By David Gooding, senior wealth manager at Irwin Mitchell
If you’re lucky enough to have a lump sum available for investment at the moment, where do you put it? Interest rates are at a very low level and after tax it is difficult to get anything other than a meagre return on your money. Once inflation is taken into account, savers will actually be losing money in real terms.
Given the level of indebtedness of the world economy, we are unlikely to see a significant rise in interest rates for some time, while inflation however may well rise in the future which would further add to the agony of savers. While cash will always have a place for short-term savings, it’s not an option for long-term growth. So where else could savers look?
Many investors have looked to property in recent years and the Chancellor’s announcement of a stamp duty holiday until the end of March next year has contributed to a surge in house prices as people rush to complete before the deadline. However there are headwinds, some property experts think the recent increases in value will recede once the stamp duty holiday is over and mortgage funding is difficult to obtain so completing by March 2021 is problematic. In addition, changes to the taxation of income from buy to let properties are causing some landlords to consider selling and this may lead to a reduction in demand.
One of the most tax efficient ways to save is to pay money into your pension. Pension contributions benefit from tax relief at your marginal rate of income tax and while there has been talk about the rate of relief being reduced or restricted, it currently represents one of the most tax efficient ways to save and shouldn’t be overlooked. The lockdown has caused many people to reconsider their lifestyles and some will undoubtedly wish to retire earlier than previously anticipated. Keeping track of existing pension plans and reviewing them on a regular basis is more important than ever.
Individuals concerned about inheritance tax may be considering giving funds away to their children and care should be taken to ensure that this is done in the most tax efficient way. Gifts of capital fall outside of your estate after seven years, but gifts of excess income fall immediately outside of the estate. There are also a number of trusts which allow gifts to be made while still retaining the right to draw an income. However, before taking any action it’s vital to ensure that sufficient funds are retained to provide for all future eventualities, including the possibility of having to meet care costs in the future which can be very expensive. Cash flow planning, which involves a projection of future income and expenses, is a valuable tool in assessing the affordability of the gift.
Government debt has soared this year, adding to already elevated levels and there is now increasing speculation as to how this will be tackled in the future. Taxation may well play a part and tax rates may need to increase. It’s important to be aware of this and ensure that all tax allowances are used including dividend allowance, capital gains tax allowance, ISA allowance. Offshore bonds can also be useful to defer tax and provide a tax efficient income stream.
It’s clear that world economies have suffered a huge economic shock this year and although the recovery process is underway, the outlook remains uncertain and diversification is likely to be more important than ever.
The information given and opinions expressed are subject to change and should not be interpreted as investment advice. All data is sourced by IM Asset Management Limited unless otherwise stated. All financial and wealth management services are provided by IM Asset Management Limited which is regulated by the Financial Conduct Authority (FCA), FCA Firm Reference Number 402770.