Building a wealth management strategy

What is a wealth management strategy and why you need one 

Developing a wealth management strategy is essential for anyone who is looking to retain and grow their wealth. It puts a clear plan in place to help manage your assets, allowing you to make informed decisions that maximise your financial resources, minimise taxes and ensure your financial security with a thorough risk tolerance assessment. It can also help you achieve your desired lifestyle by setting realistic financial goals based on your needs and cash flow requirements. 

Our professional financial advisers, based in Hull, offer guidance to help you build a comprehensive wealth management strategy. By working with our team, you can develop a strategy that aligns with your personal goals and needs and is mindful of your specific financial situation and objectives. 

What does a personalised wealth management strategy offer? 

A personalised wealth management strategy is made specifically for you, with your goals and risk tolerance in mind. It ensures your financial plan is effective in achieving your objectives. You can then make informed decisions and take control of your future financial security. They can also help you transfer your wealth efficiently, whilst focusing on wealth preservation and minimising losses. By implementing tax-efficient investment strategies, your family can inherit your assets with reduced tax burdens. 

As life circumstances change, your personalised strategy should be reviewed and adjusted regularly with your financial adviser, so that it evolves with your life. A comprehensive strategy includes; personal budgets, savings plans, insurance and retirement planning. It covers all aspects of your financial life whilst providing a risk tolerance assessment. 

What does a wealth management strategy include?

A personalised approach
Personalised financial planning involves creating a financial strategy that addresses your specific needs and goals. Your financial plan is relevant to your life circumstances and should be effective in helping you achieve your goals. It considers different eventualities to make sure that you have what you need for a secure future. 

Risk assessment
A well-structured financial plan allows you to control the level of risk and decide what investments are right for you. An experienced financial adviser will create a bespoke strategy that balances your comfort with financial risk and growth of your investments. 

Inheritance planning and being tax-efficient
A wealth management strategy should allow your investments to also lower your tax obligations. Methods include using tax-efficient vehicles such as ISAs, pensions and gifting. This means you can make your money work for your and your loved ones’ futures. 

Estate planning
Estate planning allows you to pass on assets as you wish when you die. You can also lower the inheritance tax for your beneficiaries, which can help with wealth preservation for your family.  

Estate planning includes the following processes
A power of attorney, which is a legal document allowing someone to manage your affairs for you, should be unable to. 

A will, which legally outlines how you want your estate distributed. 

A trust, which acts on behalf of the beneficiary and the trustee holds/manages assets to. 

An executor who carries out the terms/conditions of your will. 

Estate planning is essential to wealth management because even if you are unable to manage your own affairs, you know that your financial assets are taken care of. It also lowers the risk of disputes in the future, as well as reducing the tax liabilities on your estate. 

The role of pensions in your wealth management strategy 

Pensions play an important role in estate planning as they allow you to save for your retirement in a tax efficient way. Starting a pension as early as possible is beneficial as it ensures you're setting aside sufficient funds to support your future financial needs. You can make unlimited contributions to your pension fund but note that a lifetime allowance applies. 

The lifetime allowance is the total value you can have in your pension pot without incurring additional tax charges. As such, the pension value remains tax efficient. Currently, you can withdraw 25% of your pension as a tax-free lump sum. 

Different pension products offer alternative ways to save. Finding the right pension is important as factors such as age and income may determine which is better for you. 

What is inheritance tax? 

Inheritance tax is the tax your financial beneficiaries, often your loved ones, are required to pay after you die. These costs can run into hundreds of thousands of pounds. However, with strategic wealth planning, there are lawful ways to avoid having to pay a large sum, allowing you to pass on the maximum amount.

How to reduce inheritance tax

There are several ways to reduce UK inheritance tax (IHT):

• Nil rate band: The first £325,000 of your estate is exempt from inheritance tax. Anything above this is taxed at 40%.
• Tapering relief: For estates valued between £2 million and £2.7 million, the RNRB reduces on a sliding scale. For every £2 over £2 million, £1 of the RNRB is tapered away (estates over £2.7 million do not benefit from the RNRB).  
• Married couple allowance: Married couples/civil partners can combine their individual allowances, combining the allowance to £1 million if both partners have fully utilised their nil rate bands and RNRBs. 
• Transfers to a spouse are exempt: Whilst this exemption is automatic for married couples, it doesn’t apply to partners not legally married. 

