So what can those very many of us who just want a straightforward, manageable way of growing our money tax efficiently do?
If you've invested before
When it comes to money, things can seem complicated and we can feel overwhelmed by the amount of information that’s out there about what we should be doing.
Our first port of call could be to make the most of the tax incentives provided by the Government. This way we can ‘save on our savings’. Stocks and shares ISAs and personal pensions (also known SIPPs) offer tax benefits and access to some of the most straightforward funds in the market, with clear costs and charges.
A personal pension is like any other pension product and can be used as a substitute for a workplace pension if you don’t have access to one and are happy to manage what your pension is invested in yourself. You can add money into your personal pension when you can afford it and after you’ve paid in your cash, the government pays in a 25% top-up (equivalent to basic rate tax relief). You can also claim any higher rate or additional rate tax relief through your self-assessment tax return, if applicable. Once your money is in the personal pension, any growth in the value of your investments is typically free from Capital Gains tax and Income Tax. (As with other financial services, the benefits and rules may change and are dependent on your own tax position).
Stocks and shares ISAs
While personal pensions – and the tax breaks – are there to help us save and invest specifically for our retirement, ISAs are more of a general savings and investment vehicle and a fantastic additional weapon in our savings arsenal. We each have a tax-efficient ISA allowance, currently £20,000 (2018/2019 and 2019/20 tax years), which allows us to invest up to that much each year. You can also invest much smaller amounts; at Legal & General, minimum ISA contributions stand at £20 per month and £100 for a lump sum.
Although you can access the money in your stocks and shares ISAs at any time (unlike a pension which is locked in until you’re at least 55), they are still intended for the medium and long term – at least a five-year horizon. If used appropriately, a stocks and shares ISA can help your money to grow by investing across a wide range of companies or types of investment, rather than sitting in low interest deposit accounts at the mercy of inflation. While your cash will be secure in a deposit account and investing carries risks, as the value of your investments can fall as well as rise, your money won’t be exposed to the potential benefits of investing.
Combining an ISA with a personal pension
If you’ve already invested, or are seeking ways to help grow your savings in a tax efficient way, ISAs and personal pensions can make for a powerful combination. ISA money is paid in net (from your take home pay) but is invested tax efficiently, as the investments do not incur Capital Gains Tax or Income Tax on the returns your investments may generate. In addition, you can draw on your ISA savings without those drawings being treated as taxable income. For your personal pension meanwhile, your money is also paid in net but the Government adds an additional 25% of the amount invested (the equivalent to basic rate tax relief). Anything you withdraw from your pension is taxed at your marginal rate (apart from your 25% tax-free cash), however, this rate could be lower in retirement than your core earnings years.
You can also pay much more into your personal pension than into your stocks and shares ISA each year, (currently for most people up to £40,000 per year) so having both can help increase your saving power while you still have access to the money you invested in your stocks and shares ISA if you need it. Investing in both an ISA and a Pension can mean you can receive tax benefits on up to a total £60,000 worth of savings per year.
Choosing what to invest in*
Our Multi-Index range – a selection of multi-asset funds – are positioned as the investment option where ‘we do it for you’. Available at varying levels of risk, our team of fund managers invest the money in the funds on your behalf, ensuring your money is spread across different asset classes, geographies and sectors for you.
The Multi-Asset team also adopt a tactical asset allocation, meaning they actively adjust and rebalance the investments in the fund in line with market conditions. This is opposed to a strategic asset allocation approach, where the asset class allocation is only adjusted periodically. Knowing someone is making decisions to allocate your investments on a daily basis can be reassuring, especially if you’re trying to fit investing into a busy daily life and are trying to reach certain savings goals.
We also have income versions of our multi-index funds, which offer a regular income by investing in dividend paying investments as opposed to investing your money across different types of investments with the sole aim of achieving capital growth.
Active or index, that is the question
In addition to our range of multi-asset funds, we also have a broad selection of other funds to choose from. These include active and index funds that invest in both equities (company shares) and bonds across a variety of sectors, regions and markets.
With active funds, the team managing the funds research, review and assess everything their funds could be invested in, depending on what the aims of their fund are. They decide what and where to invest based on their analysis and insight. Alternatively, with index funds, the assets that make up the funds are not individually selected. Instead, index funds follow the performance of a target index. These are sometimes known as ‘tracker funds’ because they track the performance of a market index, like a FTSE 100. They can also track bond indices too.
Sustainable investing and making a positive difference doesn’t mean giving up potential investment returns. Instead, your money can have a meaningful impact on the world while securing your financial future. This way, your savings work as hard as you do.
Our Future World funds are designed to give you broad diversification across hundreds of companies. Rather than excluding all companies that fail to meet our standards, we ‘tilt’ the money in the fund away from them. This gives the company management an incentive to perform better on important issues and we will meet with them to help them improve.Combining different funds
If you want to select different funds to invest in to build and diversify your investment portfolio (your selection of investments), you can do this too. For example, you might want to include a selection of active or index equity, bonds funds, or property funds, depending on what you’re investing for.
Unfortunately we can’t advise you on what might be best for your portfolio, but we can provide guidance in the form of our Investment Academy and Personal Investing blog.
*Personal Pension investments are currently limited to our Multi-Index range.