At the very least, ISAs allow investors to be tax effectiveDanny Cox, head of advice, Hargreaves Lansdown
The government offers generous tax breaks to encourage use of Individual Savings Accounts (ISAs). These are not investments in their own right, but more like a wrapper in which to shelter savings and investments from tax.
An ISA has these main benefits: no capital gains tax and no further tax on any income; they can be cashed in at any time; they don’t need to declared on a tax return; for the over 65s, ISA income does not affect age-related allowances.
ISAs are popular—over £53bn was invested in 15m ISA accounts in 2010-11 and the amount that can be invested is set each year by the government, this year the allowance is £10,680. Investors who have fully used their ISA allowance every year since 1999 will have sheltered £101,280 from tax.
There are two types of ISA—cash and stocks & shares. Cash ISAs operate like a normal savings account, except that the interest is tax-free. This means they can be great for short-term savings because your capital is guaranteed (up to £85,000 with each bank or building society) and you can access it whenever you need.
Stocks & Shares ISAs, by contrast, can fall in value as well as rise so you could get back less than you invest—but in the longer term they can deliver significantly higher returns. Stock market investments have outperformed cash in 90 per cent of the ten-year periods since 1899 (but remember, past performance is no guide to the future.)
There is also a new Junior ISA, the long-term replacement for the Child Trust Fund (CTF), which allows parents and grandparents to save on behalf of their children and grandchildren. As with the adult variants, these come in cash and stocks & shares varieties and are not subject to tax. The maximum contribution is £3,600 per year.
Money cannot normally be withdrawn from a Junior ISA until age 18. At that point it becomes an adult ISA and property of the child.
Several tax increases have been announced in recent years, including an increase in capital gains tax to 28 per cent for higher rate tax payers, and a freezing of higher rate tax bands, making ISAs even more valuable. In many cases, it costs no more to hold investments inside an ISA than to hold them outside so investors can receive these benefits for free.
How to become your own pension fund managerMartin Tilley, director of technical services at Dentons Pension Management
There are now about 800,000 Self Invested Personal Pensions (SIPPs) in existence in Britain—where the pension holder can chose how the pension pot ought to be invested.
Projections are that, by the end of 2013, this figure will exceed 1m.
This growth may have been fuelled by recent changes to pensions schemes, including SIPPs. High earners had previously been restricted to a maximum funding limit of only £20,000 per annum. But in April 2011, that limit was increased to £50,000. In addition, where an individual has previously been a member of a registered pension scheme, unused tax relief of up to £50,000 can be carried forward from the three preceding tax years.
In many cases, the individual who holds the SIPP will be a co-trustee of his or her own plan and a co-owner of assets held and a co-signatory to the plan bank account. Because of this, fees and charges are seen and approved before they leave the SIPP.
It is, however, in its investment flexibility that a SIPP gives the client the greatest advantages over conventional plans. Stakeholder pensions, which typically have a charging structure of 1–1.5 per cent per year, offer relatively few choices. While all SIPP providers will have their own restrictions, the overall flexibility permits many more investment opportunities in equities, various investment trusts, and even gold. Others will also allow commercial property to be held, sometimes jointly with other SIPPs, the member themselves, or their employer.
The more flexible a SIPP provider may be, the more likely you will pay fees for their administrative services.. However, these are rarely dependent on fund size. In reality there should be little difference in admin costs between a SIPP valued at £50,000 and another of £500,000. The larger the fund the more economical it becomes to run.
Finally one of the stumbling blocks which dissuaded many from significant pension contributions was the stipulation that accumulated pension capital should be exchanged for an annuity before the holder reaches the age of 75. A potential for loss of capital on early death therefore existed. This rule has now been removed and you may now retain control of your capital and investment strategy until death, when a proportion of any remaining capital can be returned to loved ones.
Investing for the kidsChris Wozniak, Head of 360° Service, Collins Stewart Wealth Management
Being a parent can be costly, but children born today face a daunting financial future. Those born in 2012 face a working life of more than 45 years; time they will need in order to pay off substantial student debts, save the deposit for their first house and save enough to compensate for shrinking state pensions. It is important for parents to take this into account when structuring their own financial affairs.
Parents tend to have specific goals in mind when making financial arrangements for their children: university fees, first car or house. Other families will want to find the most tax efficient way of handing down wealth. There are myriad ways to ease a child’s future.
