Making your wealth grow and being able to retire when and how you want is one of most people’s important financial objectives. But achieving this goal takes planning and perseverance.
Bank and building society accounts
Although, as we have already suggested, history records that long-term investment in shares will outperform savings with a bank or building society, you should not overlook (1) the somewhat higher degree of certainty over investment return, albeit current rates are less than inflation and (2) the (usually) ready access to your funds. Interest is liable to income tax.
Such accounts are often held as emergency funds. An ideal solution is to have instant access to a sum equal to at least two months’ income.
Bricks and mortar
Property, whether commercial or residential, is generally considered a long-term investment and there are signs that buy-to-let investors are returning to the market. The recession of 2008/09 saw many buy-to-let investors bale out of the market. The reduction in property values resulted in a less than buoyant rental market and has caused many to rue their investment plan.
However, returns have improved and many now see the current state of the market as a buying opportunity, but only the very brave are venturing to acquire property as an investment. ‘Buy-to-let’ mortgages may generally be available to fund as much as 75% of the cost or property valuation, whichever is the lower.
Those investing in property seek a gross return that covers all outgoings and a net return from rent which is greater than the interest that could be gained on deposit while the risk of the investment is weighed against the prospect of capital growth.
However advice on any property investment is always an area where advice is essential.
Build a framework
What you need is a realistic framework so you can better seize financial opportunities as they arise. To develop this framework for your financial decisions, follow the five Ds:
- Decide where you are today – what has been the impact of the financial crisis?
- Define where you want to be in the future
- Discuss your goals and objectives with us
- Develop with us a plan to move toward your goals, and
- Drive forward to make it happen
Those with a lump sum to invest might consider an investment bond. This is a life insurance product and the norm is to draw an annual tax free sum equal to 5% of the original investment for the life of the bond. On maturity, usually after 20 years, any surplus is taxable, but with a credit for basic rate tax. Higher rate tax might be payable, but ‘top slicing’ relief might apply.
Making sure the pieces fit
Putting your financial affairs in order against the current financial difficulties is a bit like completing a jigsaw, where the main pieces are savings, investment, protection, and taxation. If you get it right, the picture can be very attractive, but get it wrong and the picture can look very muddled. The problem is that life does not come with a picture on the lid.
- What do you do with your current investments?
- How can you gauge the difference between saving and investing?
- What sort of insurance do you need?
- How much should you be salting away for your retirement?
- Are you paying too much tax?
The answers to these questions are different for each person, depending on individual circumstances, but there are certain strategies that make sense in most cases. If you can identify the broad principles that are relevant to your situation, you can use them to improve your financial standing.
Use this section of our guide in the same way you would use the picture on the box of a jigsaw puzzle. The process is ongoing; you must monitor your plan and adjust it as necessary to ensure that you are moving in the right direction. It is a simple concept – yet many who build the framework for a plan fall short when it comes to implementing it. Don’t be one of them.
Making the most of your investments
When determining your financial strategy, it is important to understand the difference between saving and investing. If you save money on deposit with a bank or building society you will earn [a low rate of] interest.
If you buy shares or invest in a share-backed plan such as a unit trust or a life assurance policy, you will have the opportunity to earn dividend income and benefit from [potential] capital growth if the shares go up [and stay up] in value. Records show that in the long term the best share investments outstrip the best building society accounts in terms of the total returns they generate.
However, it is important to remember that shares can go down in value as well as up, and dividend income can fluctuate. If you choose the wrong investment you can get back less than you put in. The watchword, therefore, must be caution. You will need to consider the most important factors for you in your investment strategy.
Other tax-break investments
Investments under the enterprise investment scheme (EIS) and investments in venture capital trusts (VCTs) are generally higher-risk investments. However, tax breaks aimed at encouraging new risk capital mean that EIS and VCT investments may have a place in your investment strategy. There is an even more high risk version of EIS known as Seed EIS which has advantageous tax breaks to investors in start up businesses.
Setting desirable and realistic goals
This involves balancing head (financially prudent strategies) and heart (emotionally acceptable thresholds). You need to bridge the gap between what you can achieve financially with what you dream of doing.
Try to meet your objectives by setting a number of short, medium and long-term goals and prioritise them within each category.
Common goals include the desire to:
- Accumulate a sizeable estate to pass on to your heirs
- Increase the assets going to your heirs by using various estate planning techniques, perhaps including a lifetime gifts strategy
- Tie in charitable aims with your own family goals
- Accumulate enough wealth to buy a business, a holiday home, etc
- Be able to retire comfortably
- Have sufficient funds and insurance cover in the event of serious illness or loss
- Develop an investment plan that may provide a hedge against market fluctuations and inflation
- Minimise taxes on income and capital.
Stocks and shares
Investment in stocks and shares gives, in theory, the best chance of long-term growth. On the other hand, it is often a volatile market, and should perhaps be avoided by the faint-hearted. Investment in unit trusts and investment trusts are designed to spread the risk, and add an element of management, without the expense of broker advice, for the small investor. Capital gains are charged to tax, as are dividends.
Paying tax on your savings and investment earnings is obviously to be avoided if at all possible. There are a number of investment products that produce tax-free income, including some National Savings products.
The enterprise investment scheme
Subject to various conditions, such investments attract income tax relief. Contributions may be carried back by one tax year provided the maximum amount for which relief is sought is not exceeded.
More importantly, they will attract unlimited CGT ‘deferral relief’ on the investment of chargeable gains, delaying tax which would otherwise be payable on disposals.
Seed EIS is available only for investments in start up companies and has more restrictive conditions. It provides both income tax relief and a capital gains tax shelter on the funds invested.
Speak to us to see how the above schemes could help you.