How to build wealth that stands the test of time

Long-term investments tend to be less risky in the end. By investing for the long term, you are committing to your investments, and history has shown that this strategy can pay off handsomely.

This is also often the best way to build wealth that stands the test of time. It’s how you plan for retirement and build a legacy to pass on to your children and grandchildren. But it’s important to keep your eye on long-term goals like retiring, paying for your child’s education and passing on some of your wealth to your family.

Regular saving as part of a long-term investment strategy offers a flexible, affordable solution for many people. And by keeping some of your wealth liquid in the form of cash deposits or short-term government securities, you should not be forced into realising investments at what might be an unfavourable time.

Long-term investment points to consider

1. Don’t disregard income

Investment is about more than capital growth. For your money to really grow, dividend income is key. The main benefit of reinvesting income from your investments is that it can be used to buy more shares or units within funds which have the potential to grow in value and boost your overall returns. Reinvesting income is essential to grow your portfolio. You will usually have the option of reinvesting all or a portion of your proceeds back into your original investments.

2. Take some risk

All investments involve some degree of risk. Differences include: how readily you can get your money when you need it, how fast your money will grow, and how safe your money will be. Risk isn’t always a bad thing, especially if you are looking for long-term rewards. Understanding risk means identifying your own attitude towards it and identifying the different types of risk. Rebalancing can also help to maintain the overall risk of a portfolio in line with your needs.

3. Balance change and constancy

Chasing trends at the expense of stability is not wise. The feeling that you’re missing out on a great performance can be very strong. Contrary to what the media may portray, you can do well – and reach your long-term investment goals – with a diversified approach that doesn’t require you to discover the latest investment fad. Resist this approach. The smart money has probably already moved on.

4. Don’t put all of your eggs in one basket

Diversification is key for successful long-term investing. Spreading your assets while focussing on long-term returns is generally a recipe for stock market success in any economic environment. It is not a case of investing large sums of money in one go, but investing wisely and consistently.

5. Invest regularly

Putting money into the stock market at regular intervals allows you to ride out stock market volatility. Drip-feeding money is the perfect solution if you want to invest but are unsure of when to do it, and it removes the uncertainty of putting a large sum of money into the market all at once. Remember, it is the time in the market that is by far the most important consideration, not any attempts at timing the market – a strategy fraught with danger.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS.

ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

Responding to situations rather than reacting to them

As the saying goes, ‘People don’t plan to fail, but they do fail to plan.’ To enable you to achieve want you want to, whether that’s trying to lose weight, getting fitter or securing that promotion, having a plan and being prepared for every eventuality is a great way to help move you closer towards your goals.

You can do almost anything when you feel confident about your finances. So how confident are you? No matter what your current age or financial situation, if you haven’t already started or you need to make improvements to your existing finances, the best time to start is right now. The financial plans you put in place today will lay the foundations for your and your family’s financial security and independence tomorrow.

Trying to get your attention

The truth is, though, some of us are better planners than others and some of us live for the now and spend in the moment. But somewhere out there, beyond the shiny feel-good of today, our future selves are waving their arms around trying to get our attention.

Being a good planner means you need to be more goal oriented and able to take control of your life. By planning ahead, you can then identify the associated risks, weigh and categorise them, prioritise and create a financial plan. In this way you can transform risks into opportunities and experience the rewards of taking them.

Increasing your net worth

Most people believe the key to wealth is a high-paying job. Yes, of course it’s easier to amass assets if you have more money coming in every month, but one key to increasing your net worth is to spend less than you make and then make it work really hard for you, and not someone else.

Thinking long term is an important characteristic of accumulating wealth and achieving financial independence. Being financially independent means that the income you generate from investments alone is enough to cover all your expenditure.

Having a sound financial plan

But without proper financial planning we are not ready to respond to challenges that life may throw our way. Hence we become reactive. Having a sound financial plan in place ahead helps us to become proactive.

By becoming proactive, we are then able to take the right action in the face of certain challenges and adversities. When you are proactive, you respond to situations rather than reacting to them.

Creating plans of action to ensure you reach your financial goals

To be prepared for the road ahead, it’s critical to think about having a plan. For many people it’s not clear where their money will come from when they no longer receive a salary. And that can be stressful. When you add in the pressures of today’s bills and basic living costs, not to mention the nice things like holidays, the thought of the future can seem a bit overwhelming.

