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8.5 million over-65s are paying Income Tax. Do you need to consider your tax liability?

A combination of frozen tax thresholds and rising inflation mean an increasing number of retirees need to consider tax. Read on to find out what you need to know about Income Tax in retirement and how you could manage your tax liability.

According to the Independent, in 2023/24, 8.5 million over-65s are paying Income Tax – that’s around a 10% increase when compared to a year earlier.

Usually, you will need to pay Income Tax if your income exceeds the Personal Allowance. For 2023/24, the Personal Allowance is £12,570.

As well as keeping the Personal Allowance in mind, when managing your tax liability, you should also consider the thresholds for paying the higher- or additional-rate of Income Tax, which are £50,271 and £125,140, respectively, in 2023/24.

There are several reasons why more over-65s are paying Income Tax, including:

• The cost of living crisis means some workers are putting off retirement: High inflation over the last 18 months means household budgets are under pressure. For some workers, it may mean they’ve delayed their retirement plans. As a result, more over-65s are likely to be working and paying Income Tax.
• Inflation may have pushed incomes above the Personal Allowance: The rising cost of living may have increased your income in retirement. For example, the State Pension increased by 10.1% in April 2023 due to inflation, or you may receive an income from an annuity that rises each year. Subsequently, many retirees could find that their income is now liable for Income Tax.
• The thresholds for paying Income Tax are frozen: While retirement incomes may be rising, the Personal Allowance has remained the same for the last three tax years, and the government has frozen it until 2027/28.

If you find that you’re paying Income Tax in retirement, there may be steps you could take to reduce your liability.

5 practical steps that could reduce your Income Tax bill in retirement

1. Make use of the Marriage Allowance

If you are retirement planning with your spouse or civil partner, you may be able to use the Marriage Allowance.

If you or your partner don’t use the full Personal Allowance, you could transfer £1,260 of it. It could reduce your combined Income Tax bill by up to £252 in the 2023/24 tax year.

The partner with the higher income must be a basic-rate taxpayer to use the Marriage Allowance.

2. Use other tax allowances to boost your income

Depending on your circumstances, there may be other ways you could boost your retirement income without increasing your tax liability.

For example, if you’ve saved or invested through an ISA, withdrawals are not liable for Income Tax, so you could use your ISA to supplement your income from other sources. Or, in 2023/24, you can receive up to £1,000 in dividends, which you may receive from some investments, without paying tax.

3. Spread out taking your pension tax-free cash

When you access your pension, you can usually withdraw up to 25% of your savings without paying tax. You can take the tax-free cash as a lump sum or spread it across several withdrawals.

By spreading the tax-free cash across several tax years, you may be able to reduce your tax liability even if your total income exceeds the Personal Allowance.

4. Manage your pension withdrawals

If you choose to access your pension flexibly, you’re in control of how much you withdraw from your pension. You can increase or decrease the income you receive depending on your needs.

As a result, you could adjust your pension withdrawals with your Income Tax liability in mind. Lowering your withdrawals could mean your entire income stays below the Personal Allowance or higher-rate tax threshold.

5. Make tax planning part of your financial plan

To effectively manage your tax liability, you may want to consider all your assets. It might highlight how you could use other sources of income to fund your retirement without increasing the amount of tax you pay.

Making tax planning part of your wider financial plan could help you get more out of retirement. Please contact us to discuss your retirement income and potential tax bill.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate tax planning.

Investing 101: 4 useful questions to answer when reviewing your portfolio

Over the last few months, you’ve read about the potential benefits of investing, what to consider when creating a risk profile, and how you could improve tax efficiency.

Now, read on to discover why reviewing your investment portfolio is a crucial part of managing your assets over the long term.

Reviewing your investments too frequently could encourage short-term thinking

Reviewing your investments provides an opportunity to ensure your portfolio still suits your needs and understand whether you’re on track to meet your goals. So, how frequently should you be reviewing your portfolio?

With daily headlines about company stocks that have risen or fallen, it can seem like you should be checking your portfolio every day or week. Yet, this could encourage a short-term mindset when managing your investments.

