Where possible clients should consider: maximising their annual pension contribution; taking up unused pension allowances from 2008/2009, 2009/2010and 2010/2011; maximising capital gains tax allowances, as well as taking advantage of inheritance tax reliefs (such as the £3000 yearly exemption).
However, the most straightforward and obvious tax break available to savers and investors are Isas. An Isa is very much like a wrapper, within which interest earned on cash and return on investments, as well as any capital gains are virtually tax-free. They are a particularly compelling argument at a time of record low interest rates. So, let us look at the tax breaks and allowances.
The headline figure of £10,680 is the most compelling. There are three options when it comes to clients using their total limit of £10,680 for this year, which can all be put into investment funds or stocks and shares. Or half of it – £5340 – can be put into a savings account, or one can mix the two and have up to half in cash and whatever is left in investments.
With the 2011/2012 annual allowance at £10,680, rising to £11,280 for 2012/2013, a couple could invest up to £43,920 tax-efficiently by using this and next year’s allowances. It should be noted that it is important to keep a stash in cash that can be accessed easily in the event of an emergency.
Over the long term, economic studies show that a stocks and shares Isa has the greater potential to produce higher returns, as history will tell us, and in this climate of low interest rates and the fact that returns are virtually tax-free clients who take a long term view will do better.
For those who do not have a large lump-sum to invest, then a one-off payment of say £500 could be contributed, or a regular savings scheme committing £50 a month should be considered. In actual fact this is a ‘must have’ for the would-be or starter private investor and the beauty of a regular saving scheme is pound cost averaging, which means that clients can benefit from some smoothing to volatility in the stock market.
Anyone can open an adult Isa so long as they are 16, although one needs to be 18 to invest in stocks and shares or investment funds. The Junior Isa was launched in November last year and has an annual limit of £3600 and is open to those under 16. This makes a fabulous present to children, grandchildren and godchildren.