Are Your Investments Tax-Efficient?
Please note this blog post was published over 12 months ago and so may not include the most up-to-date information, for example where regulation around investing has changed.
Changes to tax-efficient savings schemes have made investing for your future more rewarding than ever. With an overhaul of the ways you can withdraw your pension, as well as a shape up of the ISA allowance, now is a great time to make sure you are taking advantage of all the tax-efficient investment opportunities available to you.
It’s not too often that the Government gives away tax receipts, so a boosted ISA allowance and greater pension freedoms are good news for long-term investors. By using tax wrappers like an ISA or pension, you can pay less tax and get a better return from your investment.
ISA allowance on the rise
Currently, the annual ISA tax-free allowance is £15,240. And, from April next year (2017), the amount you will be able to contribute will rise to £20,000, meaning a couple will be able to shelter £40,000 from the taxman each year.
If you haven’t opened a True Potential Stocks and Shares ISA yet, you can get started with just £50 with True Potential Investor. If you have an ISA, but haven’t used up your full £15,240 allowance for the 2016/17 tax year, there’s never been an easier way to top-up.
With impulseSave® from True Potential, you can use our ‘Max My ISA’ feature. This tells you exactly how much of your allowance you have left for the current tax year and allows you to invest the remainder in a single click.
Pensions get greater flexibility
Since April 2015, the way you can draw benefits from your personal pension dramatically changed. You’re no longer forced to buy an annuity and can choose to withdraw your entire pot at once or use your pension like a bank account and withdraw as you need.
Greater freedoms may mean that you choose to invest more into your pension, with the knowledge that you can decide how to use the money when you reach 55. However, it’s worth considering what you might do with your newfound pension freedom. Here are five things to think about:
Leave your pension alone
When you reach 55, you’re entitled to withdraw from your pension, but you don’t have to. You may benefit from leaving the fund alone and continuing to contribute to make the most of your tax-free allowance.
Beware of hidden penalties
Although you shouldn’t be forced to do anything when you reach 55, some firms may fine you if you don’t act. Some older policies penalise you if you don’t buy an annuity or income drawdown product on the date you choose as your pension age.
Consider the tax implications
Any money you withdraw from your pension, other than your tax-free lump sum, is counted as income in the tax year you take it. That means you might tip yourself into a higher rate income tax band if you’re not careful. If you can delay taking pension benefits until your other income falls, you should pay less tax overall.
How to use your 25% tax-free allowance
You can take up to 25% of your pension fund tax-free when you reach retirement age. Since April last year, you can choose not to take this lump sum but receive 25% of withdrawals tax-free. The remaining 75% of each withdrawal would be taxed at your marginal rate.
Reducing your annual allowance
When you take money out of your pension, other than your tax-free lump sum, your annual allowance is reduced. If you only take your tax-free cash, you can continue to invest £40,000 a year into your pension. If you take more than that, you will only be able to add £10,000 a year into your pension (or £30,000 if you have a final-salary pension). Think about whether you’d prefer to keep adding to your investment for an extra few years.
Great flexibility for your pension is good news. You now have much more control over your money in retirement than you used to. However, it’s important that you plan ahead so that you know your rights, don’t get penalised, don’t pay too much tax and don’t lose out on investment growth unnecessarily.Open a TPI Pension Open a Stocks and Shares ISA