Looking at your investments too frequently can make it tempting to try and time the market. While selling high and buying low is something every investor wants, many factors affect the markets and it’s impossible to consistently time it right. It could mean you miss out on long-term growth opportunities.

Instead, reviewing your portfolio once or twice a year is often enough for many long-term investors. This frequency may help you strike a balance between understanding how your portfolio is performing and focusing on the long term.

4 key questions to answer during the review process

1. Have your long-term investing goals changed?

The reasons you’re investing may affect which options are right for you. As well as looking at figures, taking some time to review your investment goals may be important.

If your goals have changed, it could affect the investment time frame and how much risk is appropriate. As a result, you might adjust your portfolio to ensure it continues to reflect the outcomes you want.

2. Are your financial circumstances the same?

As well as your goals, you may want to consider if your financial circumstances have changed since your last review.

Again, your financial security and other assets you hold often influence your risk profile when investing. So, significant changes to your situation could mean adjustments to your portfolio make sense.

For example, if you’re approaching retirement, you may decide to reduce the amount of risk you’re taking to preserve your wealth. Or, if you’ve received a wealth boost, you might want to increase the size of your portfolio and allocate a proportion of it to higher-risk investments.

3. How has your portfolio performed?

While it’s often a good idea not to review your portfolio’s performance too frequently, the returns are a crucial part of the review process.

If your portfolio hasn’t performed as well as you’d hoped, be cautious of making knee-jerk decisions in response. The key thing is to focus on long-term trends rather than short-term movements.

Volatility is part of investing, and it’s normal to see the value of your portfolio rise and fall. Yet, when you look at the performance over the years, the peaks and troughs often smooth out.

Even after market shocks, such as when the markets fell sharply during the Covid-19 pandemic, historically, they have recovered and gone on to deliver returns when you look at the bigger picture.

Rather than reviewing just the last 6 to 12 months of data, consider how your portfolio has performed since you set it up. You may also want to consider long-term projections too, although keep in mind these cannot be guaranteed.

As well as looking at your portfolio’s performance, reviewing the wider market may be useful. If your portfolio has suffered a dip, has the rest of the market fared similarly?

4. What investment fees have you paid?

The fees you pay when investing will reduce your overall returns. As a result, it’s also worth considering what fees you’re paying, how they relate to your portfolio, and how they compare to alternative options.

We can help create and manage your investment portfolio

Whether you’re just starting to invest or want support managing your portfolio on an ongoing basis, we could offer professional advice.

An investment strategy that’s tailored to you could reflect your aspirations, financial circumstances, and tax-efficient opportunities. We can also incorporate your investments into a wider financial plan that’s focused on your goals.

Please contact us if you have any questions about investing or would like to arrange a meeting.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance.

Investment market update: July 2023

Data from economies around the world indicate business output and confidence could be slowing. Read on to find out what influenced the investment market in July 2023.

Despite some data suggesting there could be a downturn in some areas, the International Monetary Fund (IMF) has lifted its global growth forecast for 2023. The organisation now expects the global economy to grow by 3%, up from its previous prediction of 2.8%.

Globally, both households and businesses could face pressure as energy prices may rise in the colder months. The International Energy Agency warned that, if China’s economy rebounds this year, energy prices may spike in winter.

UK

The pace of inflation in the UK is slowing. Yet, it remains stubbornly high and above many other economies at 7.9% in the 12 months to June 2023. The latest inflation figures prompted the Bank of England (BoE) to hike its base interest rate again – as of July 2023, it stands at 5%.

The IMF predicts the BoE will need to keep interest rates high for longer than expected due to economic challenges.

Further rises could cause market volatility – the FTSE 100 hit its lowest closing level of 2023 ahead of the July BoE announcement at the start of the month.

The interest rate increases have led to mortgage rates soaring. In July, the average five-year fixed-rate mortgage deal exceeded 6% for the first time since 2008. In fact, by the end of 2026, the BoE predicts that 1 million households will see their monthly mortgage repayments increase by £500.

While many borrowers have been affected by interest rates increasing almost immediately, saving rates have been lagging. The Financial Conduct Authority set out expectations for “fair and competitive savings” during the month, and savers may have started to see the earnings on their savings rise as a result.

