Category: Financial News

Helping you save for a first home or for your retirement at the same time

The start of the tax year on 6 April 2017 saw the launch of the Lifetime ISA (LISA), which was announced in the 2016 Budget. This new type of ISA is designed to help you save for a first home or for your retirement at the same time. To be eligible, you have to be aged between 18 and 39 years old (up until your 40th birthday).

Supplemented by a government bonus 
You can save up to £4,000 a year into a LISA, and this will be supplemented by a government bonus of 25% of the money you put in. After year one, the bonus will be paid into your account monthly based on how much you pay in, but in the first year it will be paid in one lump sum at the end of the tax year.

The maximum bonus that you can receive is £1,000 each year. You’ll obtain a bonus on any savings you make up until you reach 50 years of age, at which point you won’t be able to make any more payments into your account. You only receive the bonus on the new money that you pay in (or transfer from another ISA) during the tax year, rather than it being based on the overall value of your LISA.

Combination of different ISA types 
You will be able to have any combination of different ISA types and a LISA at the same time. For example, if you have a Cash ISA and a Stocks & Shares ISA already, you can also have a LISA. You can’t pay in more than the annual ISA allowance however, which in the 2017/18 tax year (that started on 6 April) is £20,000, with a maximum of £4,000 going into the LISA. The ISA allowance relates to each person and not per household, so two first-time buyers could both receive a bonus when buying their first home together.

If you already have a Help to Buy: ISA, you’ll be able to transfer your balance into a LISA at any time if the amount doesn’t exceed £4,000. In the tax year 2017/18 only, you’ll be able to transfer the full balance of your Help to Buy: ISA – as it stood on 5 April 2017 – into your LISA without affecting the £4,000 limit. Alternatively, you could keep your Help to Buy: ISA and open a LISA, although you’ll only be able to use the bonus from one of these accounts towards buying your first home.

Approach to risk, investment time frame and making investment decisions
LISAs can hold cash, stocks and shares qualifying investments, or a combination of both. The option that is right for you will depend on your approach to risk, your investment time frame and how confident you are making your own investment decisions.

You will be able to use funds held in a LISA after 12 months to buy a first home valued up to £450,000. You must be buying your home with a mortgage. Alternatively, after your 60th birthday, you will be able to take out all your savings from your LISA tax-efficiently for use in retirement.

Continuing to save into your LISA 
A LISA can be accessed like a normal ISA at any time for any reason, but if not used as above, you’ll have to pay a withdrawal charge of 25% of the amount you withdraw (being the government bonus plus a penalty of 5%). However, this withdrawal charge won’t apply if you decide to cash in your account during the first 12 months after its launch.

If you want to use your LISA to save for a property as well as for retirement, once you’ve bought your first home, you will be able to continue saving into your LISA as you did previously. You’ll continue to receive the government bonus on your contributions until you reach the age of 50.

Diverse range off unds tha tinvest in different things with different strategies

Pooled investment funds – also known as ‘collective investment schemes’ – are a way of combining sums of money from many people into a large fund spread across many investments and managed by a professional fund manager.

There are a diverse range of funds that invest in different things, with different strategies – high income, capital growth, income and growth, and so on.

Popular types of pooled investment fund

Unit Trusts and Open-Ended Investment Companies
Unit trusts and Open-Ended Investment Companies (OEICs) are professionally
managed collective investment funds.
Managers pool money from many investors
and buy shares, bonds, property or cash assets, and other investments.

Underlying assets
You buy shares (in an OEIC) or units (in a unit trust). The fund manager combines your money together with money from other investors and uses it to invest in the fund’s underlying assets.

Every fund invests in a different mix of investments. Some only buy shares in British companies, while others invest in bonds or in shares of foreign companies, or other types of investments.

Buy or sell
You own a share of the overall unit trust or OEIC – if the value of the underlying assets in the fund rises, the value of your units or shares will rise. Similarly, if the value of the underlying assets of the fund falls, the value of your units or shares falls. The overall fund size will grow and shrink as investors buy or sell.

Some funds give you the choice between ‘income units’ or ‘income shares’ that make regular payouts of any dividends or interest the fund earns, or ‘accumulation units’ or ‘accumulation shares’ which are automatically reinvested in the fund.

Higher returns
The value of your investments can go down as well as up, and you might get back less than you invested. Some assets are riskier than others, but higher risk also gives you the potential to earn higher returns.

Before investing, make sure you understand what kind of assets the fund invests in and whether that’s a good fit for your investment goals, financial situation and attitude to risk.

Spreading risk 
Unit trusts and OEICs help you to spread your risk across lots of investments without having to spend a lot of money.

Most unit trusts and OEICs allow you to sell your shares or units at any time – although some funds will only deal on a monthly, quarterly or twice-yearly basis. This might be the case if they invest in assets such as property, which can take a longer time to sell.

Investment length 
However, bear in mind that the length of time you should invest for depends on your financial goals and what your fund invests in. If it invests in shares, bonds or property, you should plan to invest for five years or more. Money market funds can be suitable for shorter time frames.

If you own shares, you might get income in the form of dividends. Dividends are a portion of the profits made by the company that issued the shares you’ve invested in.

Taxed dividends
If you have an investment fund that is invested in shares, then you might get distributions that are taxed in the same way as dividends.

In April 2016, a new tax-free Dividend Allowance of £5,000 a year was introduced for all taxpayers (this tax-free allowance will fall to £2,000 in April 2018).

Dividends above this level are currently taxed at:
7.5% (for basic-rate taxpayers)
32.5% (for higher-rate taxpayers)
38.1% (for additional-rate taxpayers)

Any dividends received within a pension or Individual Savings Account (ISA) will remain effectively tax-efficient.

Basic-rate payers who receive dividends of more than £5,000 need to complete a self-assessment return.

Making investment decisions on behalf of the investor

There are many reasons to invest through a fund, rather than buying assets on your own. At a basic level, investing in a fund means having a fund manager make investment decisions on behalf of the investor.

You receive reports on the fund’s performance but have no influence on the investment choices short of removing your money from the fund and placing it elsewhere.

Spreading risk is one of the main reasons for investing through a fund. Even if you have a small amount to invest, you can have a lot of different types of assets you’re investing in – you’re ‘diversified’.

You can spread risk across asset classes (such as bonds, cash, property and shares), countries and stock market sectors (such as financials, industrials or retailers).

Reduced dealing costs by pooling your money can help you make savings because you’re sharing the costs. There is also less work for you, as the fund manager handles the buying, selling and collecting of dividends and income for you. But of course, there are charges for this. They also make the decisions about when to buy and sell assets.

Active or passive fund management

Active management
Most pooled investment funds are actively managed. The fund manager is paid to research the market, so they can buy the assets that they think might give a good profit. Depending on the fund’s objectives, the fund manager will aim to give you either better-than-average growth for your investment (beat the market) or to get steadier returns than would be achieved simply by tracking the markets.

Passive management – tracker funds
You might prefer to track the market – if the index goes up, so will your fund value – but it will also fall in line with the index. A ‘market index tracker’ follows the performance of all the shares in a particular market. In the UK, the most commonly used market index is the FTSE 100, a group of the 100 biggest companies based upon share value.

If a fund buys shares in all 100 companies, in the same proportions as their market value, its value will rise or fall in line with the change in the value of the FTSE 100. Funds that track an index are called ‘tracker funds’.

Tracker funds don’t need to be managed so actively. You still pay some fees, but not as much as with an actively managed fund. Because of the fees, your real returns aren’t quite as good as the actual growth of the market – but they should be close.