Personalised guidance, whether it’s your first investment or you have a large portfolio.
It’s vital to have a well-thought-out investment strategy to help you accumulate wealth over time.
There are several investment tools and approaches to aid in this including Individual Savings Accounts (ISAs) or ISAs, Investment Accounts, Investment Bonds and specialist investments like Venture Capital Trusts (VCTs). We can help advise which approach is best for your circumstances, the end goal being to make your money work harder for you and ultimately secure your financial future.
If you have ever considered investing in something other than cash you have probably looked at opening an Individual Savings Account, more commonly known as an ISA.
The ISA has been around for more than 20 years and there is a wide range of ISAs to choose from.
The following article will explain the key differences and how each type of ISA can be of benefit in meeting your financial goals.
An Individual Savings Account (ISA) is a special type of tax efficient account. There are different types of ISAs and the annual allowance is currently £20,000 for the 2023/24 tax year.
You are not allowed to put money into more than one of the same type of ISA in the same tax year and the allowance cannot be carried forward to the next tax year so it is important to use as much of it as you can each year.
Let us remind ourselves about the different types of ISAs that are available to you.
Cash ISAs are available to anyone over the age of 16 and are similar to a standard bank or building society account. The key difference with a cash ISA is that any interest earned within the ISA is always tax-free.
A fixed rate cash ISA will offer a fixed rate of interest for a specified term. You will be able to access your money before the end of the chosen term but you may suffer a hefty penalty to do so.
Alternatively, another option could be a variable rate cash ISA or an easy access cash ISA. These tend to offer you unrestricted access if you need to get hold of your money quickly.
A regular savings cash ISA allows you to save a small amount of money each month and is good for getting you into the savings habit by agreeing to pay in a minimum amount on a regular basis.
You will need to decide how long you are prepared to put your money away for, the type of contributions you would like to make and whether you will need quick access to your money.
It is important to review all the available options (and hidden penalties) so that you select the best cash ISA to suit your needs.
A stocks and shares ISA allows you to invest your money across a variety of markets and sectors, offering wider investment opportunities and potential for growth when compared to a cash ISA. It comes with a greater degree of risk and your investments may go down as well as up in value. All income and growth within a stocks and shares ISA is tax-free.
The charges made by your chosen provider and the investment decisions you make can have a significant bearing on how your ISA performs.
Unless you are an experienced investor who is comfortable with the ups and downs of stock market investing it is best to seek guidance from a reputable financial adviser.
A Lifetime ISA or LISA is open to individual’s aged between 18-40. It’s aimed to help younger savers accumulate a deposit for their first home or for people looking to save for later life.
You can contribute to it up until your 50th birthday and you can opt to save into stocks and shares, cash or a mixture of both. The annual LISA limit is £4,000 and the government will add a 25% bonus to the amount you save. The bonus will be added to your LISA the month after the deposit.
If you do not use your LISA for a home deposit, you can access the funds penalty-free from your 60th birthday. The LISA can be used to purchase a home up to £450,000.
You are still able to access your LISA funds before you turn 60, but unless it is for a first house deposit you will pay a 25% withdrawal penalty, in effect losing the government bonus and some more, so you must be content to lock your money away for a significant length of time.
The LISA was put in place to replace the Help to Buy Scheme. Both the LISA and the H2B ISA offer the 25% government bonus and the chance to accumulate a deposit for your first home. The H2B ISA is no longer available for new subscriptions.
Junior ISAs or JISAs were introduced in November 2011, replacing the Child Trust Fund.
How does a Junior ISA work?
A Junior ISA can be opened at birth and is controlled by a parent or guardian until the child turns 16. You can invest the annual allowance into stocks and shares, cash or a mixture of both. You can make payments to a cash JISA and a stocks/shares JISA per tax year (but can only hold one of each type). Once your child turns 16 they can also pay £20k to a cash ISA. The current annual allowance is £9,000.
This can be a concern for parents who may not be comfortable with their child having full control over a large sum of money at such a young age, especially as the parent will have no say as to how the money is held or spent.
However, JISAs are fantastic for building up savings from birth and if you choose to include your child in the process it will give them the opportunity to engage in financial planning from an early age.
NB: Any child holding a Child Trust Fund (CTF) can’t have a JISA opened for them unless the CTF is first transferred to a JISA and the CTF closed.