A big decision is when a child can access his or her savings. Trusts give parents a certain control. These are legal arrangements in which assets are placed into the trust by a parent or grandparent who sets out their wishes in their will, or in a trust deed. Their wishes are carried out by the trustees, who are legally responsible for the assets.
There are various trusts available, but two commonly used for children are bare and discretionary trusts. Bare trusts are attractive because of the tax treatment of gifts. Once a gift has been made, it cannot be taken back by the giver; the beneficiary becomes the legal owner. If the donor survives for seven years after making the gift, there will be no inheritance tax to pay.
In contrast to a bare trust, beneficiaries of discretionary trusts have no rights or entitlements to either the capital or income from the trust. The trustees are the legal owners with control over the trust’s assets, deciding who gets what and when. Flexibility is the attraction here, as to how the income and capital are distributed. Income can be used to fund activities when the children are young, and larger amounts to support their bigger requirements when they are older.
Junior ISAs have received lots of attention following their launch in November last year, and they are long-term, tax-free accounts. To be eligible for a Junior ISA, the child must be under 18, live in Britain and cannot already have a Child Trust Fund account (CTFs have been phased out and are only open to children who were born between 1st September 2002 and 2nd January 2011). Anyone can put money into the Junior ISA, so friends, relatives and parents can make gifts up to the maximum contribution limit, currently £3,600 per year, with no tax to pay on any interest or gains.
When the child reaches 18, they can either take the money out or leave it and the Junior ISA will automatically become a regular ISA. Two types of Junior ISA are available—cash, and stocks and shares.
It is worth remembering that parents can start a stakeholder pension for their children, with a current maximum contribution of £3,600 per year. The obvious drawback is that, being a pension, savings are locked in and inaccessible until retirement age (currently 55). However, it is a good long-term, tax efficient savings vehicle and a valuable tool in contributing to the financial education of your children.
As money held in trusts, pensions or Junior ISAs is put away for a significant period, perhaps 15 to 20 years, it is crucial to think about which assets to invest in. When it comes to managing these structures, it pays to seek professional advice. Legal advice is of paramount importance for structures such as trusts, which have lasting legal and tax consequences and are irrevocable once created.
This should not deter parents from starting early when saving for their children. This will give the pot the greatest possible time to build. When the time comes, they will thank you for it.
And finally—a word from the bankDuncan MacIntyre, head of Coutts Private Office
Europe is the key to financial markets and the global economy this year. Our base case scenario is that Europe is in recession this year, but manages to avoid a systemic collapse in its financial system and a partial or complete break-up of the single currency. However, the chances of such a worst-case scenario are not negligible, and we estimate them to be around 20 per cent.
With no silver bullet, and expectations that Europe will slide into recession, 2012 is likely to be another volatile year for financial markets. Fortunately, the US economy seems to have pulled away from the imminent risk of recession with economic data continuing to come out ahead of expectations, including from its housing market.
Fragile growth, restricted credit and high levels of political risk suggest a cautious approach in the short term for clients looking to enhance or grow their wealth through riskier assets such as equities. But valuations are the key long-term driver of equity markets and these are at historically attractive levels. With Asia and emerging markets driving what little global growth there is, we favour these regions and exporters into these markets.
Rising inflation has been a prime concern for clients, especially with interest rates likely to stay at ultra-low levels for much longer than originally anticipated. While current inflation is around 4 per cent, clients recognise that holding cash is not a viable long-term strategy. Index-linked bonds are the natural place to start for investors who want to protect their portfolio against potentially high inflation. With payments that adjust in line with changes in consumer prices, these relatively safe investments have provided a hedge against inflation if held to maturity. Unfortunately, demand has driven prices up and rates of return are therefore negative.
Equities have also traditionally been seen as an inflation hedge, based on the assumption that pricing power would allow companies to keep revenues increasing in line with costs. Unfortunately, periods of rising inflation usually coincide with greater uncertainty, making business planning and profit forecasting significantly harder and driving down valuations.
Gold, while technically a commodity, has also been a good inflation hedge in the long run, especially when the source of inflation is rooted in monetary expansion and currency devaluation as has been the case over the past few years.
The risks stemming from Europe and uncertainty about growth will mean price volatility is likely to remain high this year, making it more important than ever to maintain diversified portfolios. Within client portfolios we continue to suggest income orientated strategies including corporate bonds, commercial property and high yielding shares whilst positioning for growth via emerging market and in particular Asian equities.
