A pension remains one of the most tax-efficient ways of saving for your retirement. The government views retirement savings as being so important that it offers generous tax benefits to encourage us to make our own pension provision. However, the tax benefits will depend on your circumstances and tax rules are subject to change by the government.
Topic: Financial News
Pensions
Money invested into a pension receives tax relief. That means your pension contributions (subject to limits set by the government) are increased by the percentage amount of your income tax bracket. So, a non- or a basic-rate taxpayer only has to pay 80 pence for each £1 that is invested in their pension (an uplift of 20 per cent). Higher-rate taxpayers effectively only pay 60 pence for each £1 invested (an uplift of 40 per cent) and additional-rate taxpayers (in the 50 per cent band) can benefit from 50 per cent relief.
How the taxman treats investments
Different investments are subject to different tax treatment. The following is based on our understanding, as at 6 April 2011, of current taxation, legislation and HM Revenue & Customs (HMRC) practice, all of which are subject to change without notice. The impact of taxation (and any tax relief) depends on individual circumstances.
Offshore investments
For the appropriate investor looking to achieve capital security, growth or income, there are a number of advantages to investing offshore, particularly with regards to utilising the tax deferral benefits. You can defer paying tax for the lifetime of the investment, so your investment rolls up without tax being deducted, but you still have to pay tax at your highest rate when you cash the investment in. As a result, with careful planning, a variety of savers could put offshore investments to good use.
Absolute return funds
In the current investment climate, absolute return funds could offer the ordinary investor access to a range of more sophisticated investment techniques previously only available to the very wealthy. These products, which have only become generally available in more recent years, aim to provide a positive return annually regardless of what is happening in the stock market. However, this is not to say they can’t fall in value. Fund managers stress that investors should not expect the funds to make money for them month in, month out, but over the medium term – five years – they should produce positive returns.
Investing for income
During these difficult economic times, one of the tools available to the Bank of England to stimulate the economy is interest rates. Lower interest rates mean that it is cheaper to borrow money and people have more to spend, hopefully stimulating the economy and reducing the risk of deflation. This is why the Bank of England has aggressively cut them.
Investment distribution bonds
Distribution bonds are intended to provide income with minimal affects on your original investment. They attempt to ensure that any tax-free returns, up to 5 per cent and usually in the form of dividends, do not greatly reduce your original investment, thereby providing the opportunity for future long-term growth. They also combine two different asset classes, equities and bonds, inside one investment wrapper.
Individual savings accounts
An Individual Savings Account (ISA) is a tax-efficient wrapper. Within an ISA you pay no capital gains tax and no further tax on the income, making it one of the most tax-efficient savings vehicles available.
Investment trusts
Investment trusts are based upon fixed amounts of capital divided into shares. This makes them closed ended, unlike the open-ended structure of unit trusts. They can be one of the easiest and most cost-effective ways to invest in the stock market. Once the capital has been divided into shares, you can purchase the shares. When an investment trust sells shares, it is not taxed on any capital gains it has made. By contrast, private investors are subject to capital gains tax when they sell shares in their own portfolio.
Open-ended investment companies
Open-ended investment companies (OEICs) are stock market-quoted collective investment schemes. Like unit trusts and investment trusts they invest in a variety of assets to generate a return for investors.