Seven Steps To Preserve Your Wealth
There are plenty of ways of preserving wealth in real terms, protecting against most of the uncertainties that may threaten it and allowing you to sleep comfortably at night.
Those who aim to preserve wealth during their lifetime, as opposed to passing it on intact to their children, do not need mind-bogglingly complex legal trusts, tax scams or hiding assets overseas.
There are all manner of professionals who make a fat living by persuading the wealthy that they must set up such schemes and as Hutchence’s family discovered, the effects on their wealth can occasionally be far worse than even the most draconian tax regime.
What follows is not detailed investment advice (as a journalist, I’m not authorised to provide that) but it is a common sense outline for further planning that will leave you in control, and your overheads and time spent in administration at an absolute minimum.
Six reasons we are scared to invest
1. Tot it up
First, you need to establish the value of your money and assets. That’s easy enough for shares, property, cash, antiques and so on.
It’s harder for such things as share options in an employer, part holdings in private businesses or other assets which may be hard to realise at a given time, or whose value may be volatile.
A very conservative valuation should initially be attached to any such assets.
2. Set realistic objectives
Setting your objectives is an absolutely vital step. If your goal is wealth preservation, that means accepting that long-term sustainable increases in the real value (ie post-inflation) of your assets is likely to be low single figures, almost certainly below 5%.
It is always possible to go for more, but not much more without raising the risk profile. The risk-free return on lending to the Treasury, as measured by index-linked gilt yields, is currently 1.3% to 1.5% plus RPI inflation which is a good basic benchmark to start at.
While that may appear low, it is worth bearing in mind that the best performing long-term asset, shares, has only averaged 5% plus inflation over the last century or so. That return comes with a fair slice of risk, certainly for investment horizons of a decade or less.
3. Assess your risks
This is probably the single most important element of the entire plan.
Unidentified risks are a far greater threat to your wealth than tax. While tax may threaten a proportion of your wealth, poorly-identified risks can destroy it all.
This doesn’t just mean the asset risks within your investment portfolio, such as the proportion of government bonds to shares, or whether you have too much money tied up in junk bonds, but the whole financial context of your life.
Typical questions to ask yourself include: What happens if my employer goes bust? What happens if a financial services provider I have invested with collapses or is unable to meet its promises? Is my occupation pension secure? What happens if an elderly relative has to go into residential care? What happens if I divorce? Do I have enough personal, property and illness insurance?
Listing these risks, working through their implications and attaching a probability to them may be depressing, but it can help clarify the issues.
An introduction to dealing with risk
The benefits of flexibility
4. Adjust for the unexpected
Not all risks can be negated as easily as, say, inadequate property insurance cover. An employer bankruptcy is always going to be a disaster, but even more so if you have a home loan funded by them or if all your wealth is tied up in share options.
Attractive as the next tranche of cheap options might be, it might pay to put the money elsewhere. You can also hedge the value of existing options through “down bet” contracts for differences or spread bets.
Those who spend a lot of time travelling may find it makes sense to have overseas bank accounts in the euro and dollar and more deposited than is required for day-to-day expenses.
This not only protects against the transaction charges and absurdly wide spreads on piecemeal currency conversion, but in the remote chance of another sterling collapse like Black Wednesday 1992, it would help soften the blow because your wealth is spread across a number of currencies.
5. Never forget inflation
Inflation consistently nibbles away at the value of certain investments.
Government bonds (gilts), the foundations of conventional wealth-preservation are badly damaged by inflation.
That is why conventional gilts (still an important part of any wealth-protection portfolio) should be balanced by a portion of index-linked gilts whose payout rises in line with inflation.
Those who own property have some in-built protection against inflation, but there are sometimes times (as now) when the price of everything but property seems to be rising.
Why gilts are important and how to buy them
6. Don’t under-estimate the effect of charges
Even modest charges can eat away at your investment returns.
An adviser or fund management group who offers services at 1% is going to get more than a quarter of your contributions over 25 years.
Unless you really do require specialist help, you may be paying charges for nothing.
See my article on hedge funds
7. Tax
Tax can be complex but the basics are very simple. UK tax generally leaves your wealth untouched during your lifetime, but tax is levied on the income derived from that wealth.
Realised gains in wealth are taxed under capital gains tax. This is levied at your marginal income tax rate on gains in excess of the annual exemption limit of £8,500 (2005/06).
CGT does not apply to gains made within your pension, so a Self Invested Personal Pension is the ideal place to put assets that you hope will increase in value.
Under rules which come in next April, a much wider range of assets including both residential and commercial property can be sheltered in SIPPs.
CGT does not apply to gilt-edged stock, nor premium bonds, which makes them particularly useful additions to a wealth-preserving portfolio.
If you want tax-free income and total freedom from risk, the easiest place to look is National Savings and Investments, which offers premium bonds and both fixed and inflation-linked savings certificates.
Conclusion
Inevitably, this piece is only a starting point on wealth preservation. However, getting the planning ball rolling is half the battle.
If you listen to advisers and lawyers, you would think that wealth preservation is really just about dealing with tax. That is very far from the case. The important thing is actually thinking about your objectives and risk. The rest will flow from that.
By Nick Louth, MSN Money Special Correspondent
http://money.uk.msn.com/