The government offers generous tax breaks to encourage use of Individual Savings Accounts (ISAs). These are not investments in their own right, but more like a wrapper in which to shelter savings and investments from tax.
An ISA has these main benefits: no capital gains tax and no further tax on any income; they can be cashed in at any time; they don’t need to declared on a tax return; for the over 65s, ISA income does not affect age-related allowances.
ISAs are popular—over £53bn was invested in 15m ISA accounts in 2010-11 and the amount that can be invested is set each year by the government, this year the allowance is £10,680. Investors who have fully used their ISA allowance every year since 1999 will have sheltered £101,280 from tax.
There are two types of ISA—cash and stocks & shares. Cash ISAs operate like a normal savings account, except that the interest is tax-free. This means they can be great for short-term savings because your capital is guaranteed (up to £85,000 with each bank or building society) and you can access it whenever you need.
Stocks & Shares ISAs, by contrast, can fall in value as well as rise so you could get back less than you invest—but in the longer term they can deliver significantly higher returns. Stock market investments have outperformed cash in 90 per cent of the ten-year periods since 1899 (but remember, past performance is no guide to the future.)
There is also a new Junior ISA, the long-term replacement for the Child Trust Fund (CTF), which allows parents and grandparents to save on behalf of their children and grandchildren. As with the adult variants, these come in cash and stocks & shares varieties and are not subject to tax. The maximum contribution is £3,600 per year.
Money cannot normally be withdrawn from a Junior ISA until age 18. At that point it becomes an adult ISA and property of the child.
Several tax increases have been announced in recent years, including an increase in capital gains tax to 28 per cent for higher rate tax payers, and a freezing of higher rate tax bands, making ISAs even more valuable. In many cases, it costs no more to hold investments inside an ISA than to hold them outside so investors can receive these benefits for free.
How to become your own pension fund managerMartin Tilley, director of technical services at Dentons Pension Management
There are now about 800,000 Self Invested Personal Pensions (SIPPs) in existence in Britain—where the pension holder can chose how the pension pot ought to be invested.
Projections are that, by the end of 2013, this figure will exceed 1m.
This growth may have been fuelled by recent changes to pensions schemes, including SIPPs. High earners had previously been restricted to a maximum funding limit of only £20,000 per annum. But in April 2011, that limit was increased to £50,000. In addition, where an individual has previously been a member of a registered pension scheme, unused tax relief of up to £50,000 can be carried forward from the three preceding tax years.
In many cases, the individual who holds the SIPP will be a co-trustee of his or her own plan and a co-owner of assets held and a co-signatory to the plan bank account. Because of this, fees and charges are seen and approved before they leave the SIPP.
It is, however, in its investment flexibility that a SIPP gives the client the greatest advantages over conventional plans. Stakeholder pensions, which typically have a charging structure of 1–1.5 per cent per year, offer relatively few choices. While all SIPP providers will have their own restrictions, the overall flexibility permits many more investment opportunities in equities, various investment trusts, and even gold. Others will also allow commercial property to be held, sometimes jointly with other SIPPs, the member themselves, or their employer.
The more flexible a SIPP provider may be, the more likely you will pay fees for their administrative services.. However, these are rarely dependent on fund size. In reality there should be little difference in admin costs between a SIPP valued at £50,000 and another of £500,000. The larger the fund the more economical it becomes to run.
Finally one of the stumbling blocks which dissuaded many from significant pension contributions was the stipulation that accumulated pension capital should be exchanged for an annuity before the holder reaches the age of 75. A potential for loss of capital on early death therefore existed. This rule has now been removed and you may now retain control of your capital and investment strategy until death, when a proportion of any remaining capital can be returned to loved ones.
Investing for the kidsChris Wozniak, Head of 360° Service, Collins Stewart Wealth Management
Being a parent can be costly, but children born today face a daunting financial future. Those born in 2012 face a working life of more than 45 years; time they will need in order to pay off substantial student debts, save the deposit for their first house and save enough to compensate for shrinking state pensions. It is important for parents to take this into account when structuring their own financial affairs.
Parents tend to have specific goals in mind when making financial arrangements for their children: university fees, first car or house. Other families will want to find the most tax efficient way of handing down wealth. There are myriad ways to ease a child’s future.
