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Building your wealth

Build a framework
Making the most of your investments
Tax efficiency
National savings
Investment bonds
Bank and building society accounts
Stocks and shares
Bricks and mortar
ISAs
Other tax-break investments
The enterprise investment scheme
Venture capital trusts

Here's where we can advise

The difference between saving and investing
The tax consequences of different investments
How income and gains will be taxed
Tax sheltered investments
Saving for your retirement
Setting and achieving savings goals
Tax free investments

Making your savings grow and being able to retire when and how you want is one of your most important financial objectives. But achieving this goal takes planning and perseverance. After 16 years of growth in investment and property values the effect of the recession has left many with a significant minus in their expected investment growth rather than a plus.

Making sure the pieces fit

Putting your financial affairs in order against the current financial difficulties is a bit like completing a jigsaw, where the main pieces are savings, investment, protection, and taxation. If you get it right, the picture can be very attractive, but get it wrong and the picture can look very muddled. The problem is that life does not come with a picture on the lid.

What do you do with your current investments?
How can you gauge the difference between saving and investing?
What sort of insurance do you need?
How much should you be salting away for your retirement?
Are you paying too much tax?

The answers to these questions are different for each person, depending on individual circumstances, but there are certain strategies that make sense in most cases. If you can identify the broad principles that are relevant to your situation, you can use them to improve your financial standing.

Use this part of the guide in the same way you would use the picture on the box of a jigsaw puzzle. The process is ongoing; you must monitor your plan and adjust it as necessary to ensure that you are moving in the right direction. It is a simple concept – yet many who build the framework for a plan fall short when it comes to implementing it. Don’t be one of them.

Build a framework

What you need is a realistic framework so you can better seize financial opportunities as they arise. To develop this framework for your financial decisions, follow the five Ds:

Decide where you are today - what has been the impact of the financial crisis?
Define where you want to be in the future
Discuss your goals and objectives with us
Develop with us a plan to move toward your goals, and
Drive forward to make it happen

Setting desirable and realistic goals

This involves balancing head (financially prudent strategies) and heart (emotionally acceptable thresholds). You need to bridge the gap between what you can achieve financially with what you dream of doing.

Try to meet your objectives by setting a number of short, medium and long-term goals and prioritise them within each category.

Common goals include the desire to:

Accumulate a sizeable estate to pass on to your heirs
Increase the assets going to your heirs by using various estate planning techniques, perhaps including a lifetime gifts strategy
Tie in charitable aims with your own family goals
Accumulate enough wealth to buy a business, a holiday home, etc
Be able to retire comfortably
Have sufficient funds and insurance cover in the event of serious illness or loss
Develop an investment plan that may provide a hedge against market fluctuations and inflation
Minimise taxes on income and capital

Making the most of your investments

When determining your financial strategy, it is important to understand the difference between saving and investing. If you save money on deposit with a bank or building society you will earn interest. If you buy shares or invest in a share-backed plan such as a unit trust or a life assurance policy, you will have the opportunity to earn dividend income and benefit from capital growth as the shares go up in value. Records show that in the long term the best share investments outstrip the best building society accounts in terms of the total returns they generate.

However, it is important to remember that shares can go down in value as well as up, and dividend income can fluctuate. If you choose the wrong investment you can get back less than you put in. The watchword, therefore, must be caution. You will need to consider the most important factors for you in your investment strategy.

Tax efficiency

Paying tax on your savings and investment earnings is obviously to be avoided if at all possible. There are a number of investment products that produce tax-free income, including some National Savings products.

National savings

Although the products on offer from National Savings are unlikely to be at the cutting edge, a tax free return of, say, 2% compound guaranteed over five years is a return equal to about 6% for someone paying higher rate tax (40%). Premium bonds may be quoted as offering an 'interest equivalent' of just 1.8%, but there is a chance at winning a tax free million but the odds per £1 bond are 40 billion to one.

Investment bonds

Those with a lump sum to invest might consider an investment bond. This is a life insurance product and the norm is to draw a tax free sum equal to 5% of the original investment for the life of the bond. On maturity, usually after 20 years, any surplus is taxable, but with a credit for basic rate tax. Higher rate tax might be payable, but ‘top slicing’ relief might apply.

Bank and building society accounts

Although, as we have already suggested, history records that long-term investment in shares will outperform savings with a bank or building society, you should not overlook (a) the higher degree of certainty over investment return and (b) the (usually) ready access to your funds. Interest is liable to income tax.

Stocks and shares

Investment in stocks and shares gives, in theory, the best chance of long-term growth. On the other hand, it is a volatile market, and should perhaps be avoided by the faint-hearted. Investment in unit trusts and investment trusts are designed to spread the risk, and add an element of management, without the expense of broker advice, for the small investor. Capital gains are charged to tax, as are dividends.

Bricks and mortar

Property, whether commercial or residential, is generally considered a long-term investment and in 2010 there are signs that buy-to-let investors are returning to the market. The recession of 2008/09 saw many buy-to-let investors bale out of the market. The reduction in property values has resulted in a less than buoyant rental market and has caused many to rue their investment plan. Many now see the current state of the market as a buying opportunity, but only the very brave are venturing to acquire property as an investment. ‘Buy-to-let’ mortgages may generally be available to fund as much as 75% of the cost or property valuation, whichever is the lower. Those investing in property seek a net return from rent which is greater than the interest on the deposit while the risk of the investment is weighed against the prospect of capital growth.

However the credit crunch has affected the type of loans and products available and therefore advice on such an investment is essential.

ISAs

Up to £10,200 can be invested in an ISA this year. The cash element of this allowance is £5,100

Those investing in an ISA have the option to invest the full £10,200 in stocks and shares, or up to £5,100 in cash and deposits, with the same or a different fund manager.

Although most income accruing in an ISA does so tax-free, the tax credit on UK dividend income cannot be recovered. All investments held in ISAs are free of CGT. There is no minimum investment period for funds invested in ISAs – withdrawals can be made at any time without loss of tax relief. However, some plan managers offer incentives, such as better rates of interest, in return for a commitment to restrictions such as a 90-day notice period for withdrawals.

Other tax-break investments

Investments under the enterprise investment scheme (EIS) and investments in Venture Capital Trusts (VCTs) are generally higher-risk investments. However, tax breaks aimed at encouraging new risk capital mean that EIS and VCT investments may have a place in your investment strategy.

The Enterprise Investment Scheme

Subject to various conditions, such investments attract income tax relief, limited to a maximum 20% relief on £500,000 of investment per annum. Contributions may be carried back by one tax year provided the maximum amount for which relief is sought is not exceeded.

More importantly, they will attract unlimited CGT 'deferral relief' on the investment of chargeable gains, delaying tax which would otherwise be payable on disposals. In addition, although increases in the value of shares acquired under the EIS up to the £500,000 limit are not chargeable to CGT (as long as the shares are held for the required period), relief against chargeable gains or income is available for losses. The gross value of the company you buy shares in must not exceed £8 million after the investment and there are restrictions to ensure that investment is targeted at new risk capital.

Venture Capital Trusts

With similar restrictions on the type of company into which funds can be invested, VCTs now allow 30% income tax relief on investments of up to £200,000 each tax year but there is no CGT deferral for investments in VCTs. Gains and dividends on VCT shares are tax exempt provided the minimum holding periods are met.

Talk to us to ensure that you understand the advantages and risks of tax-break investments