If you are over 55 and haven’t thought about how to structure your financial affairs so your investments will provide you with an income in retirement and also about how to pass on your businesses or assets tax-efficiently to the next generation, now is the time to put your house in order.
You may be concerned that, in a stubbornly low interest-rate environment (not to mention the current market turmoil), traditional low-risk asset classes such as cash and bonds are performing poorly. Many financial advisers say that finding a way to structure your assets and investments so they will provide an income without affecting your capital will be difficult unless you are prepared to take a few risks.
Brian Walsh, head of financial planning at Davy, agrees that achieving this is very difficult because of low rates, bonds that are over-priced and other external factors like quantitative easing, which means many clients may be tempted to throw their money into higher-risk assets that would get a better return but also put their capital at risk.
There is a safer strategy that he says has been proven to work over a longer term, which is to assess your total income, your total expenditure and any deficit you are trying to meet, and then look at any asset that can be invested to meet that deficit.
“This should determine the risk profile, the targeted return, and allow you to build a portfolio that’s across the asset classes as opposed to just looking at income,” says Walsh.
“So what you are looking at is a total return of income and capital rather than just the income side of things, and this allows you then to diversify across asset classes and jurisdictions.”
This is still not without its risks, so to protect against market volatility he recommends that clients put two times their net income into a separate deposit account to allow them to dip into some of the cash during periods where the targeted return may be below what they expected, in order to meet any deficit.
Overall plan
This doesn’t change the overall plan, which is designed to work over time, says Walsh.
“You may change the asset allocation within that structure but you won’t change the overall structure.
“You will still have cash, bonds, equities, property and alternatives. It’s the mix of that gives you the return as opposed to just looking at each individual asset class.”
George Flynn, associate director of chartered accountants Smith & Williamson, says that while there are few, if any, low-risk assets that could yield a reasonable income for retirement, there some alternatives worth considering if you are prepared to “push the risk profile”.
One of them is listed infrastructure funds, which provide exposure to public and private infrastructure assets such as roads, hospitals and schools. The returns are inflation-linked, and can pay dividends from 3 to 5 per cent.
“It can pay a good level of income and can provide some inflation protection.
“They are not in the same risk category as general direct equities, but they are not as low-risk as cash and government bonds.”
Further up the risk chain is absolute return funds, which are involved in short-selling, futures and options derivatives, but “have proven over time to deliver”, says Flynn, although it’s very much “buyer beware”.
There are also guaranteed funds that guarantee your capital, but these are invariably low-risk, difficult to access, while the charges can eat into returns.
“Yes, it can guarantee that the capital will be there in five years time, but it could be zero return.”
Family affair
Whatever strategy you choose, it may also be a good time to make your investment strategy a family affair if you want to pass on a business or assets to your children or extended family in the years to come without burdening them with unnecessary tax liabilities.
There is some speculation that the inheritance tax threshold may be raised from its current low level of
225,000 to reflect rising property prices, but simply devising a succession plan of some kind today will go a long way to reducing the overall inheritance-tax burden as well as ensuring a smooth transition to the next generation.
One such vehicle is a family partnership, whereby assets are transferred into the name of the children, but the parents retain control of the partnership and the voting rights.
“The children own the equity in a partnership, but the adults control the voting rights, so the control rests with them,” says Flynn.
“It’s also a way of educating children in how to invest money, protect money, plan for the future, and also get rid of the burden, possibly, of inheritance tax on that.
“The capital remains for the parents and invested for the children and then passed onto them.” Tax reliefs One of the biggest tax reliefs in a succession context is the retirement relief from capital gains tax on passing on a business and assets to a child. There is no limit on the value of assets that can be transferred but, since last year, a cap of € 3 million applies if the transfer is made after the age of 66.
“If you don’t do it before 65, the chances are you may hang on for the rest of your life to avoid the CGT, which is not what the threshold is there for; it was designed to encourage the passing on of businesses to the next generation at a younger age,” says Walsh.
The small gift exemption of
3,000 that you can gift your children or grandchildren every year is also overlooked by many clients and individuals, says Andrew Fahy, tax and financial planning director at Investec.
“A lot of people say € 3,000, relative to overall wealth, may not seem like a lot, but if you think of it as €6,000 per couple, say a husband and wife with a son, daughter-in-law and three grandchildren, suddenly that’s € 30,000 per year tax-free without affecting the annual threshold as well as the threshold for grandkids.”
It’s a case of “you use it or lose it”, he adds.
“Only over time does it become a useful and meaningful part of a family wealth-planning strategy.
“The point the people always make, particularly with succession planning, you have got to start early,” adds Fahy.