With UK savings rates at record low levels, more people are considering longer term investments as an alternative.
For many, investing is a way to build a financially secure future. Building an investment portfolio is as individual as you are. Depending at what stage in life you’re at, your goals and the risk you are prepared to take to achieve them will be very different.
You may already have a portfolio of investments or may be starting out as a new investor. Either way, we at Future Start can use our expertise to advise and support you.
So how can Future Start help you?
We aim to provide answers to all the questions you may have around investing and what it means for you and your financial goals.
We regularly meet with clients who have built up various investments over the years. (In fact we have been approached on more than one occasion by clients with carrier bags of paperwork relating to these investments!). Through our robust financial planning process we help you to be clear about what these investments are and whether they are suited to helping you achieve your financial goals.
Once we understand your goals, time frames and level of risk you are prepared to take to achieve them we set about preparing your personalised financial plan. As Independent Financial Planners, we consider all products in the market place when determining which are best placed to meet your goals. We will recommend the most suitable products based on the information that we obtained throughout the fact-finding stage of our financial planning process. These factors include, but are not limited to, your personal tax situation, your employment and what options are available through your employer, your risk profile, your beliefs and preferences, your goals, your time frames, existing provisions and past investment experience.
For more information on investing continue reading or download our free guide, The Fundamentals of Investing.
Our goal at Future Start is to work with our clients to achieve their goals. Whatever you are saving for, whether large or small, if you are just starting out or have amassed savings or investments that you need help or guidance with, we can help.
Feel free to get in touch today.
Stage 2 – Analysis & Design what happens here?
If you have read our “Our services explained” guide, you will be familiar with ‘Stage 2 – the Analysis & Design of your financial plan’.
Once ‘Stage 1 – the Fact Find’ is completed – Future Start proceeds to carry out the Analysis and Design for you. Here is an insight as to what this stage entails.
The following sections give a summarised explanation of some of the key considerations we take into account when building your personal investment portfolio.
Different asset classes have different investment characteristics and carry different forms of risk. A technique known as Modern Portfolio Theory, originating from the work of Professor Harry Markowiitz, found that different combinations of asset classes can be selected by portfolio managers to provide the optimal return for a given level of risk. So by assessing your risk profile it is then possible to determine the correct combination of asset classes to provide the optimal return for the level of risk you are prepared to take to achieve any given goal you may have.
Modern Portfolio Theory is concerned with the way in which portfolios can be constructed to maximise returns and minimise risks. Essential to portfolio theory is the assumption that investors are risk averse and would choose a less risky investment if they were offered the choice of two that offered the same return. The higher risk investment would only be chosen if it rewarded the investor with a higher return. The implication is that a rational investor would not invest in a portfolio if an alternative portfolio existed with a more favourable risk-return profile. In other words, why take more risk than is necessary if the outcome is the same.
Taking out opposing investment positions so that if one falls, the other rises.
Holding a range of asset classes. Each different type of asset will perform well in certain market conditions. By spreading the portfolios exposure across a range of asset classes the fluctuations caused by most economic and financial events can be smoothed out. Not only can diversification be achieved by spreading your investment across asset classes, but also by spreading the investment across market sectors and geographical locations.
‘Cash investments’ (commonly referred to as ‘cash’) is the term usually given to savings accounts or similar arrangements that promise to pay a rate of interest and return your original capital investment intact.
Cash investments are relatively straightforward and are generally considered low risk investments. As with any investments, cash is not without risk. Although the initial cash investment is meant to be returned intact, this may not happen if the bank, building society or other financial institution has defaulted. An added level of security is to keep any investment with a single financial institution below the level of compensation offered by the Financial Services Compensation Scheme.
Another issue with holding cash investments is that over time the returns could be eroded by the effects of inflation and after tax is deducted, the real return could potentially be negative.
At Future Start we always recommend that every client retains a proportion of their portfolio in cash. As a minimum you should retain sufficient cash for unexpected emergencies and/or any short term planned expenditure.
A bond is a financial instrument that gives the holder the right to interest payments and the return of capital on loans made to governments and companies. They are often referred to as fixed interest securities. A loan to the UK Government is known as a Gilt. A loan to a company is known as a Corporate Bond. Gilts are generally seen as lower risk than Corporate Bonds as it is unlikely that the UK government will default on its repayments.
Investing in property can include direct or indirect investments in UK residential property, UK commercial property or property abroad. Returns come from both rents and capital appreciation.
With such investments, one must consider the costs of ownership, such as the fees for maintenance and management of the properties. Other potential risks include the chance that the tenants may not pay their rent or that properties may be vacant over varying periods.
Direct investments in property are also less liquid than cash, bonds or shares, as buying and selling buildings can be a lengthy and time consuming process. Therefore a key risk attached to direct property investments is that investors may not be able to withdraw their money as and when required.
