With the end of the current tax year fast approaching, Barclays Stockbrokers, the UK’s largest online execution-only stockbroker, shares its top tips for efficient investing.
Catherine Penney, Vice President, Barclays Stockbrokers, comments: “Time is running out before we reach the end of the current tax year. ‘Getting your financial house in order’ is important at any time of year but there is a particular opportunity in the lead up to the end of the tax year to carry out a review and ensure you have maximised this year’s tax free allowances. Every smart investor should have a ‘tax year end to-do list’ and in difficult economic times, at the top of the list should be taking steps to maximise returns.”
1. Realise the power of ISAs
Would you like £10,000 of annual tax free income?
• This is something that is achievable if investors use their full ISA allowance every year. If not already using the full annual allowance, they should start by contributing £10,680 before the end of this tax year (5th April) and £11,280 in the new tax year. By building up assets within an ISA, tax free income can be generated from investments such as gilts and bonds which can help to fund your retirement. (This calculation assumes 5% income on a pot of £200,000 which at the current allowance of £10,680 represents 19 years of contributions, taking no account of returns.)
• The numbers are compelling. An ISA millionaire invested in gilts and bonds generating a 5% income could be receiving £50,000 each year, tax free.
• Investors don’t have to find new money to fund an ISA; they can transfer investments held outside their ISA. This would crystallise capital gains liabilities on any growth on the asset since purchase, but as there is currently a CGT annual exempt amount of £10,600 there may not be any tax to pay, depending on the circumstances. Bear in mind that tax rules may change in the future.
2. Wake up to pensions
Do you know that you can contribute to more than one pension in a year?
• UK residents and those with UK earnings subject to income tax have an annual allowance of £50,000 or 100% of their income, whichever is lower, for pensions contributions. Tax relief of up to 50% is received on these contributions and the assets are protected from income and capital gains tax within the pension.1
• The benefits of pensions are very powerful provided that you accept that no withdrawals can be made before age 55. So, as well as any company pension schemes investors may belong to, they should consider getting into the habit of putting the rest of their allowance (annual allowance less contributions made by the individual or made on their behalf) into a Self Invested Personal Pension (SIPP), giving them greater control of their retirement plans.
• Also, investors should make sure that they don’t incur penal rates of tax on their pension savings. From 6th April 2012, the lifetime allowance (this is the total size your pension pot can grow to across all your pension savings in your lifetime) falls from £1.8m to £1.5m, with all amounts over the new limit subject to a penal tax rate of up to 55%. If the value of the pension already exceeds £1.5m or it is expected that growth will take the value over the limit investors can apply to HMRC for protection. But hurry - this has to be completed before the end of this tax year.
3. Give your investments a workout
Do you know how hard your investments are working for you?
• In tough economic times it is even more crucial that investors review all of their existing investments including ISAs and pensions, including those made several years ago that may be ‘neglected’ or even forgotten.
• Ensure that investments are working as hard as possible both in terms of performance and price. For confident investors, transferring pension savings to a SIPP or ISA savings to an investment ISA with an online provider puts them in control and as they choose the investments, they know exactly how their money is invested.
• Having all investments in one place also allows investors to act in a coordinated and agile way – adapting their portfolio to changing needs over time and ensuring that they are making the most of opportunities in changing markets. To maximize your investment opportunities and select the most appropriate individual investments, look for a provider who gives access to a range of good quality research tools and market insight as well as to planning tools.
• The key to taking control and maximising returns is to choose a provider offering a wide choice of investments, while convenience, service and price should top the list of considerations for the smart investor.
1 Investors cannot use the 10% dividend tax credit within a SIPP so basic rate tax payers are no better off receiving dividends within a SIPP as compared to receiving these dividends directly.
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