Springtime traditionally sees the financial services industry go into overdrive as investors seize the opportunity to maximise all their available tax reliefs prior to the year-end in April. This pressure has a knock-on effect that goes beyond ensuring that all the Isa allowances have been maximised; it is the perfect time for investors to review all of the vehicles they are using to build their portfolio.
Isas are the name of the game for many investors, but there is a much wider range of options out there and active management is the key to getting the most out of every investment, whatever the size or complexity.
Even simple cash deposit accounts benefit from a regular review. The best rates out there frequently come as part of a bonus package offering a special rate for an introductory period. Once this rate has expired, the savvy investor needs to review the market anew. Latest indications from the US are that interest rates will remain static there until at least 2014 so it may be likely that UK banks will follow their lead. Fixed-rate accounts are available for limited periods and the longer the term offered, the better the rate is likely to be.
Another popular investment route is provided by National Savings. These index-linked certificates offer a fixed rate return at RPI plus 0.25 of a percentage point over a five-year period – but their availability is generally limited to a short spring season.
They tend to appear in April but last year were withdrawn by September – early-bird investors need to keep a sharp eye out for this juicy worm. Even when inflation levels are low, they may still offer a better rate of return than some cash on deposit options, provided they are held for the full five years. If they are cashed in early, the rate will be lower.
Optimising clients’ Isa allowances has to be a first priority for advisers. The tax relief benefits for both standard and higher rate taxpayers make this route a no-brainer. From April 2012, the full Isa allowance will increase to £11,280 (£5640 for cash Isas). Finding the right balance between cash Isas and stocks and shares Isas will depend on the investor’s attitude to risk; the proportion of the allowance used for stocks and shares Isas is only limited by the full allowance so the investor can use anything up to the full amount in a stocks and shares Isa – if he or she is comfortable with the associated risks.
Shopping around in the cash Isa market is critical. There are a wide range of rates out there for both new money and for transfers between Isas. Investors often overlook the benefits of transferring from one Isa to another. Many are lured into a particular Isa by a special bonus introductory rate which may drop to an uncompetitive level after the introductory period.
Benefits
Unit trusts offer a good general investment vehicle – and they have one very specific extra benefit: a unit trust can be converted to use up a future Isa allowance. What this means for the investor is that if in any specific tax year new money is not available to save into an Isa, then the unit trust can fill the gap and reap the tax relief benefits. Another advantage of unit trusts has to be the flexibility in the way they are funded. While lump-sum investments are perfectly possible, regular monthly payments can be made into the fund, allowing pound-cost averaging to boost the long-term returns.
Pensions remain one of the most tax-efficient routes for investors, with tax relief available on contributions up to the annual allowance – although pension investments remain locked away until retirement so are only suitable for those who have no need to access the investment in the interim. Changes to the annual allowance have forced many investors to rethink their pension investment policy; the total an individual can invest into a pension fund and attract tax relief dropped from £255,000 in the 2010/2011 tax year to just £50,000 in 2011/2012. This has left some with a requirement to invest surplus income that cannot be met by Isas, National Savings or unit trusts.
For more sophisticated investors looking for a means to reduce the levels of tax they are paying, then venture capital trusts and enterprise investment schemes may provide the solution.
These schemes are designed to encourage individuals to invest indirectly in a range of small higher-risk trading companies whose shares and securities are not listed on a recognised stock exchange. While they do involve a level of risk which the investor must understand and accept, they provide a significant tax benefit by offering tax relief of 30 per cent of the amount of the investment in the year the investment is made, up to £200,000 for each tax year for a VCT and up to £500,000 for an EIS. The relief is delivered through a certificate which is presented with the investor’s annual tax return. In addition, provided the investment is held for a minimum term (five years for VCTs and three for EISs), no tax is payable on dividends or gains from the investment and no capital gains tax is payable on their disposal.
Some product providers offer VCT and EIS schemes aimed at restricting the investment risk, but still keeping within the HMRC rules. It is possible to manage term expectations within these investment schemes using a planned exit which will allow access to the capital after a certain number of years. These tax-reducers are valuable in a diverse portfolio to enable investors to obtain tax relief where pension funding has been restricted or where the better access to the invested capital is required.
Current market conditions challenge both investors and advisers and, as we have seen over recent years, there are few absolutely safe investment vehicles out there. Despite fleeting signs of market optimism, we are clearly in for another difficult year in investment markets, especially in traditionally “safe” markets such as Europe and the US. Dusting off all those products and policies and giving your investment portfolio a thorough spring clean will go some way to ensuring that you not only keep your nose ahead of inflation, but also grow your investment pot. In this climate, complacency costs: careful proactive investment management and good tax planning provide the key to your investment survival.
Carl Lamb is managing director of Almary Green