Planning for the future means making conscious decisions now. And even though we fill our lives with plans for our future selves, we’re always preoccupied with day-to-day events so we forget how important it is to take the time to take a step back and look to the bigger picture.
With our help, you can create a plan of action to ensure you reach your financial goals.

Will a plan really help me? Put simply, ‘yes’.

Where is my money going now?

The first step of your financial planning process is to determine your current financial situation in relation to income, savings, living expenses, and debts. Preparing a list of current asset and debt balances and amounts spent for various items will give you a clearer picture of where you stand financially. A monthly budget is an important step towards your financial fitness and should form the foundation of your financial planning process.

Have I built up a rainy day emergency fund?

The number one reason you should establish a rainy day fund is because, unfortunately, things unexpectedly do go wrong in life. So you also need to make sure you have an emergency fund and work towards saving six months worth of living expenses. This is money that you set aside for the unpredictable and unplanned and to cover expenses such as being made redundant or a sudden change in your income.

What are my financial goals in life?

Specific financial goals are vital to your financial planning. It’s time to consider now what matters to you. You need to decide what’s within reach, what will take a bit of time and what must be part of your longer-term strategy. Apply a SMART- goal strategy to this process. That is, make certain your ambitions are specific, measurable, achievable, relevant and timely. You should also periodically analyse your financial goals to make sure you’re always on track.

Have I prepared for unexpected events?

There are certain times when life-changing events happen. So it’s essential to protect both your and your family’s financial future. It may be difficult to think about, but if something were to happen to you or your partner, you’d want to know you are both protected financially. Think about how much money your family would need to maintain their current lifestyle if you weren’t around. This will give you a better idea of how much protection you need should different events occur – whether this is your ill-timed death, or suffering from an illness or disability.

What big moments do I need to plan for?

Life has a habit of surprising us, disrupting the best-laid financial plans. Having a plan will help you prepare for whatever comes your way, while saving for the things you care about. Whether it’s buying a property, starting a family, changing your career or life after you’ve finished work – whatever your vision for the future, having more money will help to make it rosier.

Are my financial plans still on track for success?

The financial planning process is dynamic and does not end when you take a particular action. You need to regularly reassess your financial decisions. Changing personal, social and economic factors may require more frequent assessments. When life events affect your financial needs, this financial planning process will provide a vehicle for adapting to those changes. Regularly reviewing this decision-making process will help you make priority adjustments that will bring your financial goals and activities in line with your current life situation.

Source data:
[1] The research for Royal London was carried out by Research Without Barriers (RWB) between 12/04/2019 and 15/04/2019 amongst a sample of 1,012 UK adults who have been married and separated, divorced and/or widowed. All research conducted adheres to the MRS Code of Conduct (2014).
[2] There were 101,669 divorces in the UK in 2017, according to the ONS

Don’t miss out on this little-known tax rule

For those parents who have spare cash, putting money into their children’s pension will boost the retirement prospects of their offspring. The money will be topped up by the addition of tax relief and could also earn their children a tax refund if they are higher-rate taxpayers and reduce the penalty they face if they are a higher earner receiving child benefit.

Under current rules, there is nothing to stop a parent making a contribution into the pension of an adult child. With millions of younger workers having been newly enrolled into a workplace pension, many now have a pension for the first time but are only making very modest contributions.

Building a more meaningful retirement pot

An additional contribution from parents early in their working life, benefiting from compound interest as it grows, could help them to build a more meaningful retirement pot and is money that cannot be touched until later in life.

A campaign has been launched by Royal London to make parents aware of the ‘hidden advantages’ of paying into the pension pot of their adult children. It is a little known fact that a parent who puts money into their child’s pension could be doing them a favour three times over.

Improving long-term financial security

First, the recipient will get a boost to their retirement pot, including tax relief at the basic rate. Second, recipients who are higher-rate taxpayers can claim higher-rate tax relief on their parents’ contributions, which will increase their disposable income. And third, recipients affected by the high income child benefit charge can see this penalty reduced because of their parents’ generosity.

Not every parent has spare cash to pay in to their children’s pensions, but many will be in a better financial position than their children can expect to enjoy. By paying in to their children’s pension, they can give them a triple boost and improve their long-term financial security.

Recipient receives basic-rate tax relief

A little-known feature of the pensions system, however, is that the contribution by the parent is treated as if it had been made by the recipient. So, for example, if a parent pays £800 into their child’s personal pension, the recipient will get basic-rate tax relief on the contribution, taking the amount in the pot up to £1,000.

