This is Part Two of our acclaimed look at Financial Independence. An earlier version of this article first appeared in IFA Review in July 2004.
As we concluded in Part One, the biggest threat to personal financial independence, is Inheritance Tax. The tax exempt limit of £325,000 (2009-10) is woefully short of the sum needed to provide a comfortable pension, let alone full financial freedom from dependency on the State. Until the government comes to its senses and recognises the inconsistency of its current policies, everyone should be asking themselves what they can do to avoid the impact of this wealth tax on the goal of individuals and their families to achieve personal financial independence?
It is often said that Inheritance Tax is a “voluntary” tax, with the implication that it can be easily avoided by anyone who takes the trouble to ask the right adviser. In practice, everyone should be aware of the way this wealth tax works, and an informed discussion with a suitably qualified adviser is the best way to understand how the tax will impact. It may be voluntary in that there are ways to preserve the value of the estate for inheritors, but none of the accepted ways is without its costs, and it is important to understand how the process works before deciding whether to take steps and which steps to take.
A new industry has grown up to relieve worried clients of their money by selling them insurance policies or trust schemes which they only partly understand, to provide a larger inheritance for their dependants. In every case the Treasury’s policies are resulting in some kind of reduction in their current net worth, but the alternative to following this advice is the likelihood of a much bigger hit later.
Furthermore, governments are wont to moving the goal posts, so schemes which were perfectly acceptable once suddenly become tax avoidance or worse, evasion, and exemption is reduced or removed. This not only provides a double hit to scheme holders but makes it very difficult to plan long term finances, since politicians only ever think about the next election.
The best thing you can do is ensure you have a basic knowledge of personal finance and life planning. Financial literacy is still woefully low and a major factor leading to the credit crunch as so people were unaware how much they could afford and what would happen if their personal circumstances – or those of the wider economy – hit change.
For over 10 years, FinanCity has been dedicated to improving financial literacy and education, including liaising with the FSA, PFEG (the Personal Finance Education Group) and industry. Through this new information-focussed site we hope to carry on this vital task and contribute to some extent in avoiding future problems and improving the outlook for all.