By: Tim Bennett
19.03.2018
19.03.2018
Everyone should minimise the tax they suffer on their savings and investments. So this week Tim Bennett compares five popular ways to do it.
Five ways to save tax-effectively
As we approach the end of the tax year, here is my short roundup of five ways to shelter your money from the three main taxes – income tax, capital gains tax and inheritance tax. In each case I give the main features of each wrapper and some of the main pros and cons to consider before using one, or more, of them. Please contact an Investment Manager or Wealth Planner to find out more or to receive a copy of my Killik Explains Guide to “Tax-effective saving and investing”.
Adult ISAs
These work on a “use it or lose it” basis and can shelter a huge range of investment from tax. The annual allowance per person may be split down between different types of ISA, for example £4,000 in a Lifetime ISA (see below) and £16,000 in a stocks and shares ISA.
The following slide shows the possible impact of tax-free returns on your overall wealth, assuming that certain growth rates are achieved. These are not guaranteed but just shown for illustration.
Next you can see the main points for and against ISAs. It is worth noting that although dividends can currently be protected by the separate dividend allowance, and interest on savings by the personal savings allowance, the rules on these may change at any time. For example, the dividend allowance reduces to £2,000 in 2018/19. Also, were interest rates to rise sharply those investors with big cash deposits may find even the PSA is insufficient (it already reduces to £500 for higher rate taxpayers).
Lifetime ISAs
Introduced to a big fanfare fairly recently, these products designed for first-time property buyers and retirement savers have not been as popular as perhaps the government hoped. For first time buyers, the 25% bonus on contributions is undoubtedly attractive (below), however for retirement savers the case for a Lifetime ISA versus a personal pension is not clear cut, with the latter winning in many cases.
The junior ISA
This is an additional ISA allowance that let’s parents save for their children from birth. They work much like a standard adult ISA but you should note that the child takes control of the account from the age of 18. In the meantime, parents are free to allocate the funds invested between cash and investments as they see fit.
Personal pensions
Given that these wrappers are now outside of a death estate for inheritance tax purposes in many cases, personal pensions are a pretty tax-effective way to save. The other key benefits are the tax relief on contributions and the fact that an employer can contribute to an employee’s plan. The trade-off is the fact that the money invested cannot be accessed until the age of 55 and this is rising to 57 from 2028.
Junior pensions
These offer far-sighted family members the chance to start building a pension pot for a child. Given the sheer length of the compounding period until a child reaches their late fifties, the potential benefit is huge. The problem, of course, is that the rules may well change before then.
Closing thoughts
With the choice of savings vehicles widening all the time (especially when it comes to ISAs) and the rules around pensions in particular under constant review, it is important to get the right combination of tax wrappers for your needs.
Finally, next tax year, why not get ahead and use your allowances earlier? That way you reduce the stress of having to find cash to invest in a hurry and the psychological anxiety of feeling as though you are “timing the market” in March if you drip-feed money in instead. You will also reap the benefit of more compound growth on your money.