In addition, there are two further benefits to the recipient:

If the recipient is a higher-rate taxpayer, he or she can claim higher-rate relief on the contribution made by the parent; this would be done through the annual tax return process and would reduce the tax bill of the recipient.

If the recipient is affected by the ‘high income child benefit charge’ and is earning in the £50,000-£60,000 bracket or slightly above, the money contributed by the parent is deducted from their income before the high income child benefit charge is worked out, thereby reducing their tax charge; for example, if the recipient is earning £60,000 and therefore faces a child benefit tax charge of 100% of their child benefit amount, a pension contribution by the parent of £8,000 grossed up to £10,000 by tax relief would reduce the recipient’s income to £50,000 for purposes of the child benefit charge and would completely eliminate the tax charge.

Reducing a future inheritance tax bill

Apart from generally wanting to help their children, parents may be interested in this idea particularly because they may be up against their own annual limits for pension contributions and may therefore have spare cash. Contributions may reduce future Inheritance Tax bills if they qualify for one of the standard exemptions, such as regular gifts made from regular income.

The amount that the parent can contribute with the benefit of pension tax relief is not limited by the parent’s pension tax relief limit but by the limit that their children face – which in many cases will be up to their annual salary or £40,000, whichever is the lower.

Contributing money into a child’s pension

Parents can also contribute money into a child’s pension, which will reduce the size of their estate for Inheritance Tax purposes on death if a valid Inheritance Tax exemption applies or after seven years if there isn’t a valid exemption.

For example, the ‘normal expenditure from income exemption’, which is unlimited, would apply if the contributions are not at such a level so as to reduce the current standard of living of the parents and are made on a regular basis, such as an annual contribution from the parents’ regular income.

A PENSION IS A LONG-TERM INVESTMENT.

THE FUND VALUE MAY FLUCTUATE
AND CAN GO DOWN, WHICH WOULD HAVE
AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

PENSIONS ARE NOT NORMALLY ACCESSIBLE UNTIL AGE 55. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION, WHICH ARE SUBJECT TO CHANGE IN THE FUTURE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

Your destiny is now in your own hands

If you are in your 50s or 60s, your thoughts are probably turning towards retirement. When should you retire? How much money do you need?

In trying to answer these questions, you face a problem. Because of longevity trends, we are on average living longer. With longevity increasing, your wealth may have to provide you and your spouse or partner with an adequate income for 30 or even 40 years.

Britons aged 30 today have a 50% chance of living to more than 100, while 50-year-olds have an even chance of reaching 95[1]. Longer lifespans, however, raise financial challenges – for individuals as well as for families and society.

The idea of a retirement lasting many decades may seem appealing, but longer retirements mean more years of living off your pension and savings. Will yours be enough?

Extra benefit of compound interest

How much money you need to save depends on when you actually start saving and how much you want to save in total. The earlier you and potentially your employer (if they match your contributions) start adding to your pension pot, the less you will need to save each month because the cost is spread over a longer period.

Moreover, if you start saving earlier, your funds will accrue the extra benefit of compound interest throughout the duration of your savings. Making money from the interest means you can actively save less but still end up with the same amount.

Much more freedom and flexibility

The good news is that changes to pensions also now mean you have much more freedom and flexibility over how to take your benefits – whether as tax-free cash, buying an income for life, leaving your pension fund invested while drawing an income, or a combination of all these options.

Unless you believe the Government is likely to become more generous with the State Pension and other retirement benefits, individuals will almost certainly need to save more to enjoy the standard of living they would like in retirement.

Building a retirement nest egg

Over the last few decades, employer pensions have become generally less generous. Today, people starting a new job in the private sector are very rarely offered a traditional defined benefit pension – where the employer guarantees you a certain level of pension based on your salary and length of service.

Most employer-based pensions now depend on how much you and your employer have contributed and the investment returns achieved by that money. That said, for most people, saving via a workplace pension still remains the correct approach to take for building a retirement nest egg – not least because the employer contributions are effectively free money.

