Wealth planning issues of various kinds have been a real feature of our conversations with High Net Worth Individuals in recent weeks.
It’s easy to get preoccupied with the holiday season as winter closes in, but as you hunker down against the cold and start shopping, don’t forget about defending your wealth position too. It might be later than you think.
Inflation may not be at runaway levels – yet – but the potential seriousness of an inflationary spiral will not have been lost on savers. The Office for Budget Responsibility recently warned that inflation will rise at its fastest rate for 30 years to hit 4.4% next year.
While banks have been upping interest rates on fixed-rate mortgages by up to a third in anticipation of an inflation spike, they are notably not giving much succour to savers. Even the best easy-access accounts are paying little over 0.5%, and a great many others close to nothing, meaning that holding excess cash is perhaps now worse for your wealth than ever.
The answer for most is to work out the level of liquidity you really do need and put the rest of the money to work so that your returns hopefully beat inflation, rather than the real spending value of your wealth being powerfully eroded a
The answer for most is to work out the level of liquidity you really do need and put the rest of the money to work so that your returns hopefully beat inflation, rather than the real spending value of your wealth being powerfully eroded away. There are a number of strategies for those worried about inflation to pursue, as described here, but increasing the amount you hold in an investment portfolio (or starting one) should be something everyone at least considers.
The kind of turbulent times we’ve experienced since the coronavirus pandemic hit would typically see investors flocking to the safe-haven of fixed income assets, and particularly government-issued bonds. Those seeking a low-risk refuge for their wealth could historically invest in these and earn a return of one or two percentage points above inflation as well as knowing their principal investment was largely safe. Now, amid gargantuan levels of public debt, the inverse is true – to the point that experts are warning of double-digit losses in real terms over a couple of decades if returns stay remain as poor as they have been.
There are some brighter spots for bond investors of course, particularly in the corporate space, but this doesn’t negate the fact that investors of all kinds are having to rethink the make-up of their portfolios
There are some brighter spots for bond investors of course, particularly in the corporate space, but this doesn’t negate the fact that investors of all kinds are having to rethink the make-up of their portfolios and in many cases take on more risk via greater equities exposure. Arguably though, it is retirees who are having to make the boldest moves since they are no longer in the wealth accumulation stage and face potentially decades of relying on pension pots which, though they may be of a significant size, face a double threat of inflation on one side and uncertain markets on the other.
Equities have comfortably outperformed every other asset class over the past hundred years or more and most predict they will continue to trounce bonds. However, investors who have been forced to up their risk exposure will rightly worry about whether they’ve made the right choices.
Experienced investors will recall that the FTSE has experienced a number of quite dramatic falls in the past decade and some of the more pessimistic commentators suggest that a painful market correction cannot be far away. What’s more, the headwinds facing investors extend far beyond the UK market as the impact of the pandemic continues to manifest.
As the saying goes, “When America sneezes the world catches a cold”. Now both the world’s foremost economic superpowers are looking sickly, which bodes ill indeed for the rest of the world’s growth
Supply chain and energy problems beset much of the world. The US has posted disappointing growth and is likely to be joined by China, whose growth could slide below 5% amid the additional pressures of President Xi’s regulatory crackdown on a number of sectors and a painful attempt to pivot the country away from real estate. As the saying goes, “When America sneezes the world catches a cold”. Now both the world’s foremost economic superpowers are looking sickly, which bodes ill indeed for the rest of the world’s growth.
The remedy is a really well-diversified investment portfolio which has an optimised mixture of asset classes, markets and sectors (this might also include a healthy proportion of alternatives too). What that portfolio looks like is however an intensely personal matter, dependant on your individual risk-profile and time-horizon. This danger point is no time to be making guesses, so consult an expert if you are in any doubt as to how to position.
As affluent individuals will know to their chagrin, frozen allowances across a range of taxes are actually in effect tax rises due to the effect of “fiscal drag” (inflation rears its head again). The upshot is that more and more people are being caught in various tax nets, from those who have slipped into being higher or even top-rate taxpayers, to people who find themselves exceeding the Lifetime Allowance for pension savings and have to find other means to save tax-efficiently for retirement, like ISAs.
What will pain families the most though is the fact that, going forward, more and more even quite modestly wealthy ones may have to pay punitive 40% Inheritance Tax rates because of frozen allowances despite soaring house prices and, again, inflation.
What will pain families the most though is the fact that, going forward, more and more even quite modestly wealthy ones may have to pay punitive 40% Inheritance Tax rates because of frozen allowances despite soaring house prices and, again, inflation
There is a misperception among many that proactive tax planning and strategising to pass wealth on down the generations efficiently are the preserve of the super-wealthy alone. This is not so. It is possible at most levels of wealth to make a real difference to the amounts you are able to keep within the family and out of the taxman’s clutches. The key, as with most elements of managing wealth, is to take advice – and action – as early as you can.
There is no denying that this is a particularly difficult time to be defending your wealth from erosion, whether that be via inflationary pressures, sub-par returns or taxation. The good news, however, is that there is so much that you can do with the help of professional investment and financial planning advisers.
We may be coming to the end of the year with the busy Christmas period bearing down on us, but I would urge anyone worried about threats to their wealth to get proactive rather than allow any more time to go by before taking action. We can arrange initial diagnostic conversations with a short-list of your best-matched wealth managers via a process that is fast, objective – and free. Take advantage today.
The investment strategy and financial planning explanations of this piece are for informational purposes only, may represent only one view, and are not intended in any way as financial or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.
We always advise consultation with a professional before making any investment and financial planning decisions.
Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.