terms of past savings and existing financial products. For more information about managing savings and investments, see our advice about managing savings and investments.
Step C: Matching your needs to your resources
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Your resources - in other words, any spare income, existing savings, investments and insurance policies - may not be enough to meet all your needs at the same time. You may have to revise your plans. There are various ways of doing this.
Reconsider your goals
You could drop or scale back some of the things you want to do, such as moving to a bigger house. The things that get dropped should ideally be the goals that were the lowest priorities in Step A.
Take more time
Some of the goals may be more affordable if you plan over a longer period of time. For example, you may be able to pay off debts more gradually or delay your holiday.
Boost your resources
Look at ways to increase your income, reduce spending or raise money in other ways. You may be able to apply for grants or state benefits, cut down on non-essentials or sell something you own.
Step D: Identifying what action to take
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Having gone through the first three steps, a plan should emerge. You will have identified goals that are achievable with the resources you have within your chosen timescale. The last step is to put your plan into action.
Putting your plan into action often involves buying financial products and services. Choosing suitable ones means matching the products and services to your personal circumstances, in particular:
your attitude towards risk
what you can afford
your tax and benefit position
your health and the health of your family
your views (for example, ethical or religious beliefs).
It’s essential that you understand what you’re buying, and that you’ve read all of the product documents, including any small print. The main features of many products are explained in a booklet or section headed ‘key facts’ (see our financial jargon buster).
Your attitude towards risk
Many financial products are linked to the stock market, so their value can go up or down. This means:
you may not get back all of the money you paid in (your ‘capital’) when you cash in at the end - this is known as capital risk
you don’t know in advance what return you’ll get from your investment.
This means that these sorts of investment aren’t suitable if you’re saving for only a short period (less than five years) or may need your money back at short notice (when the stock market could be low). For short-term goals, savings accounts at banks or building societies and similar products are likely to be more suitable.
However, evidence from the last hundred years suggests that, over the long-term (periods of ten years or more), the return on savings accounts tends to be much lower than that from stock market investments. This makes it hard to save enough to meet big goals, such as planning for retirement.
The return from savings accounts may not even be enough to protect the buying power of your money against inflation. So unless you’re very uncomfortable with capital risk, stock market investments are likely to be more suitable for long-term goals.
What you can afford
Make sure you can afford the full cost of a financial product or service, especially if you have to make ongoing regular payments (for example, premiums for insurance).
It’s good to shop around because there’s competition between providers, and you may be able to buy more cheaply or get a better deal elsewhere. With investment products, this means looking at the administration and other charges that will be taken from your fund. These usually have to be paid even if the value of the investment(s) falls, so choose investments with low charges.
Your tax and benefit position
When choosing products and services, you often need to take into account whether or not you pay income tax (and, in some cases, capital gains tax) and at what rate.
This can get complicated, so it may be helpful to consider:
Cash individual savings accounts (ISAs)
These are bank, building society or National Savings & Investments accounts that pay tax-free interest. You can pay in up to several thousand pounds each year. If you’re a taxpayer, it makes sense to use your annual cash ISA allowance (£5,760 in 2013–14) before considering other savings accounts.
Other savings accounts
Interest is normally paid with tax already deducted, but non-taxpayers can arrange to receive interest without tax deducted. Ask your bank or building society to arrange this.
These have a variety of tax incentives to encourage you to save for retirement. Even non-taxpayers can benefit. Between October 2012 and February 2018, most employees will automatically be enrolled into a pension scheme at work and the employer must then pay contributions for you. For more information about pensions, call our financial guides or see our information about planning your pension when you have cancer.
Some state benefits are means-tested. You could lose your entitlement to certain benefits if you have insurance payouts, investment income or lump sums that take you over the limits.
Be aware, too, that if your estate (what you leave following death, minus any debts) exceeds a set amount (£325,000 in 2013-14), then there may be inheritance tax to pay. Make sure that any life insurance and pension schemes are arranged so that they pay out directly to your survivors without increasing the size of your estate. You can do this by asking for life insurance to be written ‘in trust’ and completing an ‘expression of wish’ form for these policies and for pension schemes. Our section about sorting out your affairs has more information.
Be careful about any savings and investments that run for a set period. Make sure you understand what will happen if you need your money back early. There may be charges or you may not be able to get your money back early at all.
Your timescale is an important factor when thinking about the level of capital risk you’re prepared to take when saving and investing. The longer your timescale, the more likely you are to be able to bear some extra risk to improve your chance of a better return.
Your own health, the health of close family members and your lifestyle (for example, whether you smoke) may be taken into account by insurers when you apply for most types of life and health-related insurance. If you’re affected by cancer, you may not be able to obtain insurance at a price you can afford. On the other hand, you may get a better deal from lifetime annuities (investments where you swap a lump sum for an income for life).
Your beliefs, including ethical and religious beliefs, may influence your choice of financial products and services. For example, you may not want your money used to finance companies involved in producing tobacco products, the arms trade or gambling. There is a variety of ethical investments available that take these considerations into account.
If you’re a Muslim, you may want to purchase products that are Shariah compliant (for example, ones that don’t use interest). There is a variety of products available in the UK.
Ethical Investment Research Services (EIRIS) can help you identify ethical investments. Visit eiris.org or call 020 7840 5700. For information about Islamic banking, visit islamic-banking.com or call 020 7245 0404.