A number of attractive tax breaks

Importantly, pension savers benefit from a number of attractive tax breaks, including Income Tax relief on contributions and up to 25% of the proceeds being tax-free. For 2019/20, the annual limit on tax-relievable personal contributions is 100% of your salary (or £3,600 if more). In addition, there is a limit on tax-efficient pension funding called the ‘annual allowance’ (£40,000 for most people) – this applies to both contributions paid by you and contributions paid by your employer and, if exceeded, means you will pay tax on the excess (an annual allowance charge).

We’ll help keep track of your pension contributions so that you know if you’re getting close to your annual limits.

Maximum tax-free retirement savings

In some cases, we may be able to ask your pension provider to pay the charge from your pension benefits. You may not be subject to an annual allowance charge (or a lower charge may apply) if you have unused annual allowances from the previous three tax years that can be carried forward.

Increasingly, more people are also being caught by the ‘lifetime allowance’, which puts a limit on the total value of their pension funds that can be accumulated without suffering a tax charge. From 6 April this year, the pensions lifetime allowance increased to £1,055,000. The pension lifetime allowance is the maximum amount that you can accumulate in your pension plans without suffering a tax charge (lifetime allowance charge).

Source data:
[1] The 100 Year Life: Living and Working in an Age of Longevity, by Andrew Scott and Lynda Gratton, September 2018

A PENSION IS A LONG-TERM INVESTMENT.

THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

ACCESSING PENSION BENEFITS EARLY MAY IMPACT ON LEVELS OF RETIREMENT INCOME AND YOUR ENTITLEMENT TO CERTAIN MEANS TESTED BENEFITS AND IS NOT SUITABLE FOR EVERYONE. YOU SHOULD SEEK ADVICE TO UNDERSTAND YOUR OPTIONS AT RETIREMENT.

PENSIONS ARE NOT NORMALLY ACCESSIBLE UNTIL AGE 55. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION, WHICH ARE SUBJECT TO CHANGE IN THE FUTURE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

Financial complexities of passing on wealth

Passing on wealth is a sensitive subject, not just because of the financial complexities of it all, but also the emotion and family politics involved.

Having built up their business or wealth, many families often wish to enjoy it whilst also ensuring that it is passed on to the next generation in their families. Passing on what you have accrued in the most efficient way is of paramount importance. But some people find the idea of discussing passing on wealth uncomfortable.

Making decisions on your behalf

It is often said about those people who are healthy, wealthy and well advised that they rarely pay Inheritance Tax – or rather, their estates do not. As part of the planning process, it is essential to make certain that you have a current Will in place. Your Will ensures that when you die, your wishes are clear.

Also, give consideration to arranging a Lasting Power of Attorney, a legal document that lets you appoint one or more people to help you make decisions or to make decisions on your behalf.

Your wealth over the years

Dying without a Will could leave your partner without any rights or protection if you’re not married. If you don’t have close family, your estate could pass to a distant relative you do not wish to benefit or do not know, or even to the Crown. If you already have a Will, you should consider reviewing it at least every five years.

It might be the case that you have built up your wealth over the years, or perhaps you have had a windfall or inherited a sum of money. Whatever your individual circumstances, setting up a trust could be the right decision for the future, with the added flexibility of tax-efficiency.

Potential Inheritance Tax liability

With our help, you can work out if you have a potential Inheritance Tax liability. Once we have this information, we’ll make recommendations about how you could reduce your Inheritance Tax by reviewing all the different allowances and options available. Funding your expenses from assets that are subject to Inheritance Tax will also help reduce your taxable estate.

A trust may also help you protect your wealth, making sure that the people who matter to you most are the ones who benefit in a way that you want them to at the right time. Even though the current climate is less favourable, following major Inheritance Tax reform in 2006, there are still a number of instances where trusts can be created without an immediate Inheritance Tax charge.

Significant degree of asset protection

Putting taxation to one side for the moment, the separation of legal ownership of an asset from its beneficial ownership creates great flexibility and offers a significant degree of asset protection. This can be valuable in a range of situations, such as providing for children or grandchildren, dealing with assets on death and on marriage breakdown.

In thinking about passing wealth down the generations, another concern is whether your property may have to be sold to pay for nursing home fees. If a couple, whether or not married, own their home jointly, then it is normally possible to ensure that if the longer-lived member of the couple eventually has to go into a home, the share of the house which was owned by the other member of the couple is ring-fenced by means of a trust, so at least that part of the value of the house does not end up going on home fees.

