6th June 2016
3 Simple Ways to Save and Invest Tax Efficiently
Many savers and investors are needlessly giving away money which they don’t have to.
In this article we’ll show you 3 ways to save and invest efficiently and boost your saving and investment funds.
1. Start A Personal Pension
This is a way for people to defer tax as they save for retirement.
Your pension payments usually go into an investment fund, although you can also get Self Invested Personal Pensions (SIPPs) where you get much more control over how your pension fund is invested.
You receive tax relief on the payments you make: for basic rate taxpayers, the Government pays £25 into your pension for every £100 you put in, and for higher rate taxpayers there is an additional £25 of tax relief for every £100 you pay in.
There is a maximum amount that you can pay towards all of your pensions each year to receive tax relief.
This is called an annual allowance and for high earners, earning £150,000 and above this is currently £40,000. Any amount you contribute above that will not benefit from tax relief.
This has reduced down already from the previous amount of £50,000 and in April 2016, this will reduce down further to £10,000 per year which will have a huge impact on you if you are a high earner saving towards your retirement.
Did you know though that you can carry forward any allowance that you have not used in the previous 3 years and include it in your current years’ allowance?
On retirement you can take out up to 25% of your pension as a tax-free lump sum, and the rest can be used to provide you with a taxable income throughout your retirement.
Stakeholder pensions are personal pensions with a few unique features. Firstly, they must meet certain standards set out by the Government. They usually cost less than personal pensions if you’re putting in small amounts.
2 Use SIPPs, or Self-Invested Personal Pensions
These are another personal pension option. With a SIPP, you pick the investments yourself, such as shares, funds, bonds or even business properties, and wrap them in the benefits of a pension.
For the most part, SIPPs are subject to the same rules and benefits as other pensions, including tax relief, limits on contributions, and the 25% restriction on the tax-free lump sum.
Although your pension is an important part of your retirement savings plan, most people will find it makes sense to build on it with a range of other savings and investment vehicles, from ISAs to funds and shares.
3 Use An Individual Savings Account (ISA)
The simplest way to protect your money from income tax and capital gains tax is to hold your savings and investments in an Individual Savings Account, or ISA. An ISA is essentially a tax-proof wrapper for your money: as long as it’s inside an ISA, you shouldn’t have to pay tax on any income, or gains you make from your money. You can pay a maximum of £15,240 into an ISA each tax year but if you don’t use your full allowance in a tax year, it can’t be carried forward… so use it or lose it!
They’re well worth investigating.
Many people who have invested in them regularly have built up substantial portfolios that are totally protected from the taxman during your lifetime.