An Investment Account or General Investment Account is a way for clients to investment into a portfolio of assets that are managed by a professional fund manager.
These assets could include stocks, property, and bonds. Within the portfolio there could be anywhere from dozens of underlying assets to tens thousands. This allows the client/investor to benefit from some diversification and for the fund manager to make changes according to market conditions.
As a company we do not provide advice on direct stocks and shares (however, we do have links to specialist investment managers who do) which means our advice in this area means using unit trusts / collective investments / OEIC’s. These terms can effectively be interchanged but it can make it quite confusing for new or even existing investors.
A portfolio of assets held within a General Investment Account will, on face value, look very similar to a Stocks and Shares ISA. It is a portfolio of investments held for the benefit to provide medium to long term capital growth and income.
However, the General Investment Account does not have the same tax free status as the ISA. An investor does benefit from some tax allowances such as dividend allowance and capital gains tax. This means, when used as part of a focused tax-planning strategy, they can give you the flexibility to make the most of your annual tax allowances.
We also regularly use these General Investment Accounts to help fund future ISA and Pension contributions for even greater tax efficiency.
Investment Bonds generally fall into two categories, Onshore or Offshore and the main difference is their tax treatment.
In high-level terms, Onshore Bonds are subject to UK corporation tax, while Offshore bonds are issued from tax havens outside of the UK, for example the Isle of Man, Dublin, Luxembourg or the Channel Islands, where there is little, or no tax charged on the funds.
Investment Bonds can be set up on the following bases:
On death of the life assured (or the second/last to die with joint/multiple life plans), up to 101% (depending on the product) of the value of the fund is payable to your beneficiaries.
Investment Bonds can invest in a range of investments (varies between providers) and some also allow for a third party discretionary fund manager to be appointed.
They are designed to provide capital growth but can also facilitate a regular income withdrawal. Regular withdrawals of up to 5% of the amount invested may be taken each year free of any immediate tax liability until 100% of the original investment has been withdrawn. Withdrawals in excess of the 5% is possible, but this could result in a tax charge. As always, this is not as simple as it may seem and there are regulations to consider regarding the 5% withdrawal rate and withdrawals in general for an Investment Bond which means taking advice is recommended.
The use of an Investment Bond can be very beneficial to your financial planning needs. This has become even more apparent following changes to tax rates on capital gains and dividends. However, the use of bonds comes with complications that could un-intentionally create a tax liability so advice is highly recommended.
At Sheila Tarr we also have access to and advise on what is termed esoteric investments. These are specialist investments that can be used to great effect for a client’s long term investment goals and tax planning.
This could include:
They all offer different benefits and various tax advantages. Here are some examples.
VCTs are investment companies listed on the London Stock Exchange that raise money from investors to invest in young, privately-owned companies not listed on the stock market or listed on the junior market Aim.
When someone invests in a VCT they become a shareholder of the trust itself, giving them exposure to any investments the VCT makes after the investment as well as the existing portfolio. VCTs were introduced in 1995, as a way to offer generous tax breaks and become a well-established alternative for experienced investors.
VCT investment is long-term and not for everyone. Anyone investing needs to be aware that long-term thinking is required, as years could pass for successful investments to pay off and the potential for those that fail to result in a total loss of money.
VCTs are for experienced investors who don’t demand immediate liquidity and can withstand a potential loss. In return for this higher risk investing in future driver companies for economic growth, investors stand to get up to 30 per cent income tax relief and tax-free dividends.
EIS was developed by the government in order to incentivise investment in high-risk companies. Part of a long-term initiative running since 1994, EIS Investments encourage investors to buy shares in new or young businesses, helping those with high-growth potential to reach those heights of success faster.
While certainly not without its risks, the Enterprise Investment Scheme can help you to diversify your portfolio and make a contribution to the UK economy by boosting businesses and employment.
EIS offers many benefits – such as income tax relief of 30% on your investment.
Another benefit is that investors don’t have to pay any capital gains tax on any profits made after the sale of those shares, and any previous capital gains can be deferred. Additionally, investors are also able to offset any losses they may encounter against their earnings. Of course as with any type of investment, your individual circumstances and various other factors will have a bearing on the finer details.
As with all financial products, taking professional advice is important and this is even more so for specialist products such as these.
Contact us for a free consultation. There’s no obligation on your part and, if we think we’re not the best people to help you, we’ll tell you straight away.