Monthly Archives: October 2024

ALIGNING INVESTMENTS WITH RISK TOLERANCE AND CAPACITY

Investing is an indispensable tool for building wealth and achieving financial goals. By allocating resources to various investments, individuals can accumulate wealth over time through capital appreciation, dividends and interest. For example, investing in a diversified portfolio of stocks can yield significant returns, enabling you to grow your wealth far beyond what traditional savings accounts offer.

Additionally, investments can provide a passive income stream, helping to fund major life events such as buying a home, funding education or enjoying a comfortable retirement. The power of compounding returns further amplifies the benefits of investing, as the earnings on your investments generate their earnings over time.

However, it is crucial to understand the concepts of risk tolerance and risk capacity to make informed investment decisions. Properly balancing your investment strategy with your risk profile can significantly impact your financial success and peace of mind, helping you navigate the complexities of the financial markets more effectively and confidently.

UNDERSTANDING RISK TOLERANCE

Risk tolerance refers to an investor’s willingness and ability to endure market volatility and potential losses. It measures your comfort level with investing in assets that may fluctuate in value. Factors influencing risk tolerance include your personality, past investment experiences and financial goals.

For example, if you are comfortable taking risks, you might prefer investments offering higher potential returns, understanding that these come with greater volatility. Conversely, if you are risk-averse, you would likely choose safer investments, even if they offer lower returns.

Understanding your risk tolerance is crucial before you begin investing. Ask yourself questions like: How comfortable are you with market volatility? How might you react if your investments decrease in value? Are you someone who embraces investment risk for greater opportunities, or are you more risk- averse and likely to worry when the market dips?

DEFINING RISK CAPACITY

Unlike risk tolerance, risk capacity is not based on your emotional comfort with risk. Instead, it pertains to how much risk you can afford to take, given your financial situation, investment time horizon and life stage.

Risk capacity considers practical aspects like your income, savings, liabilities and the time frame for achieving your financial goals. For instance, a young professional with a steady income and decades before retirement may have a higher risk capacity than someone nearing retirement who cannot afford significant portfolio losses.

THE IMPORTANCE OF ALIGNING INVESTMENTS

Aligning your investments with risk tolerance and capacity is critical for several reasons. First, it helps ensure that you do not take on more risk than you can handle emotionally or financially. Second, it prevents you from being overly conservative, which might hinder your ability to grow your wealth sufficiently to meet your financial goals.

PRACTICAL TIPS FOR ASSESSING RISK TOLERANCE AND CAPACITY

Self-assessment: Reflect on your past reactions to financial losses. How did you feel and respond? Consider your long-term financial goals and how much volatility you will endure to achieve them.

Financial review: Evaluate your current financial situation, including your income, savings, debts and future financial needs. Determine how much loss you can afford without jeopardising your financial security.

Time horizon: Assess the time you have to invest. Longer time horizons generally allow for taking on more risk, as there is more time to recover from potential losses.

Risk tolerance questionnaire: We can help assess your risk tolerance and provide insights into your comfort level with different types of investments.

CHOOSING INVESTMENTS

Once you understand your risk tolerance and capacity, we can advise on the appropriate investments that align with these factors.

HERE ARE SOME OPTIONS:

For high-risk tolerance and capacity: Equities, growth stocks and exchange-traded funds (ETFs). These investments offer higher potential returns but come with increased volatility.

For moderate risk tolerance and capacity: Balanced portfolios with a mix of stocks and bonds can provide a good balance of growth and stability.

For low-risk tolerance and capacity: Conservative investments such as government bonds, blue-chip stocks and high-quality fixed-income securities. These options offer lower returns but are less volatile.

ALIGNING INVESTMENTS WITH RISK TOLERANCE AND CAPACITY

It’s essential to align your investments with both your risk tolerance and risk capacity. Failing to do so may result in taking on more risk than you can afford or being overly cautious, causing your savings to grow too slowly. Both scenarios could hinder your ability to reach your financial goals.

Understanding your unique approach to risk and how it impacts you is vital.

Additionally, aligning your investments with your risk tolerance and capacity is essential for achieving your inancial goals while maintaining peace of mind. By assessing these factors and choosing appropriate investments, you can more effectively navigate the complexities of the financial markets.

 READY TO TAKE CONTROL OF YOUR FINANCIAL FUTURE?

We’ll listen to your plans and goals and create an investment strategy tailored to your unique risk profile and financial situation. To discuss your investment requirements – please get in touch with us.

THIS ARTICLE DOES NOT CONSTITUTE TAX, LEGAL OR FINANCIAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

THE VALUE OF YOUR INVESTMENTS CAN GO DOWN AS WELL AS UP, AND YOU MAY GET BACK LESS THAN YOU INVESTED.

THE TAX TREATMENT IS DEPENDENT ON INDIVIDUAL CIRCUMSTANCES AND MAY BE SUBJECT TO CHANGE IN FUTURE.

