Preserving your wealth

If you spend too much time reading newspaper articles and tube station advertisements about investment, it is easy to conclude that most of us are preoccupied with fast growth of our money, at any cost.

However, in many cases investors and savers are focussing more on wealth preservation: ensuring that their nest egg does not lose money over time and is ready to use or pass on when needed. 

Wealth preservation can be a difficult balancing act and requires an understanding of the difference forces that act on money. Here are five ways that savers can ensure that they are preservation focussed.

1. Understand what diminishes your capital

Keeping money safe at all costs can result in it losing value. That is because there are two forces that act upon your portfolio that can deplete it even when the money is in your account.

The first is inflation, which is particularly concerning at present, when it is running high and interest rates are correspondingly low. With Bank Rate at 0.5 per cent, and inflation currently running at 2.5 per cent, money in most of our bank accounts is losing value over time.

The second force to watch out for is tax. Any growth in wealth above certain allowances could be subject to capital gains or income tax, depending on its form, unless it is placed within tax-free structures. This is especially true when wealth is handed down through the generations, when inheritance tax comes into play as well.

2. Think about protection

Preserving wealth is partly about protecting it from sudden shocks such as illness, bereavement, or liability for an accident.

That is why everyone should consider the role of insurance, or protection, in wealth preservation. Life insurance, critical illness cover and high-quality insurance policies including legal cover and accidental damage on valuable assets are all part of a strong wealth preservation strategy.

3. Switch your asset allocation focus

Not everyone wants to ‘speculate to accumulate’. Investors who want to preserve their wealth may wish to concentrate on lower volatility investment strategies.

These may involve fixed interest investment, some cash savings, and wealth preservation plans involving dividend income. Some investment trusts, which hold back profits in the good times to smooth returns in more difficult times, are also suitable for wealth preservation.

While higher risk assets may produce higher returns over long periods, if the goal is to preserve wealth, rather than to grow it, the volatility that goes with these assets may not be necessary.

4. Diversify to preserve your wealth

Seldom has the saying ‘don’t put all of your eggs in one basket’ been more relevant than in the world of wealth preservation.

Blending different types of assets and ensuring that you invest in different sectors and geographical areas will also help to preserve wealth. Expert advice may well be needed to ensure that a portfolio is truly diverse, with assets that hedge against different types of economic situation to keep a portfolio steady.

5. Plan to preserve wealth for the next generation

If wealth preservation is for the very long term, the strategies to ensure that wealth is not ravaged by tax take on a whole new urgency.

Protecting a portfolio against inheritance tax and ensuring that it is inherited by the next generation requires a series of steps including making a Will, taking advice on the UK gifting rules that allow individuals to gift money to relatives without a tax bill, and possibly using trusts to ensure that money is protected over the years.

By taking all of these steps, savers can have peace of mind that their money is being preserved as much as possible.