I was looking at methods of saving for the future but don’t have a timeframe in mind. I was thinking of saving for my children who are now five and seven, and also for a lump sum for near my retirement, but don’t want to bother about pensions as I have already taken care of that.
Pensions are naturally the most tax efficient way to invest for the future as each contribution attracts tax relief immediately at source. For a higher rate tax payer it is much more favourable in that the relief is at 40%. A contribution of £100 would therefore only cost £60. This is immediate growth of £40 or 66% on your £60 contribution, the equivalent of near ten years in the building society. They do have their disadvantages from an accessibility point of view and it’s difficult to get excited about pensions as they are so far away.
An ISA is the first port of call, meaning that any growth in the investment will grow free of capital gains tax. In reality this is a bit of a gimmick in that few people create enough of a gain to make the ISA worthwhile. To explain, a straightforward investment into a unit trust or Oeic allows you to make a gain of £9600 per year per person before you are liable to tax. You can then see why a unit trust or Oeic is the next port of call for investment, as most gains will effectively be free of tax if managed properly.
An offshore investment bond is also a nice option for the future. There are numerous tax breaks here that make it quite a flexible option.
An offshore bond (not to be confused with the tax inefficient onshore) grows free of tax (apart from a small element of withholding tax in certain countries of origin). This is excellent in that the gain can roll up with compound growth, tax free. Whilst you are managing the capital the investments can be moved around within the bond tax free which is another huge flexibility as this can sometimes create tax problems in other tax vehicles.
Perhaps the biggest benefits are the methods you can use to distribute the cash at the end. There are two excellent options: If you created an investment for your children, you can put it in your name and then later you can assign a segment of the bond to the children and encash it. The gain on the bond is then assessed against the child who of course is now 18 and at university. As a non tax payer the gain is assessed against their income. If the gain is less than £6035 there would be no tax to pay. So an investment of £5000 grows to £10435. You assign to the 18 year old student who then encashes the bond effectively tax free. This is an excellent way to plan for the future as you don’t have to determine any of this at the beginning.
Another flexibility is the chance to encash it yourself free of tax. You invest into the bond for as long as you want. When you reach the point when you want to encash, if there is a considerable tax issue with the gain, you could decide to become non resident for a year, then encash offshore, escaping Gord’s grasp on your capital.
It is worth noting however that some offshore bonds can be expensive and you should seek advice before choosing one. Consider also that tax is a small part of your plan. An investment paying 50% tax but growing at 40% per year is better than an investment growing at 0% but tax free. Be careful to choose your funds carefully as there are numerous so called ‘great funds’ with as much excitement as a party political broadcast.
Do you have a query on tax or investments? Call Peter on 0800 0112825 or e-mail info@wwfp.net and take a look at our section on Investments.
The value of shares and investments can go down as well as up
Follow us on Twitter
Become a fan on Facebook
Subscribe to the RSS Feed