Maximising your Investment returns

I mentioned last month that some of the attractive headline rates of interest being advertised are not what they seem. What kind of problem did I mean? Well, the deposit taker may limit the amounts they will accept at the advertised rate, and pay a much lower rate on the excess; or they may include a “bonus” for a fixed period, after which the rate falls drastically, sometimes without you being advised. Sometimes they require you to transfer your current account and monthly pay cheque to them, which you may not wish to do. You need to approach such offers with care, therefore, but with the appropriate research genuine rates of around 4% 1 are available at the moment, both for cash ISA’s and for other cash.

Some people say they are waiting for rates to increase. The official Bank of England Base Rate remains at 0.5%, and although this could change at any time, in my opinion the current fragile recovery could not withstand a combination of higher rates and higher taxes – and the latter is now a racing certainty. The only sensible strategy is to optimise your return in today’s circumstances.

Any strategy to improve your investment return must be two-pronged: first to receive the best rate available on your funds consistent with ensuring they are securely invested, and secondly to take advantage of the legitimate tax-saving opportunities available. But the very first step is to determine what your investment parameters might be. For example, everyone should have a modest emergency fund, which by definition needs to be readily available. The period of time for which you can commit your funds will obviously affect the return available, with short money attracting the lowest rates. If you can take a longer view, not only will you get a higher interest return, but you may also be able to take advantage of the more sophisticated tax wrappers, such as pension funds and investment bonds.

The simplest tax wrapper is the ISA, which enables everyone to invest up to £10,200 (of which £5100 may be invested in a cash ISA). Funds invested in ISA’s are immediately available, although there may be interest penalties for early encashment. If you use each year’s allowance conscientiously (and remember if you don’t use it, you lose it) it is possible to build up a substantial investment fund in relatively few years, and the whole fund will be free of income tax, with the exception of un-reclaimable withholding tax on equity holdings, and capital gains taxes. 2

Pensions should form a part of everyone’s planning, as they enjoy some significant tax breaks. Most people will get relief at their highest marginal rate on contributions to their pension, and on retirement up to 25% of the accumulated fund may be withdrawn tax-free. The balance will be taxed when it is translated into a monthly pension, but often this will be only at the basic rate, providing a further tax saving3. However, the funds are not readily accessible until retirement has been reached, so your pension should form the second tier of your investment strategy. Despite their enormous advantages, pensions are notoriously complicated, and professional advice should always be taken before commencing a pension plan.

There are other tax wrappers too, and I hope to deal with some of them in future contributions. In the meantime, remember that a financial health check could make a material difference to the future security and prosperity of you and your loved ones. In today’s climate, it is more important than ever that you do not delay your essential planning.

To receive a free guide covering Wealth Management, Retirement Planning or Inheritance Tax Planning, produced by St. James’s Place Wealth Management, contact Andrew Stevens, Associate Partner of the St. James’s Place Partnership on 020 7399 6835, by email This e-mail address is being protected from spambots. You need JavaScript enabled to view it or visit www.sjpp.co.uk/andrewstevens

1 Examples: Nationwide 4 year fixed rate ISA, offered 6.6.10; Lloyds TSB eBond, offered 6.6.10.
 

2 Investment income within the fund will be subject to tax deducted at source, which is not repayable. Please note that the  favourable tax treatment of ISA’s may not be maintained and may be subject to future changes in legislation.
 

3 Assuming total taxable income after retirement is taxed substantially at lower rates