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To invest or divest?

How long should your clients really continue to invest? 

As financial advisers, we spend most of our time encouraging clients to build up their portfolio. The issue for most people most of the time is ‘will I have enough money to retire comfortably on?’  For those lower down the income ladder, with the state pension starting at a measly £9,330, it could well be ‘will they have enough money to retire at all?

There comes a point however, for people who have invested throughout their lives, where we actually should question whether it really is the best policy to continue to invest and grow their estate?  Instead, we actually have to encourage our clients to reduce some of the wealth they have built up and divest their estate instead, to minimise inheritance tax.

Typically, this comes when the client clearly has more than enough money to last throughout retirement, including any care needs they may face in the future. They then need to consider the implications of inheritance tax if they continue to invest.  As wealth advisers, we are in prime position to help clients question whether they have actually built up enough wealth and whether they should continue to grow their estate, especially as 40% of that growth would go to the tax man – not the shrewdest of investments at this point. 

This certainly may be counter-intuitive for some clients and their advisers, to start advising to give money away, especially when the client has had a lifetime of saving, but it will be beneficial when passing on money. 

At this point, there are a number of solutions to this complex problem. Just two of the many options to be considered are:

  1. Amounts of money can be gifted – free and exempt gifts as well as larger gifts that trigger the seven-year rules.
  2. Effective structuring wills and trusts - assets can be put in trust and earmarked for family members or other beneficiaries and protected from costly inheritance tax

An adviser doing this through clever trust planning can ensure that any money is set up as a gift or in a loan trust and so any interest or growth on the money goes to the beneficiary outside of the estate.

Sometimes clients are worried that, if they put a lot of money in trusts or as gifts, they may not have enough money to last their lifetime.  The answer here is not to take an ‘all or nothing approach, but to start slowly.  Smaller amounts can be put in trust to start with. As people get older they can then often afford to do things a little bit differently, perhaps building up to larger amounts as they feel comfortable, but using the appropriate wrappers at all times in order that they retain control.

is the incentive for the financial adviser other than knowing they have done the right thing by their clients?

Clearly there are advice fees for helping clients navigate this complex area, however there are the added advantages of engaging with the whole family generational structure.  Involving children and even grandchildren within the solution strategy ensures that you are capturing that inter-generation wealth transfer and gaining more long-term clients.

Indeed, our clients who undertake estate planning are not only reassured that their estate passes on as financially intact as possible but that their wider family now have access to an adviser that they know and trust.

While it may seem counter-intuitive to ask clients to start divesting their hard-earned savings, clever trust planning can ultimately save your clients and their beneficiaries many thousands of pounds.

By Dave Magee, Head of Wealth at Just Wealth

Financial advice

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