Sometimes referred to as “stocks” or “shares”, equities represent an ownership interest in a company. Equity returns are influenced by a wide variety of factors but the main ones are the underlying performance of each company and the wider economic environment. As future cash flows are uncertain, market sentiment can have a greater impact on the price of equities than other asset classes. Equities can therefore be considered higher risk than cash, bonds and property.
Types of Investments & Tax Wrappers
There are many different investments and tax wrappers in which to hold asset classes. Not all product wrappers can accommodate all asset classes and not all product wrappers are appropriate for all clients. To understand your circumstances and determine the best and most suitable investment(s) and/or tax wrapper(s) Future Start conduct a detailed fact find and risk assessment during stage 1 of our Financial Planning Process.
Earlier we highlighted the benefits of diversification in relation to asset classes, however, diversification across tax wrappers and investment products can also be beneficial. Not only can using certain tax wrappers and investments save tax today but could also, potentially, save you tax in the future when you start to draw down on your plans.
The following are some of the investments and tax wrappers that Future Start consider as part of our ‘Analysis and Design’ process:
The growth and income on the assets held within an ISA is free from taxes.
There are many different types of ISA’s and the limit to what you can pay in each year changes. For more details visit: https://www.gov.uk/individual-savings-accounts/overview.
Some useful facts to know about ISA’s:
- You can’t transfer any non-ISA shares you already own into an ISA unless they’re from an employee share schemes.
- If your ISA is ‘flexible’, you can take out cash then put it back in during the same tax year without reducing your current year’s allowance. Your provider can tell you if your ISA is flexible.
- It is possible to transfer your ISA
You can transfer:
- a cash ISA to another cash ISA with a different provider
- a stocks and shares ISAs to another stocks and shares ISA with a different provider
- from one kind of ISA to another, e.g. from a cash ISA to a stocks and shares ISA and vice versa
- If you want to transfer money you’ve invested in an ISA this current year, you must transfer all of it.
- For money you invested in previous years, you can choose to transfer all or part of your savings.
- If you open an Individual Savings Account (ISA) in the UK and then move abroad, you can’t put money into it after you move (unless you’re a Crown employee working overseas or their spouse or civil partner). You can keep your ISA open and you’ll still get UK tax relief on money and investments held in it.
- ISA investments will form part of your estate for Inheritance Tax purposes
- If your spouse or civil partner died on or after 3 December 2014, you can inherit their ISA allowance
A pension is a way of saving for later life. To encourage people to save, pensions attract various tax benefits.
- Income and growth within a pension is free of tax.
- Contributions into a qualifying pension scheme receive tax relief.
- When drawn out pensions often allow for a tax free lump sum to be taken (usually up to 25% of the fund value) with the rest taxed at your marginal rate of income tax.
Thanks to recent changes in legislation unused pension funds on death can now be passed on in a tax efficient manner to dependents or other nominated beneficiaries. This change in legislation has opened up many financial planning opportunities that we use with our clients. To find out more call or book an appointment with one of our qualified advisers today.
Pensions have various limits on what you can contribute and receive tax relief on over the course of a year. In addition you are also limited in how much you can pay into a pension over the course of your lifetime without attracting a tax charge. For details of these limits visit https://www.gov.uk/tax-on-your-private-pension/overview.
Investment bonds mainly fall into two categories, onshore and offshore. The main difference is their tax treatment. In high-level terms, those onshore are subject to UK corporation tax, which is offset by your provider, while offshore bonds are issued from tax havens outside of the UK, for example the Isle of Man, Dublin, Luxembourg or the Channel Islands, where there is little or no tax charged on the funds.
The tax you pay on investment bonds, both offshore and onshore, is dependent on your personal circumstances. In the hands of the investor, where there is a ‘chargeable gain’, tax due is usually assessed as income tax.
To find out more about investment bonds call or book an appointment with one of our qualified advisers today.
- Structured deposits – Structured deposits are savings accounts, offered from time to time by some banks, building societies and National Savings & Investments, where the rate of interest you get depends on how the stock market index or other measure performs. If the stock market index falls, you will usually get no interest at all. But – unlike structured investments (see below) the money you originally invest has the same protection as you get with any other savings account.
- Structured investments – Structured investments are commonly offered by insurance companies and banks. Your money typically buys two underlying investments, one to protect your capital and another to provide the bonus. The return you get depends on how the stock market index or other measure performs. In addition, if it performs badly or the firms providing the underlying investments fail, you may lose some or all of your original investment.
To find out more about structured products call or book an appointment with one of our qualified advisers today.
UK resident investors holding unit trusts or OEICs who receive dividends, rental income and/or interest throughout the tax year, whether reinvested or drawn out, may have to pay income tax at the prevailing rates. The level of income tax you pay depends on your personal circumstances. You may have allowances available to offset against some or all of the tax due. Full or partial encashment could give rise to a capital gains tax liability. Individuals and trustees have capital gains tax allowances available that can be offset against any capital gains tax due. There are annual limits set on allowances. Visit https://www.gov.uk/government/publications/rates-and-allowances-income-tax/income-tax-rates-and-allowances-current-and-past for details of tax rates and allowances.
