Learn this incredible financial magic

If you’d like to learn some real financial magic – this is it.

It might even be one of the most magical money ideas you’ll ever see – and it doesn’t involve taking any silly investment risks.

This is an idea that any good, qualified and regulated financial planner will confirm as valid. Just ask one.

Before you read on, I must warn you, the key idea here might not help you personally.

Like everything in financial planning, the best solutions really depend on your personal circumstances and, as we saw here, we’re all unique in at least 10 ways

That’s why it’s essential to learn to plan your money – taking account of your unique situation – rather than wasting your time reading articles or books that promise to give you the answers.

They can’t. That’s a fact – pure and simple.

You don’t need solutions – you need processes

What you need are the processes to plan your financial freedom for yourself, or with a competent adviser, and that’s exactly what I focus on – on this website.

That said… it’s those fascinating solution ideas that get our attention right?

So, if you, or one of your friends, has wealthy parents – or other, super generous, wealthy relatives or friends – this could be a very useful idea to explore further with your adviser.

Either way, what you’ll learn here (and everywhere on this site) is that proper financial planning is the secret to acquiring (and keeping) your wealth over the long term.

This particular (proven and powerful idea) is just one of many money matters you’ll want to master.

For more like this – just follow me on Twitter and sign up to my newsletter here.

So, let’s do this financial magic

Let’s turn £2,400 into £20,000 – without taking any silly investment risks.

Seriously?

Oh, yes it’s perfectly possible and it’s not even complicated either, so stick with me here 😉

Now, this idea works best for you, or your friend, if you have wealthy parents (or a wealthy and generous friend) and you’re aged anywhere between 25 and 50.

If, like most people, you’re not quite on track with your own pension plans, this will work even better.

Side note to wealthy parents

If you’re a wealthy parent reading this – you might be thinking, ‘hang on, I know where this is going – and there’s nothing in this for me’ … but I’d disagree.

There’s nothing in this idea that will prevent you from doing precisely as you’d already planned to do with your life.

However, if this idea is right for you – and you do something about it – this could seriously boost the goodwill in your family (if that’s needed) 

Of course you should only consider ideas like this if they’re suited to your personal circumstances. And to decide on that, you should take competent and qualified advice.

No, I’m not looking to advise you. I’m a writer and financial educator.

So, take advice from a competent adviser – and be sure you don’t pay more than a fair price. Sadly, some of those people overcharge! 

Get my newsletter to learn more about that

Now back to the story!

So, this idea is simply about getting someone else to fund part of your pension for you?

Why would they do that?

Well, if they’re wealthy enough to afford it – why wouldn’t they?

If they’re going to leave you a lot of money in their will anyway, then absent any other tax mitigation strategies, YOU are going to lose 40% of your inheritance – at the margin.

What?

Oh, yes, that number surprises most people – but it’s a fact. Trust me, I passed my financial planning tax exams.

And it’s especially shocking when you think that a lot of people’s wealth is built up from income that’s already taxed when earned 🙁

What’s more, unless it’s all stored in tax free ISAs – their wealth will also have been taxed within their bank accounts and investments.

That’s the simple truth of it.

Even the allegedly tax-free ISA money will suffer a 40% loss to Inheritance Tax (IHT), before it comes to you.

Side note on Tax Free ISAs

That’s one reason why the government have been so keen to raise the ISA input limits so ‘generously’ in recent years.

They’re basically luring the wealthy into a tax trap that most don’t see coming until it’s too late.

You see, if your parent’s IHT taxable estate exceeds the ‘nil rate band’ (don’t worry – we’re not going into all the grisly details here) then 40% of the excess will be taken by the taxman when they’re gone.

OMG – what can you do about it?

Well, I’m very glad you asked 😊 … because there are ways around this horrendous IHT – in part, at least.

If your parents can afford it and they passed some money to you today (or sometime soon) then those gifts might* very well escape all of that IHT 🙂

*The rules and allowances around IHT are way too complicated to summarize in this short post, but that’s the principle of it.

Just be sure to get competent/fair value advice on this.

Wow!

