Financial asset values have fallen at a rate faster than most of us have ever seen, presenting challenges for investors as they come to grips with the impact on their portfolios. At a personal level, we continue to experience stress and anxiety from this massive evolving change.
In a period of such unprecedented uncertainty, it may help to exert some level of influence on some aspects of our lives which we can alter. Social distancing has meant that many of us find ourselves with extra time on our hands. Having to spend so much unexpected time at home might be an opportunity to look at completing things we’ve put on the long finger.
One thing definitely worth considering at this time is your financial plan which can help keep you on track by allowing you to reposition in times of uncertainty or market volatility.
1. Defer non-essential drawdowns
The worst time to draw money down from a portfolio is when assets have fallen significantly. For some, there won’t be any other choice, as lifestyle needs may dictate an immediate requirement for funds.
However, not all drawdowns are essential in the short term and any portfolio withdrawals or encashment from invested assets should be reviewed in the short term. Deferring for a period of time may allow for asset recovery and access at a more suitable time.
2. Retire pensions that are close to the tax efficient limit
The bull market that followed the global financial crisis provided plenty of growth to pension savers in the time period since. Many clients would have seen their pension grow over the €2m tax efficient limit, known as the Standard Fund Threshold (SFT).
There is an immediate 40 per cent tax charge when drawing pension benefits on any chargeable excess amount above the tax efficient limit, although a credit available from tax paid on retirement lump sums can increase the efficient value to €2.15m before 40 per cent tax arises.
A dip in pension values may present a good time for some clients to tax efficiently draw benefits as the market movements may have eliminated some or all of the amount subject to punitive tax.
3. Lifetime asset transfers
If you’re considering transferring assets to the next generation, this may still be appropriate.
A time of low asset values typically means that a transfer will give rise to less exposure to capital taxes, ie capital gains tax (CGT), capital acquisitions tax (CAT) and stamp duty. The hope is that the growth in asset values will be in the hands of children when values recover, rather than being subject to tax at some point in the future. It is possible to tax efficiently transfer wealth to the next generation in such a way that control can be maintained by parents.
Of course, there is a possibility that the rates of tax will increase in the future, which may also accelerate action.
At Davy, our strength lies in the close working relationships we have with our clients. In recent years, we have invested heavily in highly-skilled people to ensure that we are well positioned to plan for your future while mitigating risks. Our thinking is balanced and long term. We provide frequent accessible financial planning and wealth management advice which is able to weather the storm and adapt to market forces.
J&E Davy, trading as Davy and Davy Private Clients, is regulated by the Central Bank of Ireland.