Intergenerational wealth transfers 

Intergenerational wealth transfers are crucial for minimising IHT while passing on assets to future generations: 

• Residence nil rate band (RNRB): Introduced in 2017, the RNRB provides additional tax relief when your main residence is inherited by a direct descendant (e.g. child or grandchild). Currently, it adds up to £175,000 of tax-free allowance, increasing the total to £500,000 when combined with the nil rate band. 
• Seven-year rule: Gifts given more than seven years before death are typically exempt from inheritance tax. Gifts within this period are subject to taper relief, reducing the tax owed based on the time since the gift was given. 
• Financial gifts: Gifts are a tax-efficient method for intergenerational wealth transfer. Gifting up to £3,000 annually (or £6,000 if married) is exempt from IHT. Unused allowances may be brought forward one year. Additionally, small gifts of £250 to any number of individuals are exempt and do not count towards the £3,000 annual limit. 
• Gifting from surplus income: Gifts made from surplus income, like salary or rental income, are exempt from the seven-year rule provided they do not compromise your standard of living. 
• Tax-exempt gifts: Certain gifts also fall into the inheritance tax-free category, for example, wedding gifts (up to £5,000) and contributions to a child's university education. 
• Charitable donations: Gifts to charity are exempt from IHT. Donating more than 10% of your estate to charity can reduce the IHT rate by 4%. 

Assets that are exempt from IHT: 

• Certain businesses: Business Relief allows for a reduction in the taxable value of a business or its assets when calculating IHT. This relief can help businesses to be able to continue. 
• Agricultural assets: Agricultural Relief applies to certain agricultural property. It can potentially allow for the passing on of property, for example, farmland and buildings, free from inheritance tax if they meet specific criteria. 

Trusts can be a way to lower IHT 

Trusts can be an effective way for you reduce your inheritance tax liabilities whilst managing your assets. Setting up a trust involves you (the settlor) allowing your assets to be managed by the trustee. The trustee acts on behalf of the beneficiary, who receives the assets. You can specify how the assets are managed. 

There are two common types: 

Bare trust
In a bare trust, beneficiaries are chosen and cannot be changed. They are often used when parents (in the case the trustee) pass assets to children. Assets in a bare trust are classed as gifts, meaning they are subject to the seven-year rule for IHT. Upon turning 18 (or 16 in Scotland), beneficiaries gain unrestricted access to the assets. If the trust generates more than £100 per year, the tax obligation falls to the parents. 

Discretionary trust
A discretionary trust enables the settlor to make rules that trustees have to adhere to. They have flexibility in determining how and when beneficiaries receive assets. At least two trustees are required and it can include multiple beneficiaries. Trustees have discretion in distributing assets among beneficiaries, giving them control over the timing and use of funds. 

When you choose a trust, you need to consider how much control you want to have over the assets and what the tax implications of the trust are. Seeking professional advice about your wants and needs will ensure you get the right trust. It should align with your financial goals whilst minimising IHT. 

What to consider with intergenerational wealth transfers 

When transferring wealth, it's essential to consider the following to protect your interests and the future of your loved ones: 

• Loss of control: Assets transferred as gifts or through trusts are no longer under your direct control. Setting clear guidelines and choosing trustees wisely is important. 
• Financial considerations: Gift-giving should be done carefully. Avoid giving away more than you can afford and consider potential future needs such as healthcare. 
• Tax implications: Ensure that recipients of gifts are aware of their obligation to inform the relevant tax authorities to avoid any possible penalties. 
• Tax inheritance: Check that when passing on inheritance through a tax inheritance vehicle (e.g. ISA), you are not passing on a tax obligation. 

How to build wealth: 

As well as reducing taxes, you also want to be building and growing your wealth with your wealth management strategy. 

Long-term investment planning: asset allocation and diversification
Long-term investment planning involves growing wealth whilst managing risk effectively. Here's a breakdown of the key concepts: 

Asset allocation
This term refers to how you allocate your assets within your investment portfolio. Balancing potential risks against rewards involves your wealth management strategy, which considers your financial objectives, risk tolerance and investment timeframe. 

Diversification
Diversification refers to spreading investments within the same asset class. When you diversify, the risk of any single investment is lessened and gains in some investments may offset the losses of others. 

Unit trusts can help you grow your wealth  

A unit trust is managed by professionals who collect money from different investors to create a diversified portfolio. 

They are an easy and effective way to implement asset allocation and diversification. And, they can be used as a form of intergenerational wealth transfer. Comparing unit trust providers is crucial to finding the right fit for you. 

You create a diverse portfolio and access many different assets, such as bonds and stocks, without having to invest more money separately individually. 

They are professionally managed, with the fund manager making decisions that consider the funds goals. 

The investment is not concentrated into one asset, it is spread across the diversified portfolio, reducing the risk. 

Unit trusts are usually flexible, meaning that you can access your money if you need to. 

When considering long-term investments, comparing options is essential: 

• Stocks: Offer potential for higher returns but at a higher risk 
• Bonds: Generally provide lower returns but have lower risk 
• ISAs (Individual Savings Accounts): Can provide tax-efficient savings options with various investment choices 

For a personalised and in-depth wealth management plan or more information, contact our team of experienced advisers. 

Inheritance Tax/Estate Planning and Trusts are not regulated by the Financial Conduct Authority.
Will writing is not part of the Quilter Financial Planning offering and is offered in our own right. Quilter Financial Planning accept no responsibility for this aspect of our business