Investments & Wealth Management Services

How can I save tax efficiently

Individual Savings Accounts (ISAs) can take either a lump sum or regular monthly payments with a maximum annual contribution per person. If there was a shorter term need for capital then cash deposit ISAs are advisable but for medium to longer term savings goals then a Stocks and Shares ISA where real assets are invested in would provide a greater chance of getting a return ahead of inflation. This has historically been the case but of course as markets can go down as well as up, it has not always been so. Generally the longer the investment term, the greater the chance of a real return, after inflation. As we are part of The Openwork Partnership, with over 4000 advisers, we have our own Investment Committee which employs external advisers that carefully screen and analyse all UK registered funds available and narrow this down to build portfolios suitable for different risk profile clients. These portfolios can, of course, be included in an ISA portfolio.

Investments

Excess cash can be built up in many ways such as unspent income, the sale of an asset or perhaps an inheritance. For many years now, inflation has exceeded the return on cash deposits and National Savings resulting in a loss in real spendable income over the years. This is a risk that many people either ignore or are not fully aware of the consequences. For example, if inflation were 7% consistently for 10 years then this would halve the real value of any money in a bank current account. Thus any cash that is in excess of emergency funds that may be required at short notice could be considered for longer term investments such as ISAs, pensions or investment bonds. All have particular tax advantages and can be arranged to maximise the chances of reaching personal financial goals.

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Deposits

Having cash on deposit in a bank for emergency purposes is an essential part of a sound financial plan. Clients should also consider National Savings such as Premium Bonds as this money can be accessed relatively quickly and without penalty. Whilst rates have been low for many years, having around six months’ worth of outgoings available is a prudent plan.

With Profits Investments

Some investors are nervous about stock market investments and require something a little different and less volatile.

The Prufund range of funds aim to grow investors’ money over the medium to long term (5 to 10 years or more), while protecting investors’ from some of the short[1]term ups and downs of direct stock market investments by using an established smoothing process. The Fund aims to maximise growth over the medium to long term by investing in shares, property, fixed interest and other investments. The fund currently invests in UK and international equities, property, fixed interest securities, index-linked securities and other specialist investments.

The Prufund range of funds are held within an investment bond and thus can be suitable for holding within a trust as this is a non income producing asset and thus minimises administration. These can also be very useful for inheritance tax planning.

Tax Planning

Careful use of allowances such as pensions, individual savings accounts, capital gains tax and dividend allowances can really boost current and future incomes. Spouses can sometimes benefit from equalising their estates not only for everyday purposes but also for longer term estate planning. One about main aims as financial planners is to ensure clients are as tax efficient as possible. With increasing inflation, bills and National Insurance rates, careful tax planning is more important than ever. Company owners have additional options such as Relevant Life Plans which all deductible for corporation tax. These provide family protection to replace simple term insurance that is usually paid from after tax income. The savings can be substantial.

Cash flow Forecasting

With specialised software we are able to show clients the effect of increasing or decreasing savings on their medium and long term goals. Ensuring enough money is available for when it is needed is not just a technical matter but also an emotive one as if goals are not reached through lack of information this can cause pain and anguish in terms for medium and long term outcomes such as having to excessively cut back on expenditure in retirement. Clients do not of course have unlimited resources to save but judicious belt tightening and sensible saving can prevent many issues.

Lifetime ISA

A Lifetime ISA offers tax relief in the form of a 25% tax bonus added on to whatever is saved up to a limit of £4,000 per tax year for those aged 18 to 40 when starting such a plan. For example, if a young person invested £100 per month into either a cash deposit based Lifetime ISA or a stocks and shares Lifetime ISA, then the government would add £25 each month as a bonus. The primary aim is to help those who are looking at buying a first time property in the future. If the money is not used for a property purchase and is instead withdrawn, there is a tax of 25% on the value paid out. Alternatively an investor can leave this invested and take the value of fund as a pension after age 60.

Investment risk

A major part of a financial planner’s role is to ensure the client understands the risks and rewards of different asset classes, how this relates to timescales for investment and ensuring a client is invested in an appropriate fund or range of funds that match is their risk profile. Along with this we also have to consider “Capacity for loss”. An investor may be prepared to take a high risk but if his or her financial situation does not allow this we would of course suggest perhaps a lower risk profile of funds to ensure financial goals are met. Please ask us for our explanatory booklet “Making more of your money” which helps to explain these various concepts.