If you’ve been saving in a UK bank account for the last few years, you must be pretty annoyed at the returns you’ve had and if you aren’t, why not? The thing is banks have been giving very little back for the privilege of working your money to boost their own profits, but you can’t blame them if you haven’t been diligent. Bank employees naturally sell the investment vehicle that provides them with the most commission because believe it or not, your friendly bank based financial advisor is nothing more than a checkout sales person in a cheap suit.
Who Watches the Watchmen?
Okay, so you don’t really need to police your bank financial advisor or your independent financial advisor (IFA). All you need to do is ask them the right question and to do that you need to do a little research. You need to understand how to maximise your investments, but to do that you need to know what you can do with your money and most of it involves knowing what your tax limits are.
Individual Savings Accounts (ISAs)
ISAs are good for saving or investing without paying tax and in the tax year 2013-2014 you can save or invest as much as £5,760 and you pay nothing to HMRC on the dividends or interest you receive. In reality, your interest on savings is not going to amount to a great deal with only as much as 3% return on a decent ISA and that’s if you lock in your money for a fixed period. If you have to dip into your savings, you can lose 0.5% or more depending on which ISA you choose.
Some ISAs involve investing your money in shares or regular stock, but these investments are generally higher risk and you are unlikely to get a 100% capital protected investment (capital protected means your investment is safe) vehicle in any UK based investment. Occasionally, you can find a product that will give you a 95% capital protected investment with guaranteed returns, but these kinds of investments are found on rare occasions that run for short periods when banks are trying hard to acquire new customers. If these hit the market, it could be worth you switching your investments, but check for any penalties that come with ISAs that are not classed as easy-access investments.
Tax Efficient Retirement Planning
Currently, a £50,000 per year limit exists (£40,000 from 2014-15) on the amount of pension contributions that are not taxable. You will be taxed on the income from the pension when you draw from your pot, but if we’re honest, there are not many of us able to reach the limit even in a good year. Although we don’t often have the opportunity to maximise our retirement investment we sometimes have an opportunity to really take advantage of tax free investments such as receiving large redundancy settlements or profiting from the sale of property.
When you reach your £50k limit, you should invest your money off-shore and considering the money will already be taxed as income in the UK, you will not be taxed on the investment when you place it in an investment vehicle in somewhere like the Channel Islands. It’s no secret there are much more attractive investments available off-shore than are available in the UK mainland.
Just be aware that drawing profit from your off-shore investment while still living and domiciled on the UK will count towards your taxable income. Some less than ethical people would simple draw the money from UK cash points without declaring it as income, but the UK government is clamping down on people who are avoiding tax and are especially concerned with people who stockpile money off-shore.
Abel Froman is an independent financial blogger who regularly advises people on the best way to maximise their return on investment. Although money advice is his day job, he never leaves his blog at the office and loves to help people invest wisely.