ESSENTIAL TIPS FOR MOTHERS BALANCING FAMILY AND FINANCES

Balancing the many responsibilities of motherhood can be overwhelming, often pushing long-term financial planning onto the back burner. However, effective financial planning is essential for everyone, and as a mother, you face unique challenges that require extra attention. Here are some key financial planning steps to help you take control and secure your family’s future.

SAVE FOR UNFORESEEN EMERGENCIES

As a mother, you’ve probably realised that emergencies can strike when you least expect them to. While an emergency savings pot can’t prevent sick days, uniform mishaps or broken friendships, it can provide a useful financial buffer for more expensive emergencies, such as boiler or car breakdowns. Building up at least six months’ worth of essential expenditure in an easy-access savings account reduces the risk of falling into debt or dipping into savings allocated for long-term goals.

PROTECTION, PROTECTION, PROTECTION

An income protection policy should be considered if your family relies on your income to cover bills, childcare, school fees or after- school activities. This type of insurance pays out a portion of your salary if you suffer from a long-term illness and cannot work, helping you maintain financial stability and ensuring your children’s lifestyle isn’t unduly affected.

Life insurance is another essential protection, offering a vital financial safety net should the worst happen to you. It provides a lump sum or regular income if you pass away during the policy term, which could help pay off the mortgage and ease the financial burden on your family.

YOUR PENSION MATTERS

If you’ve taken time off work to care for your children, finding ways to top up your pension savings is crucial. Many mothers prioritise their children’s futures over their own, but neglecting your pension can have long-term financial repercussions that ultimately affect your entire family. The good news is that there’s still ample time to get your pension back on track.

If you qualify for the full amount of the new State Pension, you will receive £221.20 per week, or £11,502.40 a year (2024/25). You must have paid National Insurance (NI) contributions for 35 years to qualify for the maximum amount. If you’re not working, you’ll receive NI credits automatically as long as you claim Child Benefit, and your child is under 12. You may still receive these credits if you’ve claimed child benefits but opted out of payments to avoid the High-Income Child Benefit charge.

 TOPPING UP PENSIONS 

Consider topping up your workplace or private pensions. Pensions are a highly cost-effective way of saving for retirement due to the tax relief you receive on personal pension contributions. This means a £100 pension contribution will only cost you £80 if you’re a basic rate taxpayer, £60 if you’re a higher rate taxpayer or £55 if you’re an additional rate taxpayer, as long as the total gross contributions are matched by the income in that band.

Even if you aren’t working, you can contribute up to £2,880 per year into a pension and still receive 20% tax relief, boosting your contribution to £3,600. If you receive any cash gifts or inherit some money, saving it into a pension can significantly enhance your retirement funds.

WEALTH CREATION FOR YOUR CHILDREN

If financially feasible, saving money for your children can profoundly impact their future, potentially helping with university fees or securing a deposit for their first home. To maximise the growth potential of their money, consider investing in the stock market.

Although mothers might naturally lean towards being risk-averse, history shows that, over long periods, the stock market generally outperforms cash. A Junior ISA is a starting point. It offers tax- efficient investment growth and locks away funds until your child’s 18th birthday.

OBTAIN PROFESSIONAL FINANCIAL ADVICE

You might not have the time or inclination to sort out your inances independently – and that’s perfectly ine. Financial matters are one area where entrusting the responsibility to a professional can be done guilt-free.

Obtaining professional financial advice can instil coinidence that you’ve made the right decisions with your money, allowing you to focus on yourself and your family.

 WANT TO FIND OUT INFORMATION 

OR SEE HOW WE CAN HELP WITH PERSONALISED FINANCIAL GUIDANCE?

Contact us today for expert professional advice and personalised financial guidance. We’re here to help you and your family achieve financial stability and peace  of mind. Don’t wait – contact us now, and let’s secure a brighter future together!

THIS ARTICLE DOES NOT CONSTITUTE TAX, LEGAL OR FINANCIAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE PLAN HAS A PROTECTED PENSION AGE).

THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION

BENEFITS AVAILABLE. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY THE INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS

Should you consider estate planning and gifting for future generations.

As we age or accumulate more wealth, protecting and preserving our assets for future generations becomes increasingly essential. This process, known as Inheritance Tax (IHT) planning, estate planning or intergenerational wealth planning, involves strategically managing your estate to minimise tax liabilities and ensure that your wealth is passed down to your loved ones in the most tax-efficient manner possible.

Effective planning can significantly impact the financial wellbeing of your heirs, making it crucial to consider various strategies and tools available for safeguarding your estate.

One common question we receive from clients is whether to gift assets during their lifetime or wait until they have passed away. The answer is more complex and heavily depends on your personal and financial circumstances and objectives. Gifting can provide immediate support to family members and potentially reduce your estate’s size, lowering the IHT burden.