The latest release from the Office for National Statistics shows that between February and April 2023, the average wage increased by 7.2%. While growth is good news, the figure is below inflation and so wages are falling in real terms.

As well as soaring mortgage costs, food inflation has significantly affected household budgets. So, it may be of little surprise that a survey for i newspaper found 67% of consumers would back the idea of a price cap on essential goods.

Data suggests many businesses are struggling too.

According to a Purchasing Managers’ Index (PMI) UK factories shrank at their fastest pace in six months in June. Output, new orders, and employment levels all fell and could signal the challenges will continue into the medium term.

As businesses struggle with rising costs, insolvencies are expected to rise. Figures released by the Insolvency Service show business bankruptcies were 27% higher in June when compared to the same period in 2022.

Begbies Traynor, a business recovery and financial consultancy, believes insolvencies will rise over the next 18 months due to interest rate hikes. The firm added that “zombie” businesses have been able to continue operating due to cheap borrowing costs but will now struggle to service debts.

While there have been ups and downs in the market throughout July, the pound hit a 15-month high after all major UK banks passed BoE stress tests.

Europe

Inflation in the Eurozone fell to 5.5% in the 12 months to June 2023. While still above the long-term average, it’s lower than the 8.6% recorded in June 2022.

In response, the European Central Bank increased interest rates to its highest level in more than 20 years. The deposit rate is 3.75% as of July 2023.

PMI data indicates businesses in the Eurozone are facing similar challenges to the UK. Overall business activity fell and moved into negative territory. Factory output was also weak in June, particularly in Austria, Germany and Italy, and employment fell for the first time since January 2021.

US

Steps taken by the Federal Reserve have successfully slowed inflation in the US. In the 12 months to June, it was 3% – a two-year low.

According to PMI data, the US factory sector took a “sharp turn for the worse” in June. The results mirror the situation in Europe, with new orders falling. It’s increased concerns that the country could slip into a recession in the second half of the year.

While there may be worries about the US economy, official data indicates businesses are still confident about their future. American companies added half a million jobs to the economy in June and US wages increased by 4.4%.

In company news, Twitter’s rebrand to X is estimated to have wiped billions off the company’s value.

Since Tesla owner Elon Musk took over the social media platform in October 2022, he’s made a raft of changes. In July, Musk revealed a new name and logo for the platform, which have drawn criticism. According to Fortune, changing the name has wiped out between $4 billion and $20 billion in brand value.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

How impact investing could provide a solution to social challenges

Do you want your investments to have a positive effect on the world and society? Allocating some of your wealth to “impact investing” could be right for you. Read on to find out what impact investing is and what you need to consider first.

Impact investing aims to generate a positive, measurable social or environmental impact alongside a financial return.

As society faces many challenges, such as alleviating poverty, reducing greenhouse gases, or improving access to healthcare, a huge amount of investment is needed. And targeted investments from individuals could add up to deliver real change.

2 difficult challenges the UK faces that impact investing could help solve

One of the benefits of impact investing is that it focuses on particular issues. So, as an investor, you can target those that you’re passionate about. Here are just two examples of social challenges in the UK that could benefit from investment.

1. £7.7 billion is needed each year to meet care demands

The UK faces significant challenges in meeting care demands.

As people are living longer lives, more will need to rely on care in their later years and a growing number will have complex needs. As public services struggle to meet this demand, private investment could help provide the facilities, skills, and services that society will benefit from.

Earlier this year, the Guardian reported on a significant government shortfall in care funding. It suggested there is a £2.3 billion-a-year hole in the finances of the care system, which currently looks after almost 200,000 people aged over 65.

A report from Schroders suggests the care sector will need investment of £7.7 billion a year to meet long-term demand. Investment in areas like care homes, support services, and medical technology, could help to relieve some of the pressure.

2. £16.9 billion is needed each year to tackle the housing crisis

The housing crisis is another challenge that features heavily in the news. A housing shortage and soaring prices mean many families are struggling to find affordable homes.

