Tackling the Issue of ‘Time Poverty’ with Brewin Dolphin

In our experience, ‘Time Poverty’ is one of the biggest obstacles that clients face when it comes to their finances. Invariably, they are successful businesspeople or professionals whose success is based on long hours and an intense work environment. The unfortunate corollary to that success is a lack of time and bandwidth to focus on their own financial wellbeing. The analogy of the cobbler’s children having holes in their shoes often springs to mind!

The Christmas and New Year periods can offer some respite for busy individuals; yes, the period represents an opportunity to relax, to spend time with family and friends, and to plan for the year ahead, but the start of 2020 also represents an opportunity to reflect on one’s overall wealth plan and financial wellbeing. The fact that the period coincides with the end of one tax year and the beginning of the next merely augments the opportunity. So what exactly should one reflect on? Within this article, I propose to briefly consider three areas: retirement planning, succession planning, and overall wealth planning.

As we regularly point out, a pension is not merely a retirement planning tool; it can be the cornerstone of a family’s wealth planning strategy due to the combination of tax-efficiency and Einstein’s ‘Eighth Wonder of the World’, compounding. However, the power of compounding is a moot point unless the individual has a robust and coherent investment strategy. We frequently meet prospective clients whose experience with pensions has been poor, but this is typically a result of malinvestment, suboptimal advice, and a lack of clarity around charges. At Brewin Dolphin, our role is to ensure that the pension structure and retirement strategy are optimised for the client in a manner that is transparent, and then to leverage our significant investment resources to manage the underlying monies prudently. For prospective clients (who typically suffer from the aforementioned ‘time poverty’), this is an approach which is far more likely to lead to the desired result, a larger retirement fund. I would urge you to review your retirement plan and to take action in the first quarter of 2020. In our experience, far too many people have multiple pension policies and very little visibility on the value, cost, or performance of same. The first quarter of 2020 represents an opportunity to consolidate one’s pension arrangements into a single structure with a single overarching retirement plan.

People’s preference nowadays for the Approved Retirement Fund (“ARF”) makes good investment advice even more important in the context of retirement planning. Whilst poor advice and underwhelming investment performance can have a negative effect on all types of investment, their effect on an ARF can be catastrophic.

The financial services industry loves its jargon and acronyms, but, in simple terms, an ARF is merely a post-retirement pension fund. As opposed to purchasing a guaranteed income for life in the form of annuity, the ARF-option enables a retiree to retain control of his or her pension fund and to retain the fund as an asset on the family’s balance sheet.

However the mortality risk of the annuity is replaced by the investment risk of the ARF. And given that the State compels an ARF-holder to withdraw 4/5/6% per annum from his or her ARF, coupled with the fact that the retiree is, in all likelihood, no longer accumulating wealth, any lack of a robust investment strategy can be devastating over time. Accordingly, it is crucial that the retiree seeks high-quality investment advice from a well-resourced provider. It is also vital that the retiree’s investment plan is constantly monitored as his or her circumstances evolve and the investment and legislative environments change.

On the surface, it can seem preposterous to refer to a €3,000 exemption in the context of a family’s overall wealth. Nonetheless, the Small Gift Exemption can be a useful tool for families seeking to maximise their wealth. An obvious example would be grandparents who transfer a total of €30,000 per annum to their son, daughter-in-law, and three grandchildren. Assuming that the respective €335,000, €16,250, and €32,500 tax-free thresholds of the son, daughter-in-law and each grandchild will be utilised in the future, such planning saves approximately €10,000 per annum based on the current 33% rate of Capital Acquisitions Tax. However, it is important to note that the Small Gift Exemption is a ‘per annum’ amount. Once a calendar year has passed, the ability to transfer €3,000 for that year is lost; accordingly, it is important not to miss the opportunity to avail of the exemption during 2020. The Small Gift Exemption can also be useful in the context of inter-family loans. As a result of the current low interest rate environment, it is possible for parents to lend significant sums of money to the next generation without triggering any immediate tax consequences.

However, in the context of succession planning, it is important not to forget the primary purpose of wealth; in the first instance it is there to provide and care for the people who created it. It is only when it is clear that any and all eventualities such as nursing home or medical care can be financed that families should look to transition wealth. And even then, parents often worry about the wisdom of landing a significant sum of money into their child’s bank account, even if that child is a young adult. Will such a course of action kill their ambition for example? And what if the “child” squanders the funds? Luckily there are mechanisms whereby parents can retain control over the underlying monies; one such structure is the Family Partnership. The attraction of the Family Partnership is that it enables the parents to retain control over the Partnership assets. In addition, if the Partnership is funded by way of a loan, the loan can be recalled. The main advantage of the Partnership from a tax perspective is that, by allowing future investment growth of any Partnership assets to accrue to the next generation, this can limit the family’s overall inheritance tax exposure. A further advantage of the Family Partnership structure is that, unlike, say, a Trust, the Partnership does not trigger any potential adverse tax consequences. For many families, that combination of retaining control and tax efficiency is an attractive one.

The early part of the year is also an opportune time to reflect on the overall health of the family’s balance sheet and to, perhaps, commence discussions with family members regarding an overall wealth and succession plan. When doing so, it is key to ensure that you have access to the appropriate tax and legal advice for your family. We frequently assist clients in such circumstances by facilitating ‘beauty parades’ or introductions to specialist advisors. Whether your requirement is as basic as a Will or Enduring Power of Attorney, or more complex, it is probably a conversation that is worth having with an experienced wealth advisor. In our experience, most clients have a Will but it tends not to be optimised from a tax perspective. The Enduring Power of Attorney is a rarer beast but is, in my view, an absolute necessity for the majority of clients. It is essentially a mechanism for the individual’s nominated representatives to act on behalf of the individual in circumstances where he or she becomes incapacitated; not the most uplifting of conversation topics for the dinner table, but an important form of ‘earthquake insurance’ for a family nonetheless.

The job of the wealth advisor is, in broad terms, to make clients’ financial lives easier and their families’ balance sheets stronger through the delivery of robust and high-quality investment and financial planning solutions. However, this does require engagement from the client. Once 2020 kicks off in earnest and business or professional life start to ramp-up again, it can be difficult to focus on one’s own financial wellbeing; the net outcome is usually procrastination and deferral which, in the longer term, nearly always leads to poor outcomes. That poor outcome may seem distant and nebulous, so perhaps it is better to think of it in more real terms; neglecting one’s financial plan today will almost certainly limit one’s ability to fund a healthy level of gin and tonics in retirement! If that vista sounds as appalling to you as it does to me, you should contact an appropriately resourced wealth advisor.

Prepared by: Andrew Fahy, Wealth Planning, Brewin Dolphin

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