Yes, wow, although I’m surprised that this is news to you because this tax and the basic, legitimate ways of reducing it  are really not new.

This tax is voluntary or, as Roy Jenkins (the Labour politician) said, in 1986:

“Inheritance Tax, is broadly speaking a voluntary levy paid by those who distrust their Heirs more than they dislike the Inland Revenue.”

Now, if you’re happy to legitimately avoid some of this hideous tax – read on. This idea is about to get better.

Let’s get to our example

Let’s say that your parents can afford it – and gave you £4,000 today, which you agreed to put it in your pension.

I suspect that this would please most parents because they’d then know that you couldn’t spend that money any time soon.

The rules on pensions are (generally) that your money is tied up until 10 years before state retirement age.

Of course, you might think, that you don’t want the money in your pension; you’d prefer to have it to spend today?

Don’t worry.

If your parents were to fund a nice slice of your pension, then you wouldn’t have to, which should mean (unless you were planning to save nothing for retirement) that you’ll have some spare income to spend on more of the things you want today too 🙂

Now, here come the juicy numbers…

Let’s assume that you just pop the £4,000 into your pension (actually, there are circumstances where your parent could put that money in tranches, directly into your pension for you – but that’s another story) and then you’ll see the magic happen.

Your £4,000 is immediately turned into £5,000… because of the 25% boost you’ll get from basic rate income tax relief on your pension plan.

And, if you’re a higher rate taxpayer, you’d enjoy a tax refund of another £1,000 on top!

Then, if you’re employed and enjoy matched payments on your pension from your employer, that £5,000 would become £10,000… almost immediately,

Furthermore, your fund of £10,000 could easily turn into £20,000, in today’s money terms… with only modest investment growth, over the next 15 to 20 years.

How wonderful would that be for your parents who would, hopefully, still be around to see their gift grow to such an amount?

Have I short-changed you?

If you’re paying close attention, you’ll see that I’ve just shown you how you might obtain a fund £20,000 from £4,000.

So, that’s not quite the £2,400 to £20,000 conversion I promised, right?

True… but we’re not finished yet 🙂

The key question for you, to make this comparison fair, is what you might have received from your parents if they’d held onto their money – rather than making that £4,000 gift – for you to put into your pension.

If, as would be likely, they’d just held that money in a nice safe bank deposit account for you until they died, you’d only have received £2,400 (in today’s money terms )

How so?

Well, here are the numbers:

1. £4,000 sat in your parent’s bank account over 10 or 20 years will still only be worth £4,000 after inflation in the future – and possibly a bit less.
2. That £4,000, after the taxman takes his 40% slice of IHT, would leave you with just £2,400!

So, between you and your parents, I’d seriously encourage you to think hard about whether you’d like £20,000 in your pension fund – or £2,400 in cash at some future date!

It’s a bit of a no brainer really, isn’t it?

Then there’s the Jezza factor to consider

You may now be thinking that this is a good idea – but you’ll leave it for a year or two before talking to your parents about it.

Yes, you could do that but I’m not sure that’s a good idea when you factor in the possibility of Jezza Corbyn taking control of our government.

This idea might work as it does today, under at Jezza government but I wouldn’t bet on it.

There’s a good chance, if he got in, that he’d crank up the rates on IHT in various ways and he might even do away with this ‘potentially exempt transfer’ (PET) tax planning window altogether.

So, if IHT is an issue for your family, and your parents can afford to do something about it, they might want take action sooner rather than later.

Summing up

If you didn’t realise it before, you should now see that there can be some very big benefits from sensible financial planning.

There are just two things you need to remember about long term, personal financial planning.

It’s personal,

and long term!

So, be sure to take qualified and regulated advice on this and any other significant tax planning nuts that you want to crack. You really can’t afford to get this stuff wrong.

Now, I hope that was interesting but bear in mind that it was just one of many financial planning ideas that might work for you – and won’t work for others.

The key is to follow some processes, both for planning your money and for assessing what investments could be right for you, in your ‘unique’ situation.

These are the lessons I focus on here. So, if you’d like to learn more, just follow along.

Thanks for dropping in

Paul

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