To find out more about unit trusts and open-ended investment companies call or book an appointment with one of our qualified advisers today.
UK resident investors holding investment trusts who receive dividends, rental income and/or interest throughout the tax year, whether reinvested or drawn out, may have to pay income tax at the prevailing rates. The level of income tax you pay depends on your personal circumstances. You may have allowances available to offset against some or all of the tax due. Full or partial encashment could give rise to a capital gains tax liability. Individuals and trustees have capital gains tax allowances available that can be offset against any capital gains tax due. There are annual limits set on allowances. Visit https://www.gov.uk/government/publications/rates-and-allowances-income-tax/income-tax-rates-and-allowances-current-and-past for details of tax rates and allowances.
To find out more about investment trusts call or book an appointment with one of our qualified advisers today
Due to valuable support VCT’s bring to the economy, they get special tax benefits.
VCT’s are classified as high risk investments which means they are more suited to the experienced investor. They can prove difficult to sell when you require your capital back because there is little demand for a VCT’s shares on the secondary market. VCT’s should only make up a small amount of an investor’s portfolio, with the rest in more conventional investments.
VCTs are generally higher risk than more conventional investment companies given the nature of the companies in which they invest. In addition, because they tend to invest in unquoted companies the value of the underlying investments of a VCT can be uncertain.
Returns are not guaranteed and you may get back less than you invest or even nothing at all.
What are the tax advantages with a VCT?
- No income tax on dividends
- No capital gains tax on the disposal of the shares in a VCT, however the VCT must have been an approved VCT when the shares were acquired and when they were sold and the investor must be 18 or over
- Investment into new VCT shares can attract up to 30% income tax relief
For example: if you were to purchase £100,000 of new VCT shares it would be possible to reduce your income tax bill by up to £30,000. It is not possible to claim a rebate which is greater than the amount of income tax that you paid in the year of investment.
It should be noted that the investment needs to be held for at least 5 years or otherwise the tax rebate needs to be returned.
The maximum investment in to a VCT per tax year is currently £200,000.
To find out more about venture capital trusts call or book an appointment with one of our qualified advisers today.
It is possible to invest through an EIS Fund where an EIS fund manager will invest on your behalf in a number of qualifying companies. You are still the owner of the shares. There are a number of risks associated with investment into an EIS including:
- Liquidity – the shares are those of smaller companies not listed on the London Stock Exchange and as such have no secondary market to buy and sell them.
- Smaller companies have an increased chance of failure and their share price is more volatile, meaning losses are more likely and could be more significant to those of larger more established companies.
Tax legislation could change or the underlying investment could fail to meet the EIS qualifying requirements which means tax advantages could be lost
What are the tax advantages with an EIS?
Income tax relief
- Investment into an EIS qualifying investment can attract up to 30% income tax relief.For example: if you invest £100,000 into an EIS qualifying investment it would be possible to reduce your income tax bill by up to £30,000. It is not possible to claim a rebate which is greater than the amount of income tax that you paid in the year of investment.
It should be noted that the investment needs to be held for at least 3 years from the date of issue or for three years from commencement of trade, if later otherwise the tax rebate needs to be returned.
The maximum annual amount an individual can invest under an EIS is £1million. With an EIS it is possible to elect that the investment be made for the previous tax year, thus applying the 30% tax relief to the previous year’s income tax. This means it may be possible to invest up to £2million in any one year.
Capital gains tax
No Capital Gains Tax is payable on the disposal of shares after three years, or three years after commencement of trade, if later, provided the EIS initial income tax relief was given and not withdrawn on those shares.
Inheritance Tax Relief
Shares in EIS qualifying companies will generally qualify for Business Property Relief for Inheritance Tax purposes at rates of up to 100% after two years of holding such investment, so that any liability for Inheritance Tax is reduced or eliminated in respect of such shares.
Capital Gains Tax Deferral Relief
Tax on capital gains realised on a different asset can be deferred for as long as the EIS qualifying shares are held or even indefinitely, where disposal of that asset was less than 36 months before the date of the issue of shares in the EIS investment or less than 12 months after it.
If the EIS investment is held until death the deferred gain will become exempt from capital gains tax.
If EIS shares are disposed of at any time at a loss (after taking into account income tax relief), such a loss can be set against the investor’s capital gains, or his income in the year of disposal or the previous year.
How do we choose who we use?
We carry out rigorous due diligence on any provider or product that we recommend to our clients. We would never invest our clients’ money in an area that we would not invest ourselves.
We have several pieces of software that we use to carry out thousands of comparisons of blends of funds, providers and product wrappers in order to find the specific features that our clients require at the most competitive prices. We use this software in addition to our expertise and knowledge to compare existing providers, and how they stack up against your current goals and objectives.
In order to keep our knowledge up to date in a regularly changing industry we adhere to ongoing continued professional development and employ the services of a specialist compliance firm.