A government report suggests around 340,000 new homes need to be supplied in England each year, of which 145,000 should be affordable. However, new homes have fallen significantly short of this goal – around 233,000 new homes were built in 2021/22.

To tackle the challenge of housing in the UK, Schroders suggests £16.9 billion of private investment will be needed every year.

Measuring the impact in impact investing

While impact investing can be attractive, one of the key challenges for investors is it can be difficult to measure and verify the success.

Investment opportunities may provide you with data on past success and goals for the future. However, as there is no standard way to present this information, it can be difficult to compare the options.

On top of this, there isn’t an independent body that will verify the impact the investment is having and it could mean you’d need to carry out your own research if you wanted further information.

So, if you want to be part of impact investing, it’s important to note that it may not generate the impact desired and it could come with challenges too.

It’s essential to balance impact with your investment goals

Impact investing isn’t just about solving some of the world’s biggest challenges, but delivering a return too. You should still treat it like other investments, which means considering areas like risk and potential performance.

If you’ve found an impact investing opportunity that’s interesting, you may also want to consider:

• The investment time frame: Usually, it’s advisable to hold investments for a minimum of five years as they can experience short-term volatility. Consider if this matches your investment goals and whether you’d feel comfortable holding the investment over the long term.
• Whether it matches your risk profile: While all investments carry risk, the level varies. So, when you’re looking at a new investment opportunity you should weigh up if the risk involved is right for you. Your risk profile should consider many factors, from your overall financial stability to the reason you’re investing. If you’d like to learn more about risk profiles, please contact us.
• How it could fit into a wider investment portfolio: You may also want to consider what other investments you hold, and how the new opportunity could fit into your portfolio. Creating a diversified, balanced portfolio with your risk profile in mind could reduce volatility and help you reach your goals.

Do you want to talk about the impact your investment could have?

If you want to discuss whether impact investing could be right for you, please get in touch. We can talk about the issues you’re interested in and how you could use your finances to tackle challenges in a way that reflects your goals and financial circumstances.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

How you could improve tax efficiency by claiming work-related expenses

Have you considered claiming tax relief on work expenses? It could reduce your tax bill and help your money go further. Read on to find out if you could receive tax relief and how to make a claim.

The rules about what you can claim tax relief on are strict, but it’s worth checking if you could be eligible.

You could make a claim if you use your own money to buy goods or services that are necessary for your job. You must only use these purchases for work unless you can calculate the proportion of use for private and work purposes, which may be complex. You cannot claim tax relief if your employer reimburses costs.

Potential claims will depend on your role and industry. Common claims include the cost of:

• Cleaning, replacing, or repairing a uniform or specialist work-related clothing
• Repairing or replacing small tools
• Professional subscriptions or fees
• Work-related travel that is not your regular commute
• Mileage if you use your private vehicle for work.

If you work from home, you may also be able to claim tax relief on the additional expenses you incur, such as increased utility bills. However, you will usually be “required” to work from home, rather than choosing to do so, to successfully make a claim.

The tax relief you receive will depend on your Income Tax bracket

To claim work-related expenses, you must have paid Income Tax in the tax year you’re claiming for.

HMRC will use your Income Tax bracket to calculate the amount of tax relief you’re entitled to. For example, if you’re a basic-rate taxpayer and make a purchase for £60, you’d be entitled to claim £12 tax relief as your Income Tax rate is 20%. If you’re a higher-rate taxpayer, in the same scenario, you could claim £24 in tax relief as your Income Tax rate is 40%.

When you make a successful claim, HMRC will usually adjust your tax code, so you’ll pay less Income Tax. You can make claims for the last four tax years.

If you intend to claim tax relief for work-related expenses, it’s often a good idea to keep records of your spending.

How to claim tax relief for work-related expenses

To receive the tax relief you’re entitled to, you’ll need to send a claim to HMRC. It is usually straightforward.

If you already complete a tax return, you can include work-related expenses as part of your submission.

For workers that don’t complete a tax return, you can fill in a P87 form. You can do this online or submit a claim through the post. If you want to make claims for multiple tax years, you’ll need to complete a separate form for each year.

You will need to provide your personal details and those of your employer to complete the form. You should then list each expense you’d like to claim relief on.

