Savings and investment strategies
Your investment strategy might focus on pension savings, alternative savings and investment strategies, or a combination of these - but whatever your preference may be, it makes sense to start planning early. Planning is a continuous process and your financial plans should be monitored regularly, with any necessary adjustments being made to reflect changes in your circumstances. Careful planning now can help to keep you on the path to financial success.
Taking a realistic view
Being realistic about your objectives is important when putting together any financial plan. This requires a balancing act between your head (financially prudent strategies) and your heart (emotionally acceptable thresholds). We can help you bridge the gap between what you can expect financially and what you dream of achieving. One approach is to set a number of short, medium and long-term goals and prioritise them within each category, in order to meet your objectives.
Some typical financial goals
- be able to retire comfortably
- have sufficient funds and insurance cover in the event of serious illness or loss
- accumulate a sizeable estate to pass on to your heirs
- increase the assets going to your heirs by using various estate planning techniques, perhaps including a lifetime gifts strategy
- tie in charitable aims with your own family goals
- raise sufficient wealth to buy a business, a holiday home, etc
- develop an investment plan that may provide a hedge against market fluctuations and inflation
- minimise taxes on income and capital.
Your investment strategy
Records show that in the long term share investments outperform bank and building society accounts in terms of the total returns they generate. However, it is important to remember that shares can go down in value as well as up, and dividend income can fluctuate. If you choose the wrong investment you could get back less than you invested. You will need to consider the most important factors that apply to you, as part of your investment strategy.
Tax-efficient savings and investments
Paying tax on your savings and investment earnings is obviously to be avoided if at all possible. There are a number of investment products that produce tax-free income.
Premium bonds offer a modest 'interest equivalent', but there is a chance of winning a tax-free million! The Premium bonds investment limit is £50,000.
If you have a lump sum to invest long term, you might consider an investment bond. An annual sum equal to 5% of the original investment can be taken for 20 years without triggering an immediate tax liability. However, income and gains accumulating within the fund are subject to tax (equivalent to basic rate tax). On maturity, usually after 20 years, any surplus is taxable, but with a credit for basic rate tax. Higher rate tax might be payable, but a special relief (known as 'top slicing' relief) may be available to reduce or eliminate the burden.
Stocks and shares
Investment in stocks and shares has historically provided the best chance of long term growth. Investment in open ended investment companies (OEICs), investment trusts and exchange traded funds are designed to spread the risk compared to holding a small number of shares directly. Capital gains and dividends are charged to tax. A Dividend Tax Allowance of £5,000 a year is available. The rates of tax on dividend income above the allowance are 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
Bank and building society accounts
Bank and building society accounts do offer (a) a higher degree of certainty over investment return (spread large amounts over several banks, though) and (b) (usually) ready access to your funds. The Personal Savings Allowance (PSA) removes some income from income tax - up to £1,000 of a basic rate taxpayer's savings income and up to £500 of a higher rate taxpayer's income. No PSA is available to additional rate taxpayers. Additionally some taxpayers with amounts of non-savings income no more than the personal allowance also benefit from the £5,000 starting rate for savings band, with a rate of tax of 0%.
Property is generally considered a long-term investment. 'Buy-to-let' mortgages will generally be available to fund as much as 75% of the cost or property valuation, whichever is the lower. Those investing in property seek a net return from rent which is greater than the interest on the loan, while the risk of the investment is weighed against the prospect of capital growth.
Landlords are no longer able to deduct all of their finance costs from their residential property income. They instead receive a basic rate reduction from their income tax liability. The government is introducing this change gradually from April 2017, over four years. For 2017/18 75% of the finance costs are deductible in full and 25% will qualify for a basic rate reduction subject to a cap in some situations. The restriction to finance costs does not apply to landlords of furnished holiday lettings.
Individual Savings Accounts (ISAs)
The overall annual subscription limit for ISAs is £20,000 for 2017/18. Individuals can invest in a combination of ISAs up to this limit, and may involve a single plan manager or separate managers, handling separate elements. However, a saver may only pay into one of each type of ISA each year.