A big decision is when a child can access his or her savings. Trusts give parents a certain control. These are legal arrangements in which assets are placed into the trust by a parent or grandparent who sets out their wishes in their will, or in a trust deed. Their wishes are carried out by the trustees, who are legally responsible for the assets.
There are various trusts available, but two commonly used for children are bare and discretionary trusts. Bare trusts are attractive because of the tax treatment of gifts. Once a gift has been made, it cannot be taken back by the giver; the beneficiary becomes the legal owner. If the donor survives for seven years after making the gift, there will be no inheritance tax to pay.
In contrast to a bare trust, beneficiaries of discretionary trusts have no rights or entitlements to either the capital or income from the trust. The trustees are the legal owners with control over the trust’s assets, deciding who gets what and when. Flexibility is the attraction here, as to how the income and capital are distributed. Income can be used to fund activities when the children are young, and larger amounts to support their bigger requirements when they are older.
Junior ISAs have received lots of attention following their launch in November last year, and they are long-term, tax-free accounts. To be eligible for a Junior ISA, the child must be under 18, live in Britain and cannot already have a Child Trust Fund account (CTFs have been phased out and are only open to children who were born between 1st September 2002 and 2nd January 2011). Anyone can put money into the Junior ISA, so friends, relatives and parents can make gifts up to the maximum contribution limit, currently £3,600 per year, with no tax to pay on any interest or gains.
When the child reaches 18, they can either take the money out or leave it and the Junior ISA will automatically become a regular ISA. Two types of Junior ISA are available—cash, and stocks and shares.
It is worth remembering that parents can start a stakeholder pension for their children, with a current maximum contribution of £3,600 per year. The obvious drawback is that, being a pension, savings are locked in and inaccessible until retirement age (currently 55). However, it is a good long-term, tax efficient savings vehicle and a valuable tool in contributing to the financial education of your children.
As money held in trusts, pensions or Junior ISAs is put away for a significant period, perhaps 15 to 20 years, it is crucial to think about which assets to invest in. When it comes to managing these structures, it pays to seek professional advice. Legal advice is of paramount importance for structures such as trusts, which have lasting legal and tax consequences and are irrevocable once created.
This should not deter parents from starting early when saving for their children. This will give the pot the greatest possible time to build. When the time comes, they will thank you for it.
And finally—a word from the bankDuncan MacIntyre, head of Coutts Private Office
Europe is the key to financial markets and the global economy this year. Our base case scenario is that Europe is in recession this year, but manages to avoid a systemic collapse in its financial system and a partial or complete break-up of the single currency. However, the chances of such a worst-case scenario are not negligible, and we estimate them to be around 20 per cent.
With no silver bullet, and expectations that Europe will slide into recession, 2012 is likely to be another volatile year for financial markets. Fortunately, the US economy seems to have pulled away from the imminent risk of recession with economic data continuing to come out ahead of expectations, including from its housing market.
Fragile growth, restricted credit and high levels of political risk suggest a cautious approach in the short term for clients looking to enhance or grow their wealth through riskier assets such as equities. But valuations are the key long-term driver of equity markets and these are at historically attractive levels. With Asia and emerging markets driving what little global growth there is, we favour these regions and exporters into these markets.
Rising inflation has been a prime concern for clients, especially with interest rates likely to stay at ultra-low levels for much longer than originally anticipated. While current inflation is around 4 per cent, clients recognise that holding cash is not a viable long-term strategy. Index-linked bonds are the natural place to start for investors who want to protect their portfolio against potentially high inflation. With payments that adjust in line with changes in consumer prices, these relatively safe investments have provided a hedge against inflation if held to maturity. Unfortunately, demand has driven prices up and rates of return are therefore negative.
Equities have also traditionally been seen as an inflation hedge, based on the assumption that pricing power would allow companies to keep revenues increasing in line with costs. Unfortunately, periods of rising inflation usually coincide with greater uncertainty, making business planning and profit forecasting significantly harder and driving down valuations.
Gold, while technically a commodity, has also been a good inflation hedge in the long run, especially when the source of inflation is rooted in monetary expansion and currency devaluation as has been the case over the past few years.
The risks stemming from Europe and uncertainty about growth will mean price volatility is likely to remain high this year, making it more important than ever to maintain diversified portfolios. Within client portfolios we continue to suggest income orientated strategies including corporate bonds, commercial property and high yielding shares whilst positioning for growth via emerging market and in particular Asian equities.
