Financial planning for lawyers and accountants

Being a lawyer or accountant can be immensely fulfilling. But if you work in these professions you’ll know how demanding they can be. You often face challenging schedules with high professional and financial risks, not to mention the extensive ongoing qualifications required, with further study often eating into evenings and weekends.

Many law and accountancy firms now recognise how demanding these careers are and encourage employees to achieve a better work-life balance. Even so, there is often little spare time for you to focus on your finances.

Both professions have the potential to be financially rewarding, with possible lucrative pay packets and even the chance to become a partner in a firm. But we believe it’s crucial to pay attention to financial planning and how it can benefit you, so you can make the most of your success.

Plan ahead

Making time to think about financial planning early on in a law or accountancy career is crucial. In both professions there is a risk of becoming time-poor and only focusing on the present.

Financial planning can seem a low priority at the start of a career, when you will likely be on a modest salary and studying heavily for your numerous qualifications. But it’s important to make time for financial considerations even at this point.

For instance, many lawyers and accountants do not have adequate income protection insurance. Income protection insurance is designed to pay a regular income if you can’t work because you’re ill or injured. If you end up becoming the sole income provider in a household, having suitable income protection could be crucial for the wellbeing of your loved ones.

While there are numerous financial planning considerations around tax efficiency and savings it’s also important to know your end goals. Crucially, lawyers and accountants who become partners at their firms could potentially have a role in selling the company.

You can spend years building a business, raising capital through loans and then managing the repayments. Here, cashflow planning can help you understand the costs involved and what you could ultimately receive if the business is sold.

Prepare for salary jumps

A successful law or accountancy career can involve significant salary jumps. Earning this success is one thing, but you need to protect it and therefore take tax planning strategies into consideration.

This is especially the case when becoming a partner, which typically involves a change in your employment status. Becoming an equity partner likely means transitioning from being a salaried employee to becoming self-employed. Equity partners are entitled to a share in the profits of the firm’s business and will pay tax on this income at self-employment income tax rates.

Where lawyers or accountants run their own corporate practices, there will be different taxation obligations. They will face corporation tax on any profits, income tax on employment income and/or dividend tax on any dividend payouts.

As your salary grows, and your tax affairs become more complex, it’s important to explore a wider range of tax planning strategies. One option could be to utilise a spouse’s tax allowances, especially if they are non-working.

Consider pensions

Both lawyers and accountants are likely to deal with pensions when helping arrange clients’ affairs. But it’s such a complex area that I’ve seen many decide to focus on alternative investment vehicles when building their own retirement pot.

However pensions can be very tax efficient for both employed and self-employed people. So it’s important to review these arrangements early on in a career to establish effective pension contribution arrangements and ensure compounding is maximised for the long term. Compounding means that investment returns are themselves reinvested, potentially leading to exponential investment growth.

Monitoring the amount that has built up can help inform lifestyle decisions and clarify when retirement can be taken. If you’re a lawyer or accountant immersed in your career, you may wrongly assume the date you can afford to retire. By making time to review your pension pot, and using cashflow planning, you may find yourself closer to retirement than you realised.

For these reasons, it pays to have regular reviews with an adviser, a dedicated professional with the experience, skills and knowledge to support the specialist financial planning needs of lawyers and accountants. At Schroders Personal Wealth, one of our key principles is to have regular reviews with an adviser, to help ensure your financial plans adapt in line with your developing professional life.