Top Ten Tips: Protecting your wealth

YOU’VE worked hard to build a stable financial future for you and your family, so you should take steps to protect it – particularly in times of uncertainty.

Jason Hemmings, a partner at Edinburgh-based Cornerstone Asset Management, presents his top tips on protecting your wealth:

1 SPREAD YOUR ASSETS

With even gold losing its shine from recent record highs, it highlights the folly of jumping into the latest “hot” investment. As those who ploughed into property at the top of the market also found, all good things come to an end. So spread your money across all major asset classes (shares, bonds, property and cash) and sub-asset classes. Multi-asset portfolios can reduce risk by investing in different asset classes that don’t perform in the same way at the same time.

2 DON’T TIME THE MARKET

The ultimate way to make money on the stock market is to be invested when markets are rising and out of markets when they’re falling. But attempting to second-guess market movements can be a sure-fire way to destroy wealth. Seek professional help to ascertain your tolerance to risk, invest and stick with your plan.

3 KEEP YOUR BALANCE

Review your portfolio regularly and ensure you maintain the correct mix of assets so the risk you’re taking doesn’t get out of step with your tolerance to it. Rebalancing reduces volatility and produces superior returns.

4 LIQUIDATE

With the economic outlook potentially worsening, there could be more stock market volatility to come. If you can’t face the risk of losing money, then the answer might be to sell out of equities and turn to cash. If your deposits are more than £85,000, split this across different banks. The Financial Services Compensation Scheme pays up to this limit per person per authorised institution.

5 REINVEST PROCEEDS

The re-investment of dividends – or compounding – is one of the most important determinants of returns over time. If you invested £100 in the UK stock market in 1899, it would have grown to £12,665 in capital terms or a mammoth £1.7 million with re-invested dividends, according to the Barclays Capital Equity Gilt Study 2011. The figures aren’t as impressive when you leave interest to accrue more interest on cash savings, but such a strategy helps mitigate the effects of inflation.

6 USE TAX BREAKS

Hold assets tax-efficiently. Keeping more of your money in your pocket – not the taxman’s – will help protect your wealth. You can invest up to £10,680 a year in individual savings accounts, half of which can be saved in cash. You can also realise gains of £10,600 a year free of capital gains tax. If you’re married or in a civil partnership, use both parties’ allowances. If one of you is in a higher tax band than another, transfer any income-producing assets to the lower-rate taxpayer.

7 PROTECT YOURSELF

You are your greatest asset, especially if you have dependants. Protect this by taking out insurance that pays out if you die (life cover), are diagnosed with a serious illness (critical illness insurance) or lose your job or fall ill and are unable to work (income protection).

8 GIVE IT AWAY

Inheritance tax (IHT) is charged at 40 per cent on estates worth over £325,000, but there are ways to reduce your liability. You can give away £3,000 a year tax free; £5,000 to children and £2,500 to grandchildren when they get married; and £250 to any number of recipients in any tax year. Donations to charity are also exempt, as are unlimited gifts out of income, provided these don’t reduce your standard of living. Larger gifts can be made, but you have to survive at least seven years to make them IHT-free.

9 CARE COSTS

The average cost of residential care in Scotland is £25,064, or £31,616 a year if nursing care is required. Anyone with assets above £22,750, including the value of their home, must meet these costs. Only when total assets are below £14,000 will the local authority fully foot the bill.

Many people are forced to dip into savings and investments to meet care costs, making capital erosion hard to avoid. You could consider gifting savings or releasing equity from your home to pass on to future generations long before you need care, but beware falling foul of “deliberate asset deprivation” rules. Alternatively, an impaired annuity pays a guaranteed income that can meet care costs for as long as you live, in return for a lump sum. Either way, plan early.

10 PAY A FEE

Independent financial advice is a must, but pay a fee rather than commission. Fees are far more transparent and generally work out cheaper. Fee-based wealth managers can often access investments at creation price or net asset value, meaning initial investment charges (up to 5.5 per cent) are waived. They don’t generally receive commission on the products they recommend, but if they do, it’s passed back to you.