Ten things you should know about managing wealth

Risk profiling

Investment managers are increasingly making use of a wider range of profiling criteria when considering a client’s appetite for risk. Investors were once graded as “cautious, moderate or adventurous”; now it is more typical to have seven or more categories, says Paddy Swan of pension and investment consultants Invesco.

“Advisers are becoming more refined in this respect. Sometimes it’s a case of also looking at an individual’s track record of investment and their response to market fluctuations, which gives you great insight.”

Low interest rates

The notion of earning an income from cash on deposit has all but disappeared. Inflation and deposit interest retention tax (Dirt) will erode virtually all of the benefits of leaving money on deposit.

Increasingly, investors need to look to more adventurous ways of protecting and growing their capital, with significant equity exposure needed, especially in the early years of the scheme.

It pays to be proactive

Many investors take an overly passive or overly reactive approach to their investments, buying products in the run-up to tax deadlines or when an asset class is considered to be a ‘hot tip’, for example, says Andrew Fahy of Investec Wealth and Investment . The result can be replication or even products working against each other.

“You need a coherent long-term plan that is actively managed and adjusted for the different stages of your life cycle,” he says.

Spread

History has shown that a mix of asset classes provides the best return over time. Smith & Williamson’s Derek Ryan advises thinking in terms of mixing five assets classes.

Age appropriate

Creating wealth takes time and involves taking calculated risk. Invesco’s Paddy Swan says investment managers are increasingly reallocating assets on the basis of age with the broad principle of taking more risks earlier in the life cycle, using time to smooth out market volatility and locking in gains and adopting a more cautious approach as the fund moves towards maturity.

Advance Planning

Advance planning can take the sting out of an inheritance. With a maximum tax free allowance of €225,000 on the estate of a parent, inheriting a share of a estate can result in a hefty tax bill, all the more likely now with property prices increasing. Making use of annual tax free gift allowances could mitigate a significant portion of this. It’s just one common example of how advance planning could pay dividends and how a wealth management strategy is not just for the wealthy.

Pensions still provide value

Raided by Government for revenue from levies and capped for tax reliefs, pension plans may not be quite as attractive as they were a few years ago but still represent value for money as a form of long-term savings plan. “It’s the last really good tax scheme out there,” says Derek Ryan of Smith & Williamson Investment Services. “It allows you to accumulate a savings fund of up to €2m with significant tax advantages at the entry and exit levels. Compared with other investments you have huge advantages in respect of Income Tax, Capital Gains Tax and DIRT,” he says.

Planning for longer retirements

In calculating annuities, actuaries used to think in terms of 10-15 years as the typical lifespan of a retiree. Longevity has increased significantly over in recent decades. Living to age 90 and beyond is now more common.

Future shock

Ireland has a relatively generous noncontributory state pension of €230 a week. However, what many workers have not planned for is the fact that from 2028 they will be able to draw that state pension only from the age of 68 as opposed to 65. With some workers retiring from their positions from the age of 60, a long gap will need to be bridged in many cases.Having a secondary source of income by way of a private pension will be increasingly important in the years ahead.

Approved Retirement Funds

An increasingly popular choice instead of annuities, ARFs allow for a tax-free draw-down of 25 per cent of your pension pot on retirement, within generous qualifying limits.

The balance is invested in a fund from which you can draw down income. One of the great advantages ARFs have over annuities is that on your death, the value of the ARF passes to your estate.