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Making the most of savings and investments

Planning for your financial future

The process of financial planning is ongoing. Once you have made a plan, you must continue to monitor that plan and adjust it as necessary to ensure that you are moving in the right direction.

It is also essential that you are realistic about your goals and objectives when putting together a plan. We can help you with this process.

Being realistic

This involves balancing your head (financially prudent strategies) and your heart (emotionally acceptable thresholds).

You need to bridge the gap between what you can expect financially and what you dream of achieving.

Try to meet your objectives by setting a number of short, medium and long-term goals and prioritise them within each category.

Some common financial goals

  • Increase the assets going to your heirs by using various estate planning techniques, perhaps including a lifetime gifts strategy
  • Accumulate a sizeable estate to pass on to your heirs
  • Tie in charitable aims with your own family goals
  • Accumulate sufficient wealth to buy a business, a holiday home, etc
  • Develop an investment plan that may provide a hedge against market fluctuations and inflation
  • Be able to retire comfortably
  • Have sufficient funds and insurance cover in the event of serious illness or loss
  • Minimise taxes on income and capital.

Saving versus investing

When choosing your financial strategy, it is important to understand the difference between saving and investing.

If you save money on deposit with a bank or building society you will earn interest. If you buy shares or invest in a share-backed plan such as a unit trust or a life assurance policy, you will have the opportunity to earn dividend income and benefit from capital growth as the investments increase in value.

Records show that in the long term the best share investments outperform the best 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 products

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, including some National Savings products.

National Savings

Although the products on offer from National Savings are unlikely to be at the cutting edge, they are nevertheless worth careful consideration. Premium bonds may be quoted as offering a modest 'interest equivalent', but there is a chance of winning a tax-free million!

Investment bonds

Those with a lump sum to invest might consider an investment bond. This is a life assurance product and the norm is to draw an annual tax-free sum equal to 5% of the original investment for the life of the bond. 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 the burden.

Bank and building society accounts

Although, as we have already suggested, history records that long-term investment in shares should outperform savings with a bank or building society, you should not overlook (a) the higher degree of certainty over investment return (spread large amounts over several banks, though) and (b) the (usually) ready access to your funds. Remember that interest is liable to income tax.

Stocks and shares

Historically, investment in stocks and shares has provided the best chance of long-term growth. On the other hand, it can be a volatile market, and should perhaps be avoided by the faint-hearted. Investment in unit trusts and investment trusts are designed to spread the risk and add an element of management for the small investor, without the expense of broker advice. Capital gains are charged to tax, as are dividends.

Investing in property

Whether commercial or residential, 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.

Individual Savings Accounts (ISAs)

Up to £11,280 can be invested in an ISA this tax year.

Those investing have the option to invest the full £11,280 in stocks and shares, or up to £5,640 in cash and deposits, with the balance up to the maximum in stocks and shares. Investors may choose to invest up to the limit with a single plan manager who can provide both elements, or to invest with separate managers, each handling separate elements.

16 and 17-year-olds are able to invest up to £5,640 in a cash ISA.

Following the closure of the Child Trust Fund (CTF) to new entrants early in 2011, a tax-free Junior ISA is now available to all UK resident children under the age of 18 who do not have a CTF account, as a cash or stocks and shares product. However, annual contributions are capped at £3,600. Funds placed in a Junior ISA will be owned by the child but investments will be locked in until the child reaches adulthood.

Although most income accruing in an ISA does so tax-free, the tax credit on UK dividend income cannot be recovered. All investments held in ISAs are free of CGT.

There is no minimum investment period for funds invested in ISAs - withdrawals can be made at any time without loss of tax relief.

However, some plan managers offer incentives, such as better rates of interest, in return for a commitment to restrictions such as a 90-day notice period for withdrawals. It is worth shopping around online for the best deals, particularly with interest rates for many ISAs being currently relatively low.

Alternative tax-efficient options

Investments under the Enterprise Investment Scheme (EIS) and investments in Venture Capital Trusts (VCTs) are, generally, higher-risk investments. However, tax breaks aimed at encouraging new risk capital mean that EIS and VCT investments may have a place in your investment strategy.

The Enterprise Investment Scheme: Subject to various conditions, such investments attract income tax relief, limited to a maximum 30% relief on £1m of investment per annum. The effective maximum investment for 2012/13 is £1.5m, if £500,000 is carried back for relief in 2011/12 - speak to us for more details, as restrictions apply.

In addition, a deferral relief is available to rollover any chargeable gain where all or part of the gain is invested in the EIS shares.

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 that investment is targeted at new risk capital. Companies must also have fewer than 250 full-time employees (or the 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.

The new Seed Enterprise Investment Scheme (SEIS) 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 CGT relief on gains realised on disposal of an asset in 2012/13 and invested through SEIS in the same year. 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
  • the shares are held for at least three years.

Venture Capital Trusts: With similar restrictions on the type of company into which funds can be invested, VCTs now allow 30% income tax relief on investments up to £200,000 each tax year but no CGT deferral.

Gains and dividends on VCT shares within the investment limits are tax exempt, although tax credits are not repayable and losses are not allowable.

Follow-up - Contact us about…

  • Your wealth building strategy
  • Setting and achieving savings goals
  • The difference between saving and investing
  • How income and gains will be taxed
  • Investing for your retirement
  • Tax-free investments
  • The tax consequences of different investments
  • Tax shelter investments
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