The now or later dilemma
The objective for most people (or perhaps just those lucky enough to be able to do so), is to balance the spending of income during their working lives, with building wealth that will fund life after retirement.
Whether that is investing into pension schemes, property, ISA’s and other savings, or any other store of wealth, the broad intention is to build a pot of money that they can draw from to maintain the lifestyles they have become used to, when they are no longer putting any money into the pot.
In our experience clients fall into two camps…
- Those that already have a sufficient store of wealth but are still focussed on building more, at the expense of enjoying life right now. Whilst working hard and perhaps beyond ‘normal’ retirement dates is a choice some make in preference to gardening, golf, or sailing, some are just on a treadmill that they don’t know how to get off. Understanding their financial position, the value and saleability of their business, or how to plan Wills and passing on wealth tax efficiently, might mean some clients choose to step off the treadmill.
- Those living a lifestyle that is within their means, but who are not investing enough to maintain that lifestyle into retirement. This will ultimately leave them with two options; to carry on for many more years than they want or suffer a dramatic drop in their lifestyle when they want to stop working.
So, the critical starting point for anyone looking at their long-term financial plan, is to understand this trade-off between banking money along the way to build the funds for a future beyond work. If you start that investment planning at 20, it is a lot easier to build enough by the time you want to retire, than leaving it until your 50’s or beyond to start banking some income into the wealth pot.
Building the pot
Building wealth is a journey that spans years of hard work, good decision-making, and prudent financial management, and perhaps a little bit of luck! Whether it’s through successful business ventures, property investments, or diligent savings and investments, each asset brings its own set of risks and rewards.
Putting money into a pension is extremely tax efficient, you get tax relief on contributions, and income and gains within the fund are tax free. You can even pass it on to your beneficiaries without Inheritance Tax. That is all fine if you are within say 5 to 10 years of wanting to access the money, but when you are in your twenties, their idea of locking money away for perhaps 30+ years is a tough choice.
Many have seen property as a safe and valuable investment asset, but in the short-term markets can be volatile with changes in interest rates, political interference in regulations, and many other factors outside of the investor’s control. Certainly, those investing say 30 years ago have done well, but any investment advert stipulates, “Past investment returns are no guarantee of future investment returns”, and investors must look at each option at that point in time to decide whether it is a suitable place for their wealth.
The broad strategy should be to save as much as you can possibly afford into liquid funds that are easy to access if needed, and possibly more than you can really afford to save. That could be general savings accounts, ISA’s or even stocks and shares that are listed and easily sold if needed. You may occasionally need to dip into these funds for unexpected bills, or even for discretionary spending on holidays etc. but saving aggressively will still see the pot growing faster than if you see what’s left over at the end of the month to save.
As these investments grow, you will build a bigger and bigger pot of funds, and should see a hard-core balance developing, i.e. you may dip into the funds along the way, but the core balance still grows. At this point you can think about investing some of this core balance into longer term and better return investments, such as perhaps property or pensions.
Understanding the risks
Building the size of the pot is important, but so is keeping it safe.
For any investment, the common warning of “The value of investments can go down as well as up” is often ignored, and certainly as individuals get closer to their retirement they should be looking to move away from high return, high risk investments into those with a less risky profile even if the returns are lower.
Every aspect of your wealth portfolio carries a unique risk profile. While investments in National Savings Accounts offer stability with minimal risk, they often come with limited returns. Conversely, the share of your wealth tied up in your businesses faces a myriad of risks including bad debts, economic downturns, and unforeseen crises like the recent pandemic. Our role as wealth planners is to meticulously assess each component of your wealth and identify key risks that could potentially jeopardize your financial security. Whilst some business failures were the result of an unforeseen event, such as Covid, the vast majority were in reality foreseeable and perhaps preventable. Even if a business is on an inevitable pathway to closure, closing it sooner and in a controlled manner will make a huge difference to the financial outcome. Having cash flow plans, budgets, forecasts etc are the tools to ensure that your investment in your own business is as safe as possible and producing appropriate returns.
Tailored Solutions
Every client is unique. Their financial situation, their aspirations, their attitude to risk are all personal. The starting point is a clear picture of the current situation. A wealth statement. What assets do you have? What debts do you owe? What is the value of your home, your business, or any other investment?
How will that wealth grow in the next 5 to 10 years? How much are you saving? What will property values increase by? Are you paying down debt? Are you expecting to inherit?
Where are the risks? Is your wealth well diversified? Are pension funds in high-risk investments? How stable is the business? Once we’ve identified the risks, we work closely with you to devise customised protection strategies. This may involve restructuring your business to mitigate risks, putting assets into holding companies to separate from the day-to-day business risk for example.
The goal is to build wealth in a way that is appropriate for the unique circumstances of each individual client, and to monitor and manage that wealth as their circumstances change and they get closer to their planned retirement date.
Adapting to changing circumstances
As you journey through life, your financial landscape evolves. We often find that wealth accumulates at a faster pace in later years as debts are paid off and financial commitments decrease. However, with age comes a reduced capacity to absorb losses and rebuild wealth. Therefore, it’s imperative to continually reassess your financial situation, identify emerging risks, and explore all available options for wealth protection.
When circumstances in any market change, being up to date on what’s going on and reacting quickly will make a huge difference. The recent suggested changes to the tax treatment of furnished holiday lettings have already seen a surge of properties being listed for sale, and that will inevitably impact on the saleability and price of any properties in that market. Early reactors will get a better deal than those that are slow to act. Whilst those in for the long haul could ride this out, any expecting to exit soon may find the outcome is worse than expected.
Taking action
Whilst most of the above is perhaps simple common sense, there are many important technical details on some areas. Regardless, the key, as it is with almost anything in business, is to actually do something rather than keep putting things off until the future. We know that many clients are finding themselves running at 100 mph at the moment, the day-to-day challenges of business never seem to get easier, and it sometimes seems like the government, various industry regulators, and just the current economy, makes everything harder. It is too easy to push back on the things that will impact in 10 or 20 years’ time in favour of the problems right in front of us.
At Mark Holt & Co, we’re committed to safeguarding your wealth and helping you navigate the complexities of financial planning with confidence. Contact us today to schedule a wealth protection review and take the first step towards securing your financial future.