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Savings and investment strategies
An investment strategy might include a range of different
elements, from pension savings to alternative savings and
investment strategies. The key is to start planning early:
planning is a continuous process and your financial plans should
be monitored regularly, to ensure that they remain up-to-date
and that you remain on course to achieve your financial goals.
A realistic approach
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.
Setting your financial goals
Some typical financial goals might include the following:
• being able to retire comfortably
• having sufficient funds and insurance cover in the event of
serious illness or loss
• accumulating a sizeable estate to pass on to your heirs
• increasing the assets going to your heirs by using various
estate planning techniques, perhaps including a lifetime gifts
strategy
• tying in charitable aims with your own family goals
• raising sufficient wealth to buy a business, a holiday home,
etc
• developing an investment plan that may provide a hedge
against market fluctuations and inflation
• minimising taxes on income and capital.
Your 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.
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. A Dividend Tax Allowance
of £2,000 a year is available. The 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. The Personal Savings Allowance (PSA)
removes 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%.
Investing in property
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.
Landlords are no longer able to deduct all of their finance
costs from their residential property income. They instead
receive a basic rate reduction from their income tax liability.
The government is introducing this change gradually from
April 2017, over four years. For 2018/19, 50% of the finance
costs are deductible in full and 50% will qualify for a basic rate
reduction subject to a cap in some situations. The restriction
to finance costs does not apply to landlords of furnished
holiday lettings.
Individual Savings Accounts (ISAs)
The overall annual subscription limit for ISAs is £20,000 for
2018/19. Individuals can invest in a combination of ISAs 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 of each type of ISA each year.
16 and 17-year-olds can invest in an adult Cash ISA. A Junior
ISA (JISA) is available to all UK resident children under 18
as a Cash or Stocks and Shares product or both. Total annual
contributions are capped at £4,260. JISAs are owned by the
child but investments are locked in until adulthood.