So, write a blog he says. OK, I say…what would you like? He says “How about a financial plan for the band members of One Direction – everyone needs a financial plan, even boybands!” Frankly, I thought and said “you have got to be kidding!” I am not sure who is running the book on this one, but I would certainly have bet on me laughing all the way home.
The only thing is, when I got home, I couldn’t help but think about this and, putting all the One Direction celebrity stuff to one side, this is actually quite an interesting subject. Well, it is if you’re a finance propeller head like me!
In the States, it’s big business after all. If you are a successful quarter back, say with the Arizona Cardinals or the Dallas Cowboys, it is perfectly normal to appoint a finance manager to be part of your support team, alongside your physio, personal trainer and nutritionist. They get that, although they are earning the mega bucks, this may not go on forever. They have to be on tip top form to be a first pick for the squad and age or injury could soon get the better of them. Typically, and apologies to any quarter backs out there, they have come straight out of the college and have not yet had any practical experience in any other field and do not necessarily have a career to return to. Like in the UK, opportunities exist for the eloquent and gregarious amongst the fallout in the form of commentator jobs, but for most it is sensible to protect themselves against an untimely demise and to put a little money aside.
So, what does this have to do with One Direction? Well, fundamentally, they are in the same boat. Of course Harry Styles may go on to be the next Robbie Williams or perhaps given recent events the new Liam Gallaher, but they could equally go on to be one of those chaps who was in a band once. It may well be that, short of getting a second chance on the Voice, if it is still running in ten years’ time (mind you there’s a good chance of that methinks), they may not get a lucrative job after the music stops. It therefore makes sense to plan now, when the money is pouring in, to cover the possibly leaner years later on. Boring, I know, but they probably will not even miss what they put to one side and it could make all the difference later on.
Their current expenses will be running pretty high and no doubt they have an accountant working on that for them and ensure that their tax returns are completed and that any work related expenses are written off where possible. He or she would certainly want them to be as tax efficient as possible with regard to their provisions.
Press reports seem to suggest that their earnings were around £5million each last year, so they should be in pretty good shape and in a position to make some provision for their futures. Just because they have so much more money coming in than most, does not mean they need to do anything particularly fancy with their financial planning. The principles are just the same.
The investments need to be suitable to their own circumstances and appropriate to their own attitudes to risk. Despite being brought together as “one” for the band, they will each have unique personal goals and they will need to tailor their financial plan to their own personal needs. As a good start to formulating a well-rounded financial plan, there are a few basics they can cover off:
Identify what their essential expenditure is, how much they need to run their social life and see if there is anything left over.
If there isn’t anything left over, there is something going very wrong somewhere, they will either need to sing more, bin the girlfriend or otherwise cut back on expenditure. If there is, then their first priority, assuming they don’t have any debt, would be to:
Set up an emergency fund that is easily accessible, say with one month’s notice, that contains about 6 months essential outgoings in case there is a sudden change in the state of play.
If this sum is more than £85,000, they should split the fund between different organisations up to that limit so they can get the most protection possible from the Financial Services Compensation Scheme.
Look at how protection could give them any instant safety net.
They should take a look at income protection. There is probably not much they can do to protect themselves against simply no longer being flavour of the month or a band break up, but they may be able to protect their income should they not be able to perform because of an accident or illness. This is something they could put in place straight away and have at least the peace of mind that those types of scenarios are covered and it will probably cost less than they spend on cocktails in a week.
They probably don’t have any dependants to worry about just yet, but if they did, they could also put in place some life assurance.
Start to save to supplement their income at a later date
How much they can do here to help themselves will depend on how much money is left after all the parties are done with. If they are sensible, that should be a lot. Let’s assume they are sensible and that they have another 5 years ahead of them before the income dries up and that they can achieve a modest return of 5% across the board. They can look at a mixture of strategies:
1) Use their ISA allowance each year– they are all over 18 and so can invest in a stocks and shares ISA. Assuming no increase in the current allowance, this would leave them with a lump sum of just under £70,000. All of this would be accumulating on a tax free basis, apart from a little dividend income within the funds.
2) Use their Capital Gains allowance. Each year we all have a certain amount of capital gain on our investments we can make without paying any tax. It is also possible to focus some of your investments towards capital gain rather than income. They could invest around £200,000 per year and stay within their allowance as it stands today. So, more tax free investment returns to please the accountant.
