Being a millionaire doesn’t mean what it once did.
When you were younger, a million pounds seemed like a life-changing amount. Today, it represents a lifetime of working, saving, and investing.
There’s no doubt about it, a million pounds is still a lot of money.
Enough that you need to think carefully about how to invest it. Large sums of money are at risk from over-taxation, loss-making investments and inflation, so as you build your wealth, it is important that you also build your knowledge of wealth management.
View the Best Interest Rate for 1 Million Pounds
So, before you make any life-changing financial decisions, make sure you consider the following things:
It goes without saying that you should never invest all your money in just one place. No matter how safe that one place may seem, there will still be an element of risk involved.
However, diversification helps to mitigate this risk by spreading your funds across a range of different sectors and markets.
For most people, the first step towards diversification is deciding on your equity/debt/cash split. Equity investments can include stocks and shares, property, or hard assets (such as gold, wine or art).
Debts can cover the bond market, peer to peer loans, and gilts; while cash usually involves leaving your money in a bank account or partly in a cash ISA.
No matter where you invest your money, you should weigh up the projected returns against the possible risk. The top paying cash ISAs currently pay around one per cent in interest, at a time when inflation is 2.6 per cent.
This means that any money left in those accounts will be losing approximately 1.6 per cent of its value in real terms. On the plus side, you are extremely unlikely to lose any more than that, unless your bank goes under.
And even in that unlikely scenario, the Financial Services Compensation Scheme (FSCS) guarantees your capital up to the value of £75,000.
Beyond cash holdings, you are more likely to find inflation-beating returns.
As a general rule, debt is the more conservative option, with lower risk and fixed returns. Equity investments can pay attractive dividends, but – in the worst-case scenario – they can also collapse.
With a £1m portfolio, it is important that you choose an equity/debt/cash split that you are comfortable with, and that you diversify even further within each of these categories.
If you don’t like the idea of researching every possible investment option yourself, you can take a short cut to diversification by investing your money with a fund manager.
A £1m portfolio will give access to some of the top-performing funds in the country, where your money will be invested on your behalf by a professional investment manager.
However, this option usually comes with hefty management fees. Plus, you will have to accept the fact that you are relinquishing control of your money and entrusting it instead to a complete stranger.
In the spirit of diversification, fund management investments should probably be considered as a proportion of your overall portfolio.
Before you invest any of your money, you should have some sort of investment goal in mind.
Maybe you’re saving for your retirement, for a trip, or for your children’s future. Whatever plans you have for your £1m, there will be a point at which you will want to withdraw your money. Invest with this date in mind.
For instance, if you want to retire in ten years, make sure you don’t tie your money away in a 20-year bond. Likewise, if you think you might need to access some of your funds at short notice, make sure that you aren’t going to be subject to penalty fees for early withdrawal.
Protect the £1m from taxation
Taxation is inevitable, but there are a lot of ways to shield your savings from an over-zealous Inland Revenue.
Make the most of your £20,000 annual ISA allowance, and make sure your spouse uses their full allowance as well.
You can also gift up to £325,000 to friends and family members tax-free, although they will be liable to pay tax on these gifts if you pass away within seven years of the payments.
It is also possible to effectively delay excess taxation by investing your money in a Self-Invested Personal Pension (SIPP).
You can put 100 per cent of your annual income into a SIPP, with a lifetime limit of £1m.
The first £40,000 that you invest each year is completely tax-free, and everything that you invest is eligible for at least 20 per cent tax relieve (25 per cent if you are a higher-rate tax payer).
Once you turn 55, you can withdraw 25 per cent of your SIPPs pot, completely tax free, and the rest can be drawn as an annuity to support your retirement.
Finally, whatever you do with your £1,000,000, make sure it brings you some form of enjoyment.
After all, what is the point of saving all these years if you are never going to reap the benefits of being a bona fide millionaire?
That doesn’t mean you should blow your cash on champagne and sports cars, but you should make sure that at least some of your investment choices will bring you joy.
This joy may come from knowing that your family is financially secure, or from investing in ethical or sustainable funds that you believe in. Or it may simply mean setting aside a few pounds to invest in yourself.
The choice is yours, but make sure that you choose wisely.
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