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SPONSORED CONTENT: Making the most of available tax wrappers

One thing that you can influence – that significantly impacts your wealth – is the use of tax wrappers that contain your investments
SPONSORED CONTENT: Making the most of available tax wrappers
An ISA wrapper is an effective method of mitigating tax

THIS IS SPONSORED CONTENT PAID FOR BY NETWEALTH

When investing there are several factors that are out of your control, such as market performance, volatility and inflation. Yet one thing that you can influence – that significantly impacts your wealth – is the use of tax wrappers that contain your investments, and ensuring that tax-free allowances and exemptions are also used. 

There are two main types of tax-incentivised wrappers for investments in the UK: pensions and ISAs. Both wrappers benefit from tax-free investment returns but pensions offer two key further advantages. 

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The advantages of pensions 

Firstly, money paid into your pension benefits from tax relief at your marginal rate, which can mean that paying £20,000 into your pension costs you as little as £8,000. Twenty five per cent of the total pension can then normally be taken tax-free when you retire. Secondly, pensions do not form part of your estate for the purposes of inheritance tax, which can provide an additional benefit to the beneficiaries of your estate. 

Changes to pension legislation, such as the reduction of the lifetime allowance to £1.03m and the introduction of the tapered pension annual allowance for those earning more than £150,0002, have not only earned HMRC an additional c£250m this year3, but also mean that it is sensible in many cases for clients to look to other tax-efficient wrappers to bolster their savings for retirement (or any other financial goal they have). 

That said, even high earners impacted by the tapered annual allowance can contribute up to £10,000 per annum (gross of tax relief) to a pension, while maintaining the tax advantages discussed above. It is also possible for one spouse to provide cash that allows the other spouse to make a pension contribution (or indeed to fund a child’s pension contribution4). 

Why ISAs are such a solid choice for investors 

Individual Savings Accounts (ISAs) have become a slightly more attractive investment vehicle in recent years as the inheritability, flexibility and amount you can invest have all improved. They are therefore suitable for many types of clients, although the tax shelter ISAs provide is still limited to £20,000 per annum per person. 

Unlike pensions, investors do not receive tax relief on contributions into an ISA, but they do benefit from tax-free growth and income, and withdrawals are tax-free rather than being treated as income as they are with pensions. 

Further benefits for clients who need extra 

It may be that the annual level of savings you can make is covered solely by pensions and ISAs, although for many clients, something beyond this limit is also required. The solution is often to invest through a General Investment Account (GIA) that can replicate the same investment strategy that is present in a pension and ISA portfolio. 

Investing through a GIA is not as advantageous as investing via an ISA or pension, but using a GIA does allow you to take advantage of your annual capital gains tax exemption (£11,700 currently), your annual dividend allowances (£2,000 currently), and your annual Savings Interest allowance (up to £1,000 currently). 

Between a married couple, for example, these allowances can still add up to a reasonable degree of income or capital gains before tax is due – especially if managed in conjunction with an ISA or pension portfolio. 

Two different routes with very different outcomes 

The following case study shows how an investor could use their various tax wrappers, and the allowances within, to invest a total of £936,000 over 45 years.

 

Case Study Key Facts

Client Age

50

Netwealth Risk Level

Contributions

£600 per month for 5 years

Retirement Age

60 

Income in Retirement

£4,000 (net) per month

Inflation Assumption

2% per annum

Timeframe

45 years (to age 95)

 

 

 

Scenario A

Scenario B

 

Pension Starting Value

£400,000

£0

 

Pension Contributions

✔ (£600 p/m net)

-

 

GIA Starting Value

£500,000

£900,000

 

GIA Contributions

-

✔ (£600 p/m net)

 

Annual ISA Funding from GIA

-

 


The projection below shows a range of outcomes for Scenario A whereby the investor appropriately uses the various tax wrappers available and is also carefully drawing upon those tax wrappers in retirement to fund their income of £4,000 per month, increasing in line with inflation. 

 

 

Conclusion 

In summary, although there are many factors to consider when investing that are out of your control, They should still be frequently assessed and taken into account so that action can be taken where necessary. 

Making use of the appropriate tax wrappers (along with minimising fees, ensuring you stay invested and that you are well diversified) is very much within your control and can have a huge impact on your net returns over the long term. To focus on this is time well spent.

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