Tax-efficient wealth creation

Taking advantage of the increased savings allowance

If you are considering your Individual Savings Account (ISA) options, the good news is that the permitted contribution allowance will be extended for investors over the age of 50 from 6 October this year.

If you are under the age of 50 you will also be able to take advantage of the increased allowance from 6 April next year.

The overall ISA limit will increase to £10,200 (up from £7,200), although the maximum tax-free entitlement will remain unequal for those depositing savings and those investing in shares. You will be able to invest up to £10,200 in a share ISA, whereas the maximum cash ISA deposit will be £5,100.

Cutting the time taken for annuity transfers
The pensions industry’s ‘Options’ initiative has delivered significant improvements in its first three months of operation, cutting the time taken for annuity transfers between providers signed-up to the Options initiative to an average of just eight calendar days, compared to a pre-Options pilot scheme achieving an average transfer time of 31 days. This improvement of over three weeks will see annuity policies processed through Options being set up much more quickly. The system is designed to speed up the exchange of information and funds as part of the annuity transfer process, including those carried out under the Open Market Option (OMO). Timescales are expected to improve further over time as refinements are made and more providers start to use the system.

Investing offshore

For the appropriate investor looking to achieve capital security, growth or income, there are a number of advantages to investing offshore, particularly with regards to utilising the tax deferral benefits. You can defer paying tax for the lifetime of the investment, so your investment rolls up without tax being deducted, but you still have to pay tax at your highest rate when you cash the investment in. As a result, with careful planning, a variety of savers could put offshore investments to good use. 

The investment vehicles are situated in financial centres located outside the United Kingdom and can add greater diversification to your existing portfolio. Cash can also be held offshore in deposit accounts, providing you with the choice about when you repatriate your money to the UK, perhaps to add to a retirement fund or to gift to children or grandchildren. Those who work overseas or have moved abroad to enjoy a different lifestyle often want to pay as little tax as is legally possible.

Many offshore funds offer tax deferral. The different types of investment vehicles available offshore include offshore bonds that allow the investor to defer tax within the policy until benefits are taken, rather than be subject to a basic rate tax liability within the underlying funds. This means that, if you are a higher rate tax payer in the UK, you could wait until your tax status changes before bringing your funds (and the gains) back into the UK.

The wide choice of different investment types available include offshore redemption policies, personalised policies, offshore unit trusts and OEICs. You may also choose to have access to investments or savings denominated in another currency.

Many banks, insurance companies and asset managers in offshore centres are subsidiaries of major UK, US and European institutions. If you decide to move abroad, you may not pay any tax at all when you cash-in an offshore investment, although this depends on the rules of your new country.

Regarding savings and taxation, what applies to you in your specific circumstances is generally determined by the UK tax regulations and whatever tax treaties exist between the UK and your host country. The UK has negotiated treaties with most countries so that UK expats in those countries are not taxed twice. Basically, if a non-domiciled UK resident is employed by a non-UK resident employer and performs all of their duties outside the UK, the income arising is only subject to UK tax if it is received in or remitted to the UK.

Investor compensation schemes tend not to be as developed as in the UK, so you should always obtain professional advice to ensure that you fully understand each jurisdiction. It is also important to ensure that you are investing in an offshore investment that is appropriate for the level of risk you wish to take.

The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not an indication to future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts. Currency movement can affect the value of an offshore investment.

Safety in numbers

Reducing the risk of acquiring wealth

If you require your money to provide the potential for capital growth or income, or a combination of both, provided you are willing to accept an element of risk pooled investments could just be the solution you are looking for. A pooled investment allows you to invest in a large, professionally managed portfolio of assets with many other investors. As a result of this, the risk is reduced due to the wider spread of investments in the portfolio. 

Various funds available are based on:

Income or growth needs, such as: –

income funds providing high dividends
capital growth funds
balanced funds which aim to achieve a mix of both

Geographical allocation, such as:

UK funds

international or specific regional funds (e.g. Far East)

Specialist funds which invest in a specific type of company, such as a property or technology fund.

The main vehicles for pooled investments are:

unit trusts
open-ended investment companies (OEICS)
investment trusts
insurance company funds

Pooled investments are also sometimes called ‘collective investments’. The fund manager will choose a broad spread of instruments in which to invest, depending on their investment remit. The main asset classes available to invest in are shares, bonds, gilts, property and other specialist areas such as hedge funds or ‘guaranteed funds’.

Benefits of pooled investments include:

Professional expertise – you arrange for an investment expert to pick investments for you, to watch those investments daily and judge when to sell them.

Spreading your risk – even if you have small amounts to invest, you can spread your money across a wide range of investments. You reduce the impact on your investment if, say, one company performs badly. Pooled investments will invest in one or more asset class.

Reduced dealing costs – if you want to buy a range of different investments directly, you would probably only be able to invest a small sum in each. This means dealing costs could reduce your profits significantly. By pooling your money, you make savings because of bulk buying.

Less administration – the fund manager handles the buying, selling and collecting of dividends and income for you. They also deal with foreign stock exchanges and brokers.

Choice – there is a very wide choice of funds so that you can pick one – or many – that suit you individually.

Most pooled investment funds are actively managed. The fund manager researches the market and buys and sells assets with the aim of providing a good return for investors.

Trackers, on the other hand, are passively managed, aiming to track the market in which they are invested. For example, a FTSE100 tracker would aim to replicate the movement of the FTSE100 (the index of the largest 100 UK companies). They might do this by buying the equivalent proportion of all the shares in the index. For technical reasons the return is rarely identical to the index, in particular because charges need to be deducted.

Trackers tend to have lower charges than actively managed funds. This is because a fund manager running an actively managed fund is paid to invest so as to do better than the index (beat the market) or to generate a steadier return for investors than tracking the index would achieve. However, active management does not guarantee that the fund will outperform the market or a tracker fund.

The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not an indication to future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.