Tax legislation and allowances constantly evolve

If you are a farmer, you are probably aware that agricultural property relief on agricultural property, including the farmhouse, can be claimed to reduce or avoid an Inheritance Tax bill after death. You should also be aware, though, that if before your death you retire, in the sense that you are no longer actively farming the land yourself, then the relief may be lost, particularly on the farmhouse.

Making sure that you can pass on your wealth to the right people, at the right time, will be one of the most valuable things you can do for yourself and your family. Tax legislation and allowances are constantly evolving, so it is essential to review your financial and investment arrangements to ensure unexpected tax bills won’t jeopardise any wealth intended for your family.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS AND DEPEND ON YOUR INDIVIDUAL CIRCUMSTANCES.

ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE RULES AROUND TRUSTS ARE COMPLICATED, SO YOU SHOULD ALWAYS OBTAIN PROFESSIONAL ADVICE.

When it comes to your life insurance, you’ve got options

‘Single life’ policies cover just one person. A ‘joint life’ policy covers two people, and when one person on the policy dies, the money is paid out and the policy ends. You will need to decide whether the joint policy pays out on first or second death, as this will determine when the policy ends.

When choosing between these options, think about:

Affordability – a joint life policy is usually more affordable than two separate single policies
Cover needs – do you both have the same life insurance needs, or would separate policies with different levels of cover be more appropriate?
Work benefits – if one of you has work ‘death in service’ benefit, you might only need one plan
Health – if your joint policy is with someone in poor health, this may increase your monthly payments

Common ways fraudsters can steal your personal information

As individuals, throughout our lifetime we exchange personal information with a vast number of institutions including banks, credit card suppliers, utility companies, supermarkets, government organisations and retailers. This may be to receive important services, but also to allow us to do the fun things like shopping, eating out or going on holiday.

Fraudulent or stolen identities being used to make false applications for credit cards or loans, to obtain goods and services, or even to access money or other assets is naturally something that concerns us all. Worryingly, it is not untypical for a victim to first become aware of this when they receive a letter of demand for payment.

Of course, there are a number of basic things we can all do as individuals to protect ourselves against identity crime and reduce the risk of our personal information falling into the wrong hands. If you discover your identity has been stolen, act immediately. Following these steps will help to minimise the impact and prevent additional issues from arising.

1. Check your credit reports
At a small cost, you can check your credit file with a credit reference agency such as Call Credit, Equifax or Experian to help identify any activity that you are not aware of.

2. Monitor your mail
Make sure you receive all post that you are expecting. If you think post is missing, contact the Royal Mail. Also, arrange for the Royal Mail to re-direct post to your new address if you have moved house, and inform companies that you deal with regularly that you have moved.

3. Review bills and bank statements
Check bank, credit card and other financial statements frequently, and look out for transactions that you do not recognise. Check for fraudulent charges or suspicious activity. Report issues immediately. Consider receiving statements and bills electronically, setting up direct deposits, and using online bill pay.

4. Identity theft protection
Identity theft protection providers monitor your credit reports, as well as online debit and credit card number(s). If suspicious activity is detected, you will be notified and will receive identity recovery assistance.

5. Shred documents
Carefully dispose of documentation that contains personal details rather than just throwing them away. Use a cross-cut shredder to destroy envelopes and documents.

6. Secure your computer(s) and mobile devices
Whether a desktop, laptop, netbook, tablet or smartphone, your computer contains critical personal information.

To help protect your electronic devices, you should also:
Password-protect your device
Install and update operating system, antivirus and anti-spyware software. For smartphones, also install a ‘wiping’ program to erase all data remotely if it is lost or stolen
Use a personal firewall
When using a wireless network, activate WPA encryption and any other security features available. Change your router’s default password and SSID
Beware of ‘smishing’ – text messages containing links capable of downloading malware to your smartphone
Do not leave your device unattended or your screen visible to others
Close your browser when you’re finished with a secure session
Log off when you leave or step away

Use caution online
Only access personal and financial information from a computer you ‘trust’
Only do business with financial institutions and online merchants you know and trust. Watch out for copycat sites, and confirm the email address is correct
When accessing financial information or ordering online, be sure the site is secure. Look for a URL that begins with ‘https://’ and the ‘closed padlock’ symbol
Never reply to an email or pop-up message that requests you provide or update your personal information

On social media sites, it’s always a good idea to:
Review the privacy policy
Choose a challenging password
Don’t reveal your physical address, date of birth, school names or phone numbers
Use privacy settings