Fine wine and classic cars don’t necessarily make vintage investments

Chris Cole at Towry advises on financial planning.

Knowing where to invest your money can be a challenge, especially if you don’t have the time to be on top of what’s happening in the financial markets. It can therefore be tempting to invest your savings in areas
where you have a keen interest, in things like wine, art, classic cars or even violins as I heard recently.

However, while mixing hobbies and investment together may seem like a good idea, it can actually involve quite a lot of risk and may not help you achieve your long-term financial goals.

THE IMPORTANCE OF DEVELOPING A PLAN

The truth is, the key to achieving financial independence is a lot simpler – it’s about putting together a financial plan matched to your attitude to risk, which is designed to help you achieve your long-term goals.

Unsurprisingly, the bedrock of most financial plans are sensible, run-of-the-mill investments, like pensions and ISAs.

These can at times seem humdrum, but they remain very tax-efficient ways to save – the less you pay in tax, the greater your potential returns will be. Importantly, they also allow you to invest in a diversified spread of global investments in order to reduce unnecessary investment risk, which in turn can protect your capital in times of economic turbulence.

Of course, low pension and ISA allowances may mean you also need to consider other investments within your plan, particularly as the annual pension allowance for high earners is being reduced to £10,000 from April 2016. The good news is there are lots of options open to you. A diversified portfolio of ‘non-tax-wrapped’ investments, for example, can play a very important role in helping you achieve your goals. You may incur some tax liability on your returns, but this can be minimised through the skilful use of your annual capital gains tax allowances.

A WIDER WORLD OF TAX-EFFICIENT INVESTING

Once you have utilised all of your mainstream tax allowances, it may then be appropriate to consider other more specialised investment schemes. Venture capital trusts and the Enterprise Investment Scheme, for example, both offer generous tax incentives and could be appropriate depending on your risk profile and personal circumstances. These schemes invest in smaller UK companies and are often considered high risk, however they can have a part to play as a small portion of a wider overall investment strategy.Another alternative is offshore bonds.

The Inland Revenue allows UK tax residents to make 5% annual withdrawals from these investments for up to 20 years without incurring any immediate tax liability. These can therefore be very useful savings vehicles for those who are currently additional-rate tax payers but who will not be in retirement. They can in future years help to deliver a tax-efficient income stream as part of a coordinated and wider income strategy.

Finally, inheritance-tax planning also typically forms a crucial part of a high earner’s financial plan – more so now given the new pension rules make it much more tax-efficient to pass on your pension to both family and friends as well as charities.

THE VALUE OF ADVICE

A financial plan is not something you should consider putting together yourself. Given the wide variety of products and tax breaks available, it’s vital to seek the help of a specialist financial adviser who will not only guide you through all of the options and risks involved, but also someone who understands the demands and time pressures placed upon a partner of a law firm. They will construct a plan suited to your needs and those of your family, and one that, importantly, will match your attitude to investment risk and capacity for loss. Of course, once you have a plan in place it should be reviewed regularly to ensure that it is on track to meet your goals and aspirations, and also so that it keeps up with any changes, both economic and legislative. A good adviser will be one that makes sure you do all of the small things consistently well over time, as ultimately this is how you will make a difference.

They should also be there to act as your counsel and be available as a conduit to bounce ideas off, the latter being especially useful should you be contemplating a career change, for example.

The benefit of following a wellconstructed plan, over a number of years, is that it will provide you with context to the wealth that you create, allow you to make better-informed decisions about your future and ultimately ensure you reach financial independence. What’s more, and once you have achieved your goals, you can perhaps allow yourself to have a little more fun with some of your investments. You can, for example, invest a proportion of your savings in the finer things in life, with the reassurance of knowing that your financial future is not dependent on them.