Protecting my wealth
5 minute read
People can tend to overlook the importance of protecting their own wealth. Our Wealth Planners can help you discover how to protect your wealth.
Wealth Management and protection
Wealth Planners can advise on many areas of financial planning but there is an argument that says wealth protection is the foundation on which all other ‘pillars’ of planning stand.
We’ve all heard of The Goose that Laid the Golden Egg and if any of us had one of these magical creatures, we would be sure to insure it rather than risking depriving ourselves of the gain we were assured of every day.
When asked the question ‘what is your biggest asset?’ the answer that comes to mind may be the family home, a classic car or gold but in reality, the answer for many people will be the total value of their future earnings potential.
Most people have insurance for their homes, their cars and even their pets, but far fewer people have any, let alone sufficient, insurance for that Golden Goose – themselves.
How to protect your wealth
Income Protection will provide a regular replacement income which is generally tax free should an individual’s earnings cease due to accident or illness. Different deferred periods, payment amounts and terms are available depending on individual circumstances. This could help for example to cover mortgage payments, pay school fees and maintain a desired lifestyle.
Life Assurance (Term)
Term Life Assurance will pay a lump sum (or in some cases a regular income) which is usually tax free on the death of an individual within a specified term. The money could be used for example to reduce or clear debt or to cover expenditure.
Term Life Assurance can also be used to protect the loss of the Nil Rate Band which has come about as a result of making a gift which isn’t exempt for Inheritance Tax purposes.
Life Assurance (Whole of Life)
Whole of Life will pay out whenever a Life Assured dies. If the policy is written in Trust the proceeds will be free from Inheritance Tax and are often used to pay the Inheritance Tax due on an estate.
Critical Illness Cover
Critical Illness Cover will pay out a tax free lump sum on diagnosis of a specified critical illness. The money could be used for example to pay for necessary home conversions or for a recuperating holiday.
Case Study 1 – Protect your lifestyle
Client – A
Income – £100,000 gross
Expenditure – £5,000 per month net
Savings/Investments – £1,000,000
Income Protection Held – £4,000 per month after three months until age 65 or return to work
Objectives – Buy properties for both children when they turn 25 in two years circa £250,000 each then take early retirement in five years and purchase a cottage by the seaside for circa £450,000.
Situation – Client A suffers a car accident and is unable to work whilst they recover. They make a successful claim on their Income Protection. They use £15,000 of savings to tide them over for three months until their Income Protection of £4,000 per month kicks in. They recover and are back to work 18 months after the accident having used a further £15,000 to top up the Income Protection payment of £4,000 and cover their total expenditure of £5,000 per month from months three to 18.
Summary – Without the Income Protection, they would have needed to use £90,000 of savings to cover their expenditure whilst not working which was not its intended use. One or more of the three planned property purchases would not be affordable and retirement may need to be delayed.
Had Client A never recovered sufficiently to return to work, there would have been a loss of earnings for years and a need to use most if not all of their investments if they weren’t protected.
Case Study 2 – Protect your estate
Client – B
Total Estate Value – £3,000,000
Objectives – Gift £250,000 to their only child today to help with property purchase and pass as much down as a legacy when they pass away. Their Will leaves everything to their child and their full Nil Rate Band is available.
Situation – Client B sadly passes away five years after gifting £250,000 to their child. As seven years hasn’t passed, the £250,000 remains part of their estate and uses £250,000 of their available Nil Rate Band. Their remaining £75,000 of Nil Rate Band can be offset against their estate which is worth £2,750,000 following the gift. The Inheritance Tax payable will be 40% of the taxable estate which equals £1,070,000. The net result is that their child received £250,000 five years ago plus £1,680,000 of their remaining estate (assuming the remainder is used to clear the Inheritance Tax).
Had they taken a seven year Level Term Life Assurance policy with a sum assured of £100,000 (40% of the £250,000 gift) the full Nil Rate Band would have been available to offset against their estate.
If they had also taken a Whole of Life policy with a sum assured of £1,070,000, the proceeds could have been used by their child to cover the Inheritance Tax. In this scenario they would not only have received the gift of £250,000 five years ago, but the full net estate of £2,750,000.
Summary – Without protection, Client B’s child would receive a total of £1,930,000. With protection, they would receive £3,000,000. This is an uplift of £1,070,000 which would otherwise go to HMRC and meets Client B’s objectives of passing down as much as possible to their child.
Many people work hard to build up their wealth through their working lives and have a good idea of what they want to do with it whether that be retiring early, moving to the seaside or simply passing that wealth down the generations in as efficient a way as possible. It can be heart breaking to see those plans fall apart if the unexpected happens and funds are needed to be deployed elsewhere.
Whatever your financial situation and objectives, our Wealth Planners are available to guide you through the best ways to achieve them and make sure that Golden Goose stays alive and well.
This article was written by Wealth Planner, Amy Spiller.
Speak to your Wealth Manager or contact us if you'd like to arrange a meeting with a Wealth Planner to discuss your options.
Your Wealth Planner can help you understand the effect of tax on your wealth and offer tax-efficient wrappers for your investments. They’ll be able to guide you towards making the right decision for your financial planning needs. Your planner can't offer tax advice – you should seek that independently. Please bear in mind that tax rules can change in future and their effects on you will depend on your individual circumstances.
This article does not constitute personal financial, tax or legal advice. Each person’s circumstances are different so if you are unsure about investing, you should seek advice from a regulated adviser.
Things to consider
The value of investments can fall as well as rise. You may get back less than what you originally invested.
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