Savings and Investments
The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.
Tax treatment varies according to individual circumstances and is subject to change.
Savings and investment products provide a solution for individuals who are seeking to make their money work harder for them.
There are a wide range of options available, from relatively low risk cash options such as bank accounts and government bonds to more adventurous hedge funds and investments in small unlisted companies.
The suitability of each product will ultimately be dependent upon the individual’s circumstances, investment goals and attitude to investment risk.
Types of Investments
Depending on your goal, your tax position and other circumstances will determine the most suitable type of investment for you. Each type of investment will have different tax treatment and features but all can be used in conjunction with each other to plan towards your financial goals.
An Individual Savings Account (ISA) is a tax efficient savings account. Each year the Chancellor of the Exchequer sets the annual limit that can be saved into an ISA in their budget; this is currently set at £20,000 for either cash or a combination of Stocks and Shares.
The types of ISA currently available are:
• Cash ISAs – These essentially are bank accounts where there is no tax on interest. They generally do not offer much capital growth opportunity and are suited to cautious investors. The minimum age of investment is 16.
• Stocks and Shares ISA – Provide the opportunity to invest in stock market shares within a tax efficient environment. The investments can be tailored to the individual’s appetite for investment risk. The minimum age for investment is 18.
• Junior ISA (JISA) – A tax free savings plan for parents or guardians to build a tax free ‘nest egg’ for any child below the age of 18. The maximum contribution for the 2016/17 tax year is £4,368. The fund cannot be accessed until the child reaches that age of 18, at which time it will automatically convert to adult ISA status.
On 6th April 2017, the government launched the Lifetime ISA (LISA). It is available to those aged between 18 and 50 and the government will boost annual contributions of up to £4,000 by 25%, resulting in an annual contribution of £5,000; additional contributions will be possible over this, but will not attract the government bonus.
The funds built up within the LISA accounts will only be able to be withdrawn if the proceeds will be used to purchase a first home or at the point of retirement. An early withdrawal penalty if money is taken out for any other reason is applicable. Further caveats include, that all new applicants must be under the age of 40 before applying, in order to qualify for the bonuses, so those born on or before 6th April 1977 will not be eligible.
Investors do not pay any personal tax on income or gains, but ISAs do pay unrecoverable tax on income from stocks and shares received by the ISA managers.
National Savings and Investments (NS&I)
The government offers a variety of tax free or tax efficient saving and investment opportunities, which are designed to appeal to a broad demographic of ages as well as levels of income.
The range of products on offer include Premium Bonds, which provide an opportunity to ‘win’ interest on savings without risking the capital (although growth is not guaranteed), ISAs, savings accounts and bonds, including a Children’s bond, which provides a competitive rate of interest for those wishing to build funds for children up the age of 16.
The exact range of products can vary at any one time, as some may be available for a limited period or may close to new investors once a pre-specified investment target has been met.
These products appeal to a wide range of investors and are especially suited to those with a more cautious outlook on risk, due to the added security of knowing that the government is unlikely to default on interest payments or repaying capital. However, these products always have a place within a well-diversified investment portfolio.
The current range of products available can be accessed on the NS&I website www.nsandi.com.
Investment Bonds are typically single contribution investment vehicles, so are suited to those individuals with a sizeable sum to invest which is not required for expenditure in the short term.
The tax treatment of investment bonds is not as favourable as that of ISAs, as an investor may be liable for tax on any capital gains achieved whilst holding the bond upon encashment. However, there is an option for bond holders to take tax deferred withdrawals of up to 5% of the original capital value per annum and if these are not taken in a given year, they can be taken as a lump sum cumulative figure, over a maximum of 20 years.
Venture Capital Trust (VCT) and Enterprise Investment Scheme (EIS)
Venture Capital Trusts and Enterprise Investment Schemes provide additional opportunities for wealthier individuals to make additional legitimate tax savings. They are typically suited to those with an adventurous appetite for risk, who have maximised their other pension and wealth planning opportunities and have high levels of liquid cash reserves, held separately to their investment portfolio.
These investment vehicles are similar to each other in principle because they both encourage investment into small unquoted trading companies (on the Alternative Investment Market or AIM) and have certain legislative and tax saving features in common.
A financial adviser will identify which of their clients would be suited to these investments and provide full details in relation to the investment limits and potential tax savings available.
Venture Capital Trusts (VCT) and Enterprise Investment Schemes (EIS) invest in assets that are high risk and can be difficult to sell such as shares in unlisted companies. The value of the investment and the income from it can fall as well as rise and investors may not get back what they originally invested, even taking into account the tax benefits.