If you want support, there are specialist tax refund companies. However, they will take a fee from any repayment you receive and, depending on the agreement, could be entitled to other tax returns you receive as well.

There have been cases of scammers targeting victims by claiming they can assist in completing tax relief forms. So, make sure you check the firm is legitimate and carefully read what you’re agreeing to before providing any personal details or signing paperwork, including digital documents.

Contact us to talk about making your finances tax-efficient

Claiming work-related tax relief could help make your finances more tax-efficient. There may be other steps you could take to improve tax efficiency too, such as:

• Using an ISA to save or invest
• Contributing to a pension to invest for your retirement
• Making use of the Marriage Allowance to reduce your Income Tax bill
• Using exemptions to reduce tax when you make a profit selling assets.

As part of a wider financial plan, we could help you understand which tax allowances make sense for your circumstances and goals. Reducing your overall tax bill may help you get more out of your money.

Please contact us to arrange a meeting.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

5 powerful reasons to learn more about your pension today

For many people, their pension is a crucial part of their retirement plan. With Pension Awareness 2023 starting on 11 September, it’s the perfect time to learn more about your pension savings.

Despite pensions often being essential for reaching retirement goals, a survey suggests many savers lack pension knowledge and don’t plan to seek support.

According to a report in FTAdviser, 31% of savers either don’t know where to go for retirement advice or won’t accept support. In fact, 26% of over-55s say they won’t seek any support in the run-up to retirement. For some, not seeking advice could place their retirement at risk.

The potential knowledge gap is especially concerning given the current cost of living crisis. Rising prices could hamper people’s ability to save and place pressure on those that have already retired, who may not have planned for a period of high inflation.

Similarly, the Great British Retirement Survey 2022 found 59% of retirees worry about the rising cost of living.

The survey results also suggest people tend to be overoptimistic about their income in retirement and aren’t sure how much they need to save to reach their goals. Not fully understanding your pension or what steps you could take to secure the retirement you want could lead to the next chapter of your life falling short of your expectations.

So, here’s why you should embrace the Pension Awareness campaign to boost your knowledge.

1. Planning for retirement could mean you’re more likely to reach your goals

It’s never too soon to start planning for your retirement. Having a goal in mind and being aware of the steps you need to take to reach it could mean you’re more likely to enjoy the retirement you want.

Without a target for your pension, it can be difficult to understand what income it may provide. According to the Great British Retirement Survey, 6 in 10 pension savers have no idea what their income will be in retirement.

Taking steps to improve your knowledge about your pension now could lead to more financial freedom later in life.

2. You could identify potential gaps in your pension

Analysis from Scottish Widows suggests 1 in 3 Brits could struggle financially in retirement. A third of people are on track to receive a retirement income that means they’re “at risk of not covering their needs”.

Engaging with your pension now could help you identify potential gaps sooner. It could provide you with an opportunity to increase contributions or take other steps to bridge the shortfall. If you spot a gap in your 40s, you may have more options to close it compared to if you didn’t review your pension until you were ready to retire.

3. It could put your mind at ease

Retirement is a big step and you may need to make decisions that could affect your finances for the rest of your life. So, it’s natural to worry about if you have “enough” or how you’d cope if the unexpected happens.

Taking some time to learn more about your pension and seeking support if you need it could provide peace of mind. Tailored financial planning could help you understand the lifestyle your pension will realistically provide and what you can do to improve your financial resilience.

4. You could find ways to get more out of your pension contributions

Often, pension contributions are deducted from your salary automatically. So, you may give little thought to whether you’re getting the most out of your money.

There may be things you can do to boost your pension savings or even reduce how much tax you pay now. For example:

• Are you claiming all the pension tax relief you’re entitled to?
• Would your employer increase their contributions if you put more into your pension?
• Could salary sacrifice schemes reduce your tax liability now?

Learning more about how pensions work and why they could be a useful way to save for retirement may help your savings go further.

5. You may better understand how your pension is invested

Usually, your pension savings are invested. By investing, the aim is that your pension will grow over the long term.

