Whenever I speak to a prospective client about investment, the conversation must at some point include the subject of risk. In my opinion, risk is one of the most misunderstood concepts, and one which can cause no end of headaches when you get it wrong.
Most people understand risk as the risk of losing money. Therefore they view cash deposits, where there is little risk of the capital value falling, as risk free. But there are risks to this strategy – not so much to do with the investment, but with the bigger picture.
For example, let’s say you are going to have to pay Inheritance Tax (the tax payable on death). Your cash ISA – which you have carefully taken no risk with and got the best returns on - will lose 40% to tax. Let’s put that another way – if you have £50,000 in your Cash ISA, £20,000 is going to the tax man in the form of Inheritance Tax.
Not a very risk-free strategy then is it? Most people adopt the “Ostrich Approach to Inheritance Tax Planning”. Which is fortunate for Mr Taxman - he raises billions of pounds this way.
The Ostrich Approach to Money Matters:
- It doesn’t apply to me
- I don’t understand
- I’ll think about it tomorrow
- Hopefully the rules will change
- It’s not fair so it won’t happen
- I’m going to spend all mine
Take this approach to financial planning and you’ll leave the taxman rubbing his hands with glee. There is analternative of course...
Raise your head from the sand and download our handy eGuide: ‘Cash ISAs are worth zilch: where should I be saving my money?’.
Guest Post: Julie is the director of Pen-Life, financial planning practice which provides independent, no-nonsense financial advice from Yorkshire. We advise private, corporate and trustee clients throughout the country on insurance, investments, pensions, long term care and inheritance tax. You can also find her on Google+ and Twitter.