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In today's financial climate, your investments will need time to grow, so whether you choose to focus on pension savings, alternative savings and investment strategies, or a combination of both, make sure you start planning ahead of time.
There are significant changes proposed to the rules at retirement for those in defined contribution schemes, to apply from 6 April 2015. If enacted, these changes will open up the possibility of taking flexible benefits at retirement from age 55 (scheme rules permitting) up to and including 100% withdrawal of the accumulated pension savings at retirement (with an income tax charge at marginal rates).
There is little doubt that pension savings should start as soon as possible, but for those looking forward to retirement in the near future, taking the above changes into account may give greater flexibility over the pension pot!
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.
Putting together a realistic plan can be a balancing act between 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 setting a number of short, medium and long-term goals and prioritise them within each category, in order to meet your objectives.
Being realistic about your objectives is important when putting together any financial plan. We can help you with this process.
When defining 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.
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.
Premium bonds offer a modest 'interest equivalent', but there is a chance of winning a tax-free million!
If you have a lump sum to invest, you might consider an investment bond. This is often described as a tax-free product but the income and gains accumulating within the fund are subject to tax in fund (equivalent to basic rate tax). The 'tax-free' element is derived from the ability to draw an annual 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.
Investment in stocks and shares has historically provided the best chance of long term growth. Investment in unit trusts, 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.
While 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.
Property is generally considered a long-term investment, whether commercial or residential.
'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.
Up to £11,880 can be invested in an ISA this tax year, increasing to £15,000 from 1 July 2014 for investment in a 'NISA', the New ISA.
Between 6 April and 1 July 2014, the total amount that can be paid into a Cash ISA is £5,940. For those with a Stocks and Shares ISA, money can still be paid into that account, but the combined amount paid into Cash and Stocks and Shares ISAs must not exceed £11,880. From 1 July 2014, when any ISA will automatically become a NISA, further money can be added to either the Cash or a Stocks and Shares NISA up to the new £15,000 limit.
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. However, a saver will only be able to pay into a maximum of one Cash NISA and one Stocks and Shares NISA each year.
Any subscriptions made to an ISA since 6 April 2014 will count against the NISA subscription limit for 2014/15 and account holders who have paid into a Cash or Stocks and Shares ISA since 6 April 2014 will not be able to open a NISA of the same type before 6 April 2015. These account holders can make additional payments, up the NISA limit, into their account(s) opened since 6 April 2014 or by transferring their account(s) to another provider that will allow additional amounts to be added.
16 and 17-year-olds are able to invest in a Cash ISA or NISA (but not a Stocks and Shares NISA).
Following the closure of the Child Trust Fund (CTF) to new entrants early in 2011, a tax-free Junior ISA (JISA) 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 £4,000 (£3,840 to 1 July 2014). Funds placed in a JISA 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 currently being relatively low.
Investments under the Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS) and investments in Venture Capital Trusts (VCTs) are, generally, higher risk.
However, tax breaks aimed at encouraging new risk capital mean that EIS and VCT investments may have a place in your investment strategy.
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 2014/15 is £2m, if £1m is carried back for relief in 2013/14 - 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 Seed Enterprise Investment Scheme 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 in 2014/15 and invested through the SEIS in the same or following year. A gain on the disposal of SEIS shares will be exempt from CGT as long as:
With similar restrictions on the type of company into which funds can be invested, VCTs allow 30% income tax relief on investments up to £200,000 each tax year but no CGT deferral.