Floyd Mayweather Jr was often criticised for being a boring boxer, but the fact is that he retired undefeated and will go down as one of the greatest of all time. He was effective, efficient and got the job done, in short – he boxed clever. And you should too!
Whilst this may not sound like the most exciting strategy, it is precisely how you should approach your wealth building journey. There is no point wearing flamboyant shorts and somersaulting into the ring, only to get KO’d in the first round!
Tax wrappers
Over the past few weeks we have covered off the essentials that you need to consider when deciding upon the right investment fund, the next thing you need to do is box clever!
What I mean is that you need to fully utilise the available tax wrappers, such as pensions, bonds and ISA’s.
These tax wrappers are effectively boxes, and into these boxes, you place your investments. Each of these boxes serve a slightly different purpose, they each have their advantages and disadvantages and can complement each other, depending on your life stage and financial goals.
Regardless of the box, whilst inside – the investments themselves effectively work the same.
The big difference is the tax treatment on entry, within, and on exit.
(The value of investments and pensions can fall as well as rise. You may get back less than you invested).
(Tax treatment varies according to individual circumstances and is subject to change).
| Wrapper | Tax treatment on entry | Tax treatment within | Tax treatment on exit | Access | Limits | Notes |
| Stocks & Shares ISA
(Investors do not pay any personal tax on income or gains, but ISAs do pay unrecoverable tax on income from stocks and shares received by the ISA managers). |
Typically, contributions are made from NET income which has already been taxed elsewhere | Any growth is largely tax free | No income Tax or Capital Gains Tax payable | Can usually access the money at any time | £20,000 annual contribution limit per individual
No lifetime limit |
As of April 2018, all individuals are eligible for a £2,000 tax-free Dividend Allowance Dividends received on shares held within an ISA will remain tax free and won’t impact your dividend allowance |
| General Investment Account | Same as ISA | Gains and Dividends are potentially taxable | Gains and Dividends are potentially taxable | Can usually access the money at any time | Unlimited contributions |
For those investors that have made full use of their ISA allowance Typically used to hold funds until the next tax year, at which point funds can be absorbed by the new ISA allowance |
| Pensions | Tax relief received on contributions at your marginal income tax rate | Same as ISA | Usually you can take up to 25% of your pension tax free. It’s up to you how you take the rest, which will be taxed as income. | Typically, unable to access funds until age 55 | Various limits apply, the main two are:
Annual limit of 100% earned income up to a maximum of £40,000PA Lifetime contribution limit, currently £1.03M |
The rules and limitations applicable to pensions are both numerous and complex |
A quick word on Investment Bonds
These have become less popular over the years and the tax treatment will depend on whether it is held onshore or offshore.
They may still appeal to certain types of investors though, so don’t automatically discount them! Particularly if you are a higher/additional rate income tax payer or have already maximised your ISA and pension allowances.
Summary
Whichever box(es) you use, make sure the investments within them are as boring, effective and efficient as Floyd Mayweather Jr and in the end, you will be the real winner!
Remember that you can send me an email at planning@claritylfp.co.uk if you have any questions about investing or any other financial matter, or if there is anything you would like me to cover in a future blog.
Until next time…
Financial Planner | Financial Adviser | Investment Advice | Pension Advice | Insurance Advice | West Yorkshire
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