16 and 17-year-olds can invest in an adult Cash ISA. A Junior ISA (JISA) is available to all UK resident children under 18 as a Cash or Stocks and Shares product or both. Total annual contributions are capped at £4,128. JISAs are owned by the child but investments are locked in until adulthood.
All investments held in ISAs are free of CGT and there is no minimum investment period for funds. However, some plan managers offer incentives, eg. better rates of interest, in return for a commitment to restrictions such as a 90-day notice period for withdrawals and it is worth shopping around.
From 6 April 2017 any adult under 40 is able to open a new Lifetime ISA. They can save up to £4,000 each year and will receive a 25% bonus from the government for every pound they put in, up to the age of 50. Funds can be used to save for a first home worth up to £450,000 or for retirement.
Help to Buy ISA
Help to Buy offers a tax-free savings account for first time buyers saving for a home. Savings are limited to a monthly maximum of £200, with the option to deposit an additional £1,000 on opening the account.
The government provides a 25% bonus on the total amount saved including interest, capped at a maximum of £3,000 on savings of £12,000, which is tax-free. Interest received on the account will be tax-free. The bonus can be put towards a first home located in the UK with a purchase value of £450,000 or less in London and £250,000 or less in the rest of the UK. Once an account is opened there are no time limits on how long an individual can save for, or when they can use their bonus.
The Innovative Finance ISA
This ISA is designed to encourage peer-to-peer lending. It can be offered by qualifying peer-to-peer lending platforms in accordance with the ISA Regulations. Loan repayments, interest and gains from peer-to-peer loans will be eligible to be held within an Innovative Finance ISA, tax-free. Returns have the potential to be significantly greater than on Cash ISAs, but they will carry a greater degree of risk.
Some alternative investment schemes
Although generally higher risk, the tax breaks aimed at encouraging new risk capital mean that the following schemes could have a place in your investment strategy.
Enterprise Investment Scheme (EIS)
Subject to various conditions, EIS investments attract income tax relief, limited to a maximum 30% relief on £1m of investment per annum. The effective maximum investment for 2017/18 is £2m, if £1m is carried back for relief in 2016/17 and no EIS investment has been made in the previous year. A deferral relief is available to rollover chargeable gains where all or part of the gain is invested in EIS shares (within the required period).
Although increases in the value of shares acquired under the EIS up to the £1m limit are not chargeable to CGT (as long as the shares are held for the required period), relief against chargeable gains or income is available for losses.
The gross value of the company must not exceed £16m after the investment and there are many restrictions to ensure investment is targeted at new risk capital. Companies must have fewer than 250 full-time employees (or equivalent), and have raised less than £5m under any of the venture capital schemes in the 12 months ending with the date of the relevant investment.
Venture Capital Trusts (VCTs)
These bodies invest in the shares of unquoted trading companies which would qualify for receipt of investment under the EIS. An investor in the shares of a VCT will be exempt from tax on dividends and on any capital gain arising from disposal of the shares in the VCT. Income tax relief of 30% is available on subscriptions for VCT shares, up to £200,000 per tax year, as long as the shares are held for at least five years.
Seed Enterprise Investment Scheme (SEIS)
This provides income tax relief of 50% for individuals who invest in shares in qualifying companies, with an annual investment limit for individuals of £100,000 and a cumulative investment limit for companies of £150,000, and provides a 50% CGT relief on gains realised on disposal of an asset and invested through the SEIS. A gain on the disposal of SEIS shares will be exempt from CGT as long as the shares obtained income tax relief, which has not been withdrawn, and are held for at least three years.
Your next steps: contact us to discuss...
- Creating a savings and investment strategy
- Establishing and achieving your savings goals
- Tax on income and gains
- Investing for your retirement
- Tax-free investments
- The tax consequences of different investments