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What's the most tax efficient way to invest?
October 10, 2011 at 2:57 PM
Great accountancy is about more than just crunching the numbers, which is why we've asked Wow's Financial Planner, Geoffrey Mabbutt to answer one of the questions that he gets asked the most.
There are many ways to invest – ISAs, pensions, stocks & shares and even plain old savings accounts - and we often get asked by our clients “which one is best?” Well, the answer obviously depends on your specific circumstances, but from a tax perspective there is usually a clear winner.
Wow offer complimentary investment reviews. Get in touch if you'd like us to review your existing ISA & Pension funds.
Some numbers to work with...
Let’s assume you have £10,680 (your annual ISA allowance) to invest each year. You save for a period of 20 years and you are a 40% tax payer during that time. Let's assume you get 5% per annum investment return (wherever you invest).
What you get back can be significantly affected by the tax treatment of different investments. Here is a summary of how some of the main options compare:
Your return after 20 years (after tax)
| Investment Type | Fund at the end of 20 years (after tax) |
| Bank Deposit Account | £291,639 |
| Investment ISA | £362,709 |
| Offshore Bond | £303,065 |
| Personal Pension | £604,379 |
With a pension, you can draw 25% of the fund as a tax free lump sum (provided you are over 55), so you would be able to get £151,095 in the above example. The remainder of the fund, £453,284, would need to provide an income on which you would be taxed at your rate of income tax at the time.
This example highlights what a dramatic difference tax can make to overall returns. People often pay so much attention to interest rates or investment returns, they fail to take into account the huge difference simply investing in the most tax efficient way can make.
How Wow can help
We specialise in helping our clients get this right and minimise the amount of tax they pay on their savings & investments. Please get in touch to chat to one of our Tax & Financial Planners who will be able to review your existing investments to see if they are as tax efficient as they can be.
Wow offer complimentary investment reviews. Get in touch if you'd like us to review your existing ISA & Pension funds.
Please be aware....
When investing, the value of your investment and the income from it can fall as well as rise and is not guaranteed - you may not get back the full amount invested. The past is not necessarily a guide to future performance and any tax rules may change in the future. You probably knew this stuff anyway, but just in case....
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Posted by
Simon Weeks
on
Oct 19th, 2011
Pensions look even more attractive from a tax perspective when you consider Inheritance Tax too. Prior to drawing on your pension fund, the whole value will usually be completely outside of your estate for IHT purposes. The other vehicles in the article are subject to IHT so you could see 40% of the value of these wiped out on death if you don't ensure you get everything structured properly. Leave a Reply
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