If you’ve not selected how you’d like your contributions to be invested, they will often be in your provider’s default fund. It’s worth taking a look at how your pension is invested and what the other options are. Typically, a pension provider will offer several funds to choose from, with various levels of investment risk.

How you invest your money will have a direct effect on the value of your pension when you retire. So, spending some time understanding how it could help your savings grow to support your goals may be worthwhile.

We can offer you advice about your pension

Retirement advice that’s tailored to you could provide peace of mind when you reach the milestone and help you get the most out of your money. If you’d like to talk about your pension, whether retirement is years away or just around the corner, please contact us to arrange a meeting.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.

Millions of retirees could be overlooking the benefits of annuities, research suggests

The number of retirees choosing an annuity to generate an income is on the rise. Yet, research suggests millions of people may be overlooking the option because they don’t understand how annuities work.

An annuity could provide you with a way to create a guaranteed income throughout retirement. It’s something that you purchase, and it will then pay out a regular income. Given rising inflation and investment volatility over the last couple of years, it’s not surprising that some retirees find annuities to be an attractive option.

According to statistics from the Association of British Insurers (ABI), annuity sales soared by 22% in the first three months of 2023 compared to the same period in 2022.

However, a separate survey indicates some retirees may be disregarding annuities even though it could be an option that’s right for them.

19 million over-50s could be overlooking annuities

A survey conducted by the Financial Services Compensation Scheme (FSCS) found that just 10% of over-50s are willing to take risks with their money. Yet, despite an annuity providing a guaranteed income, just 28% said they either have one or would consider buying one.

Alternatives to annuities could mean your retirement savings are exposed to investment volatility. So, for risk-averse retirees, annuities may be an option to consider. The FSCS estimates that 19 million over-50s could be overlooking annuities.

Annuities could alleviate some of the key concerns those nearing retirement have.

37% of people that are unwilling to take risks say they worry about not having enough money to last the duration of their retirement. A guaranteed income could ease financial concerns for some people and help them enjoy the next chapter of their life.

Misunderstandings may be to blame for some over-50s disregarding annuities.

• 25% of survey participants said they didn’t understand how annuities worked.
• 26% said they worried a provider would go bust. However, UK-regulated insurers are protected by the FSCS, so retirees would usually still receive an income if this happened.

Annuities could form a valuable part of your retirement income, but you need to weigh up the pros and cons to understand what’s right for you.

The pros and cons of annuities you need to know

3 key benefits of annuities

1. They provide a guaranteed income

One of the potential benefits of annuities is that they provide a guaranteed income. So, you may feel less concerned about running out of money in your later years. For some retirees, this could provide peace of mind.

2. It is possible to link your income to inflation

When you’re selecting an annuity, you can choose one that will provide an income that would increase each year in line with inflation. As the cost of living is likely to increase during your retirement, a static income would gradually buy less and less. An income that’s linked to inflation may help preserve your spending power.

3. They could provide an income for your partner

If you’re doing your retirement planning as a couple, you may also choose an annuity that would continue to provide an income after you pass away. It’s a step that may ensure the long-term financial security of both you and your partner.

3 potential drawbacks of annuities

1. They are less flexible than alternative options

Compared to some options, an annuity is less flexible. For instance, if you choose flexi-access drawdown, you could increase or decrease the income you take based on your needs. An annuity will provide a regular income, but if you wanted flexibility, you’d need to use other assets to do this.

2. You wouldn’t benefit from potential investment returns

As you’ll use your savings to purchase an annuity, the money won’t remain invested as it may with other options. While this means you’re not exposed to investment volatility, you also wouldn’t benefit from potential returns either. If growing your wealth is part of your retirement plan, an alternative may be better suited to you.

3. Some annuities may have high fees

Annuities may come with higher fees when compared to alternatives. However, fees can vary between providers, so understanding the potential costs is crucial when you’re weighing up the different options.

A financial plan could help you create a retirement income that suits you

There are several ways to access your pension and you can choose to mix and match the different options. So, understanding your retirement goals and what suits you is crucial. As financial planners, we can work with you to put together a retirement plan that’s right for you.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

Investing 101: What you need to know about tax efficiency and your investment options

Investing may provide a useful way to grow your wealth, but getting started can be overwhelming. There are some important decisions to make when investing that could affect the outcomes and the tax you’re liable for, and we’re here to offer support.

