Financial freedom is often described as peace of mind that your finances will allow you to do what you want in life. Whether this is knowing you’re progressing towards your personal goals or having confidence your money will last for your lifetime and allow you to leave a legacy.
1. Build a foundation
Before building a house, a solid foundation is constructed and the same can be said for any good financial plan. Reflect how your finances will be impacted by a change in your circumstances or those of a family member – for example an accident, injury, serious illness or loss of income. You can protect your future from many of these events with a solid plan that could include an emergency fund and insurance to provide income and/or capital at a time of need.
2. Accumulate your wealth tax efficiently
As you invest for your future, do so in the most tax-efficient way so the impact of tax on your overall returns is minimised. For UK residents and expats make sure you use the tax allowances the UK Government provides, such as the annual ISA allowance, the annual Capital Gains Tax allowance, and the annual dividends allowance.
By structuring your investments correctly, you can position your wealth to use these tax allowances, plus others available to you, and reduce the impact of tax.
3. Think about deferring tax on investment returns
Assuming you’ve structured your investments to use your various tax allowances, if your portfolio is still large enough to create taxable income and gains each year you could potentially invest part of your portfolio into an investment bond.
Profits on money invested within an investment bond are tax deferred, meaning the tax is only paid on the profits when they’re extracted. When this tax is paid can be controlled by the owner, so it may be possible to extract capital in the future when paying tax at a lower rate or by gifting part of the investment to family who are lower tax payers.
4. Review how you wish to use your pension(s)
You may wish to make contributions to grow your pension and obtain tax relief of up to 45% in the UK. However, you may not be able to make contributions to your pension if you have certain valuable lifetime allowance protections available to you so it’s always best to check first.
Before retirement, many clients consolidate their pension into one pot and then use their pension to produce a flexible income in retirement and/or leave it for their family to benefit from when they die. It’s important to consider how you can make the best use of your pension.
5. Consider investing in tax-efficient investments
In the UK, Enterprise Investment Schemes and Venture Capital Trusts are government-backed investments into early-stage, high-growth companies that offer attractive tax breaks, including 30% tax relief. These investments come with a number of risks – for example, smaller companies have higher failure rates than more established companies – however, the impact of the loss may be mitigated in part by tax reliefs.
6. Estate planning
Have you got a will? If so, what does it say? Who do you want to benefit from your wealth and when do you want them to access this wealth? These are questions to consider when undertaking estate planning. A great estate plan will allow you to have the desirable amount of access and control over your wealth, while also reducing the impact of inheritance tax on you and your family.
7. Find a trusted partner
Finding a trusted partner to help you achieve and maintain financial freedom can be difficult. However, Phoenix Waters Wealth Management in partnership with St. James’s Place has the knowledge, skills and expertise together with access to the products and services that can help you on your journey to financial freedom.