Tax Efficient Investing - The Basics
By Robert Brear BSc (Hons) Dip PFS IFA
The 6th April 2011 was an important date for investors. Following a number of announcements in recent budgets some significant chages to various allowances took place on this date. I intend to look at two of the main ones here.
ISAs
From this date the amount that can be invested into an ISA (Individual Savings Account) increased from £10,200 to £10,680 per adult for the tax year 2011-12. Although ISAs have been around since 1999 in my experience many people still have a number of misconceptions about these important investment vehicles.
Because the banks and building societies do a great job of promoting predominantly cash ISAs on TV and on billboards, some investors only ever use their cash ISA allowance and disregard the investment ISA element of the allowance. As a result, they put £5340 into a cash ISA and leave £5340 of unused investment ISA allowance.
I think the reason for this is down to the perception of risk, many investors think that when it comes to ISAs you either buy a cash ISA or a risky stocks and shares ISA. In reality however it is very different, a whole range of investment funds are permitted within an investment ISA ranging from very cautious to super adventurous. The funds that will be suitable is down to the individual risk tolerance of the client and how that is matched to appropriate funds by a good quality IFA.
With interest rates on many types of savings accounts being at a record low it could be worth exploring the alternatives.
Another common issue is some investors don't realise that if they don't take out a cash ISA in a particular tax year they can invest a full £10,680 into an investment ISA.
Many Independent Financial Advisers (IFAs) such as overselves use some kind of investment platform for client ISA portfolios. An investment platform or wrap is a way of accumulating assets in your chosen tax wrapper, whether it be an ISA, pension, investment bond or a collection of OEICS (open ended investment company schemes) or unit trusts. The main benefits being the huge range of different investment funds which are available within a streamlined administration process. These can be tailor made to match a clients attitude to investment risk.
Pensions
The 6th April was an important date for pension investors, a new annual limit on personal contributions was introduced of 100% of earnings or £50,000 per annum whichever is the lower.
Employer contributions, such as those being made by directors of their own limited companies can be made up to £50,000 per annum regardless of income.
Also, at the same time a concession was brought in to allow carry forward of unused pension allowances for up to three previous tax years where contributions of £50,000 per annum have not been made. In practice, this means that many Directors, Partners and high earning employees will be able to receive or make substantial pension contributions and save considerable amounts of company and personal tax.
The current lifetime allowance ( the maxiumum amount that an individual can have in their pension pot by retirement) is also to be reduced from £1.8 million down to £1.5 million in 2012/13 tax year. Where an investor were to exceed this limit a special punitive excess charge would apply.