Savings and investment strategies

An 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.

Being realistic

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.

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.

An 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.

National Savings

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.

Investment bonds

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. From April 2016 the Dividend Tax Credit has been abolished and a new Dividend Tax Allowance of £5,000 a year has been introduced. The new 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. From 2016/17 the Personal Savings Allowance (PSA) will remove 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 investment

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.

The Government has announced future plans to restrict the amount of income tax relief landlords receive on residential property finance costs to the basic rate of income tax. Landlords will no longer be able to deduct all of their finance costs from their property income. They will instead receive a basic rate reduction from their income tax liability. The Government will introduce this change gradually from April 2017, over four years. This restriction will not apply to landlords of furnished holiday lettings.

Individual Savings Accounts (ISAs)

The overall annual subscription limit for ISAs is £15,240 for 2016/17. Individuals can invest in a combination of Cash or Stocks and Shares 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 Cash ISA and one Stocks and Shares ISA each year.

16 and 17-year-olds are able to invest in an adult Cash ISA. A tax-free Junior ISA (JISA) is available to all UK resident children under the age of 18 as a Cash or Stocks and Shares product or both. Total annual contributions are capped at £4,080. Funds placed in a JISA will be owned by the child but investments will be locked in until the child reaches adulthood.

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 and it is worth shopping around.

Help to Buy ISA

Help to Buy ISAs provide a tax-free savings account for first time buyers wishing to save for a home. Savings are limited to a monthly maximum of £200, with an opportunity to deposit an additional £1,000 when the account is first opened.

The Government will provide 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 only 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 is no limit on how long an individual can save into it and no time limit on when they can use their bonus.

The Innovative Finance ISA

The new Innovative Finance 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, without being subject to tax. Returns on Innovative Finance ISAs have the potential to be significantly greater than on Cash ISAs, but they will carry a greater degree of risk.

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, such investments attract income tax relief, limited to a maximum 30% relief on £1m of investment per annum. The effective maximum investment for 2016/17 is £2m, if £1m is carried back for relief in 2015/16 and no EIS investment has been made in the previous year. In addition, a deferral relief is available to rollover chargeable gains where all or part of the gain is invested in the 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 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.

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