Making partner is a huge step up for any lawyer and it’s one that can have a major impact on your earning profile. Here, Private Banker Emily Bernstein and Financial Planning Lead Simon Bashorun from Investec talk about the unique challenges they could help you overcome.
If you’d like to find out more about how Investec can support law firm partners, contact Emily.Bernstein@Investec.com
As a partner, what challenges should I be aware of?
Emily Bernstein: The lawyers we speak to describe the move from salaried employee to Partner as a big change. Not only is it a potentially lucrative career move, but you have a much stronger stake in the success of your firm because your remuneration is tied to its performance through profit distributions and bonuses.
This complex income structure means it can be harder to secure a mortgage from a mainstream lender that reflects your true earning potential.
However, it can also create other needs. For example, if you’re receiving some or all of your remuneration in another currency, foreign exchange is an issue you’ll be more aware of.
Simon Bashorun: On the financial planning side, if you’re an equity partner you may have invested a large amount of capital in the firm and so benefit from cash flow planning to ensure your current and future needs are met.
If you have become self-employed you will be responsible for your tax affairs and may no longer receive certain employer benefits such as pension contributions and so you will need to consider the replacement of these benefits.
Partnership often comes with an increase in earnings and this could cut the amount you can contribute to pensions to just £4,000 a year, so investments through ISAs and other tax wrappers may be required to support your retirement.
Does my law firm differ in its remuneration?
EB: Every single law firm we speak to is different. For example, some will follow a ‘lockstep’ model, with all lawyers who become partners in the same year typically earning equal compensation, but others may offer a ‘merit-based’ pay system that links remuneration to performance metrics, such as the number of hours billed or the amount of new business brought in.
However the partnership is structured it usually results in equity partners drawing a relatively low monthly income in comparison to their often lumpy profit distributions. In the case of salaried partners, any guaranteed annual income is typically subsidised by performance-related bonuses, which can be complex for the high street to accommodate.
Does making partner affect how much I can borrow or structure my mortgage repayments?
EB: Well, we start with a holistic view of our client’s income across profit distributions, drawings, deferred income and bonuses. We try and understand a partner’s entire financial life, so we can work together to find a solution to match.
Depending on your circumstances, we might also look at your forecasted earnings, so we aren’t as bound by a three-year historic average as some lenders are when it comes to calculating mortgage affordability. We’ve recently helped a number of partners with LTVs of up to 95 per cent.
In terms of a repayment schedule, if we know you’re receiving profit distributions at a certain time, we can tailor the mortgage so there are mandatory payments at the same time of year.
We take this approach across our lending. We do a lot of work with Buy-to-Let (BTL) mortgages, including lending to Special Purpose Vehicles, which many clients are using for their BTL portfolios at the moment.
We also see a lot of interest in revolver mortgages, which clients can take out on an interest-only basis and can also draw money out of if they need to – this could be useful if you have an unexpected expense.
Emily Bernstein, Private Banker for Legal Professionals
Do earnings in foreign currency complicate the picture?
EB: Partners receiving their income in a foreign currency can sometimes struggle to get a mortgage through the high street. We can take a client’s foreign earnings and assets into consideration when we’re looking at affordability.
On a day-to-day basis we can hold up to 15 different currencies in our Currency Access Account free-of-charge. We also have an FX team directly integrated into our private banking offering who can set an exchange rate up to 24 months in advance for eligible trades (FX forwards), monitor the markets and execute transfers when agreed rates are met.
How can I make sure my income is tax-efficient? Can you help with financial planning for my spouse or children?
SB: When it comes to tax efficiency, the most common discussion we have with Partners is about getting the basics right for the whole family, including spouses and children. For example, it may be more tax-efficient for family assets such as a buy-to-let property to be owned by a spouse who has a lower overall income. We look at using annual ISA allowances across the whole family and, once the basics are in place, we can help you consider other options that might be appropriate – perhaps tax-efficient investments like Enterprise Investment Schemes, Venture Capital Trusts or Offshore Investment Wrappers.
I’m looking ahead to retirement, what do I need to consider?
SB: If you’ve made partner in your 30s or 40s you may have a long time to go until retirement. But with pension contributions limited for many, it’s important to explore all the strategies available to safeguard your future financial wellbeing. This is likely to include other directly held investments and the use of other tax wrappers which our Investec Wealth & Investment team can help with.
We can also help you to explore what income you might actually need in retirement, how it might be generated and help you put in place a plan to get you there.
EB: Long-term, we work very closely with our Wealth and Investment colleagues as Partners diversify their assets. There is a real value to having all of our services under one roof.
Beyond understanding income, what are your biggest priorities when working with lawyers like me?
EB: Time is always key. When you’re billing down to every six minutes of your day, it sounds clichéd but every second really is precious.
Please get in touch today for an initial conversation about your lending, banking or financial planning needs.
Call +44 (0)20 7597 4050 or email Emily.Bernstein@Investec.com
The contents of this summary do not constitute a formal recommendation or personal advice and no action should be taken, or not taken, on account of the information provided. Tax treatment depends on the individual circumstances of each client and may be subject to change in future. All statements concerning tax treatment are based upon our understanding of current tax law and HMRC practise and can be subject to change.