However, careful consideration must be given to the gifts’ timing, amount and recipients to ensure that they align with your long-term goals and comply with tax regulations. Understanding these nuances is essential in making informed decisions that will benefit you and your loved ones.

UNDERSTANDING INHERITANCE TAX

When you pass away, IHT is potentially payable to HM Revenue & Customs (HMRC). The amount due depends on the estate’s value minus any debts and after all available thresholds have been used. These thresholds are the nil rate band (NRB) and the residence nil rate band (RNRB). At a high level, the NRB is £325,000, and the RNRB is £175,000, the latter of which is only available if you leave your home to a direct descendant. The standard rate of IHT due to HMRC on amounts over these thresholds is 40%. This reduces to 36% if at least 10% of your net estate is left to charity.

WHY DO WE GIFT?

We gift for two common reasons: We want to help our family and loved ones now, when they need it, and whilst we can see them enjoy it, as opposed to when we have passed away. This is often called a ‘living inheritance’. Additionally, we may have a large estate and wish to reduce its value so that our beneficiaries pay less or no IHT when we pass away.

HOW MUCH CAN YOU GIFT?

In short, you can gift away however much you want to whoever you like and whenever you like. If these gifts fall within the ‘annual gift allowances’ or are made from your regular surplus income, they automatically fall outside your estate for IHT tax purposes. Otherwise, you must survive seven years after making the gift before the gift is excluded from IHT tax calculations.

THE IMPACT OF SEQUENCING GIFTS

The sequencing of gifts can significantly impact the wealth you want to pass on. In addition to the seven-year rule, there is the less well-known 14-year rule. Giving a gift outright to an individual and/or Absolute/Bare Trust in excess of the annual allowances is known as making ‘Potentially Exempt Transfers’ or PETs.

POTENTIALLY EXEMPT TRANSFERS AND THEIR USES

For example, a common reason for making a PET might be to help a child onto the property ladder. To ensure the gift is outside of your estate for IHT tax purposes, you need to survive seven years from when the gift is made. If the PET is more than the NRB (£325,000), there is gradual tapering on the excess once you have survived for over 3 years. The longer you survive after making the gift (between 3 and 7 years), the greater the tapering.

CHARGEABLE LIFETIME TRANSFERS

Should you settle any money into a relevant property trust, such as a Discretionary Trust, these gifts are known as ‘Chargeable Lifetime Transfers’ or CLTs. An example of such a settlement might be grandparents wanting to pass money down to their grandchildren. A common reason for this may be that their children already have a large estate, so if they were to inherit any more, it would be unhelpful for their IHT position.

COMPLICATIONS IN GIFT ORDER

Complications may arise when an individual has passed away and has made both PETs and CLTs. This is because the order of these gifts can result in bringing 14 years’ worth of gifts into the IHT calculation. When considering which gifts are liable to IHT, the gifts are placed in the order they were made, starting with the oldest and moving towards the date of death.

HMRC RULES ON FAILED PETS

HMRC rules are such that any CLTs made in the seven years before any ‘failed PETs’ must also be brought into account. If an individual makes a PET and dies within 6 years and 11 months, the PET fails. From the ‘failed PET’ date, HMRC will look back a further seven years and include any CLTs in their calculation to determine the IHT due on the PET.

ANNUAL GIFTING ALLOWANCES

Under current legislation, everyone can gift away £3,000 per year. This is called your ‘annual exemption’. Any unused allowance can be carried forward to the following tax year; however, it cannot be carried over again. There is also a wedding allowance of varying amounts depending on the relation, which must be made before the wedding, and the wedding must happen: £5,000 to a child, £2,500 to a grandchild, £1,000 to a relative or friend. Wedding gifts can be combined in the same year with the annual exemption.

SMALL GIFTS ALLOWANCE

You can also make gifts of up to £250 to as many different people as you like, as long as the person has received more than £250 from you that tax year.

 DO YOU REQUIRE INFORMATION OR  PERSONALISED ADVICE ON GIFTING AND INHERITANCE TAX PLANNING?

For those seeking further information or personalised advice on gifting and Inheritance Tax planning, please do not hesitate to contact us for expert guidance tailored to your specific circumstances.

THIS ARTICLE DOES NOT CONSTITUTE TAX, LEGAL, OR FINANCIAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

THE FINANCIAL CONDUCT AUTHORITY DOESN’T REGULATE TRUST PLANNING AND MOST FORMS OF INHERITANCE TAX (IHT) PLANNING. SOME IHT PLANNING SOLUTIONS PUT YOUR MONEY AT RISK, AND YOU MAY GET BACK LESS THAN YOU INVESTED. IHT THRESHOLDS DEPEND ON INDIVIDUAL CIRCUMSTANCES AND THE LAW. TAX AND IHT RULES MAY CHANGE IN THE FUTURE.