3) Use their pension allowances. This will also please the accountant as any relief to their tax situation I am sure would be welcome as they likely to have no free pay available to them. They would be best advised to put the maximum amount possible into their pension each year.
In recent years, the maximum amount you can put into a pension each year and over your lifetime has been dropping as, although pensions tax benefits don’t have a very good take up within the general public, wealthy people know only too well how much money it can save them by taking advantage of the tax break. There is nothing fancy about these tax breaks and it is intended that people use them and make the most of them. They are there as an incentive to save. However, this was the costing us quite a lot to fund, so in the interest of making cut-backs- these higher allowances that wealthy people were using were taken away. They still look pretty high by most people’s standards and I think that is really the point. There is still plenty of incentive for “normal” people to save. They have also allowed someone starting from scratch and, in a way, to cater for people just like One Direction, who have high incomes all of a sudden and possibly for just a short period of time, to use their last three years’ unused allowance as well. So, instead of just £40,000, the allowance for this year, they also have an additional £150,000 from previous years they can use. If they do that now and, assuming the allowance doesn’t drop further, invest £40,000 each year for the next 5 years, they will have a lump sum of £470,000. If they do nothing else ever again, this would give them an income of around £65,000 from 55 onwards. With regard to what they invest in, there is so much flexibility these days and you can take a lot of control over this. So, really, the pension should be thought about as simply a tax break, just like an ISA. In fact the investments in a pension grow tax free, just like an ISA. The main difference is that you have to undertake not to access the money until you are 55 and, in return, you get the extra bonus of getting tax relief at you marginal rate on your contributions. For One Direction, this could mean a tax saving of nearly £160,000 over just the 5 year time horizon. In other words, £160,000 of the money they have invested would have otherwise simply have been paid to Mr Tax Man….No wonder those annual allowance have been coming down!
4) Allocate some savings to an investment bond. This could be another tax efficient way for them to save now and draw an income later on. It would probably take too long here to go into all the ins and outs, but they could basically withdraw up to 5% of their original investment each year without any immediate impact to tax when they need to which could come in very handy later. They may also be useful to them when it comes to estate planning.
5) Using the SEIS and EIS tax breaks. This is a great way to fund businesses in this country and could even be regarded as a philanthropic act on their part. The investments are smaller, start up or early development companies and they are diversified investments in themselves and so there is a higher level of risk, but you do get very generous tax breaks to make up for this. For example, under SEIS they could invest £100,000 each year and get full tax relief with other capital gains tax advantages. So, £40,000 of the money invested would otherwise have gone to the tax man. Under EIS, there is 30% tax relief available up to £1mln so up to £300,000 in tax can be saved. On a more interesting note, this could also be a way to take an interest in businesses they like, know a bit about already or perhaps wish to learn more about. Perhaps this could lead to a career later in life.
6) Let’s not forget the UK favourite….Property. As you can invest in commercial property within a pension and get the tax relief, it makes sense to focus on residential property outside of that and sticking to the primary residence also makes sense for now. Unless it ruins the street cred, it would be advisable to stick to a property worth £2 million pounds. Not only do you save 2% in stamp duty tax by staying under that price, but they has been a lot of muttering about introducing a mansion tax and the most favoured value level is £2 million, so it would be better safe than sorry. Perhaps somewhere around the £1,700,000 mark would make sense to be on the safe side. (If they need any help shopping, I would be pleased to help.) As their primary residence, they should be able to sell it without any capital gains tax being payable and, later on, having a place to live without any mortgage to pay will be very handy.
Beyond this there are still plenty of options to be looking at to create diversity within the portfolio. Other tax breaks, like those available to finance films in the UK and more esoteric investments like fine wines or classic cars, will be available to use. However, this is at least a good start.
If you are in the band One Direction, as I am sure you are, and you have not appointed a finance manager, we would be pleased to help. If you have already got your own financial planner who has helped you deal with your finance, you should be well on the way to a comfortable life after the limelight. Perhaps you’ll be able to join Dr Brian May when you have a few grey hairs, saving badgers from a cull whilst revelling in the wonders of the universe. Perhaps your career will go on and on and you will never need to fall back on your provision, but, hey, the downside is that you would just be better off than if you hadn’t done it. No brainer really!
What strikes me in all of this is that the basic plan is the same for all of us. The only difference is that the sums may be smaller and we may not get as far down the list of possibilities as One Direction are in the fortunate position to be able to do. So, if like me, you didn’t think you had much in common with One Direction, think again….