Last month, you read about investment risk and what to consider when creating a risk profile. Now, read on to discover what your options are if you’re ready to start investing.

Shares v funds: What’s the difference?

Investing is filled with terms that can seem confusing. When you’ve looked at investing, you may have come across options like investing in shares or through a fund.

You may want to consider both options and understanding the differences is important.

Shares

When you purchase a share, you’re investing in a single company. When you hold a share, you essentially own a very small portion of the business. You can then sell the share at a later date and, hopefully, make a profit.

The value of shares is affected by demand. A whole range of factors can affect demand, from company performance and long-term plans to global economic conditions.

If you purchase shares, you’re in control and can decide which companies to invest in and when to sell them.

It’s normal for the value of shares to fluctuate, even daily. It can be tempting to try and time the market by buying when the price of a share is low and selling when it’s high. However, consistently timing the market is impossible. For most investors, buying shares to hold them for the long term often makes sense.

Funds

A fund pools together your money with that of other investors. This money is then used to purchase shares in a range of companies.

A fund is managed on behalf of investors. So, you wouldn’t make decisions about which companies to invest in or when to buy or sell shares.

There are lots of funds to choose from, so you can select an option that suits your risk profile and goals.

Funds can be a useful way to ensure your investments are diversified. As your money is spread across many companies, it can help create balance. When one company performs poorly, the success of another could balance this out. So, the value of your investment in a fund may be less volatile than individual shares.

However, the value of your investment will still rise and fall, and investing with a long-term plan is often advisable.

2 tax-efficient ways to invest and reduce your potential tax bill

When you sell certain assets and make a profit, you could be liable for Capital Gains Tax (CGT). This includes investments that aren’t held in a tax-efficient wrapper.

For the 2023/24 tax year, individuals can make £6,000 of gains before CGT is due – this is known as the “annual exempt amount”. If profits from the sale of all liable assets exceed this threshold, you could face a CGT bill. In 2024/25, the annual exempt amount will fall to £3,000.

The rate of CGT depends on your other income, but when selling investments, it can be as high as 20%. So, CGT may significantly affect your profits.

The good news is that there are tax-efficient ways to invest that could reduce your bill, including these two:

1. Invest through a Stocks and Shares ISA

ISAs provide a tax-efficient way to save and invest. For the 2023/24 tax year, you can add up to £20,000 to ISAs. The returns made on investments held in a Stocks and Shares ISA are not liable for CGT.

There are many ISAs to choose from. They can hold shares or you can invest in a fund through one. Usually, you can access your investments that are held in an ISA when you choose.

2. Use your pension to invest for the long term

If you’re investing with your long-term wealth in mind, you may want to consider pensions. Pensions are tax-efficient for two reasons.

• First, you could claim tax relief on the contributions you make. This provides a boost to your contributions, which may grow further too, as tax relief would be invested alongside other deposits.
• Second, your investment returns are not liable for CGT when held in a pension. Instead, you could pay Income Tax when you start to access your pension once you reach retirement age.

In 2023/24, you can usually add up to £60,000 (up to 100% of your annual earnings) into a pension while retaining tax relief – this is known as your “Annual Allowance”.

If you are a high earner or have taken an income from your pension already, your Annual Allowance may be lower. Please contact us if you’re not sure how much you can tax-efficiently save into a pension.

Before you start investing in a pension, one key thing to consider is when you’ll want to access the money. Usually, you cannot make withdrawals from your pension until you are 55, rising to 57 in 2028. So, your goals and other assets should play a role in deciding if investing more into a pension is right for you.

Contact us if you have questions about your investment portfolio

We can work with you to create an investment portfolio that suits your risk profile and goals. We’re also on hand to answer any questions you may have, from deciphering financial jargon to explaining tax-efficient options. Please contact us to arrange a meeting to talk about your investments.

Once you’ve set up an investment portfolio, how often should you review the performance? Why is ongoing advice useful? Read our blog next month to learn about managing investments on an ongoing basis.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

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