Where should you be investing your Tax Free Cash?
The majority of people take the tax free cash from there pension fund at retirement, and then don't know what to do with it. The tax free cash is typically 25% of the pension fund value at retirement from a Personal Pension, and can be even higher if the pension fund is an Occupational Pension Plan. We are here to help you make the most informed decision as to where the best home is for this money, and can offer you independent advice to match your own financial circumstances and risk profile. Detailed below are some of the options that are available. This is just for |
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Savings Accounts
The majority of people end up putting their tax free cash lump sum into a bank account or savings account, and take the interest as another form of income. Savings accounts will offer typical interest rates of approximately 3/4% pa, but you may get more or less than this depending on which bank or building society you choose.
The money is at no risk of falling in value, what you put in is what you can take back out, plus the interest. This is as low risk as you can get with investing your tax free cash lump sum. However there are a number of negative effects that this type of investment will have on your savings. Firstly your money will in real terms drop in value once inflation is taken into account, for example if you are taking the interest as income, the value of your investment will stay the same, however in real terms your money will be eroded by inflation each year. Secondly your income will only increase over time if interest rates go up, and your income could fall if interest rates reduce.
Therefore we can see that a Savings account is a safe place to invest your money but will only offer you a low return after you take into account inflation, this coupled with ever decreasing annuity rates, will mean the majority of people will not have enough income to live off in retirement.
Investment Bond
Investment bonds can offer you different ways to invest your money. The two main investment options are unit linked and with profits. Both work by taking your money and placing it in a 'fund', together with money from other investors. The fund is then invested on your behalf in stocks and shares, government bonds, property, cash and other investments. By investing your money into an investment bond you are able to make a tax deferred withdrawal of 5% per annum, but you can withdraw up to 10% per annum if you wishbut 5% of this will be subject to tax. This investment portfolio is put together by us to match each indivduals attitude to risk, and income requirements.
This type of investment carries more risk than a savings account,as an investment bond does not provide the same level of security as a savings account, but it will give you the opportunity to take your income and potentially increase the value of your investment to cover the effects of inflation. This is in no way guaranteed, and will only be achievable with the growth in the investments that have been selected for you. This type of investment is suited to those who are prepared to take more risk, in the hope that they can increase their income and investment value over time, however, they must remember that they may not get back the full amount invested.
An Investment Bond can also be used as an Inheritance tax planning tool, and can be wrapped around various trust arrangements whereby you can still receive the income from the bond, while the capital growth belongs to your beneficiaries, potentially saving Inheritance tax. If you are interested to know more about Inheritance tax planning, you can click on the link and it will take you to the Inheritance tax planning part of the website. Inheritance Tax Planning.
Indivdual Savings Accounts ( ISAs)
ISAs are tax efficient savings accounts that enable you to invest your money in a variety of different places. You can take out a £3,000 Mini Cash Isa that will offer you the same benefits and features of a Savings account but tax free, or you can take out a £3,000 Mini Equity ISA alongside the cash ISA and also have your money invested in other assets such as Equities, Corporate bonds etc. You could also elect to just take out a £7,000 Equity ISA instead of the two mini ISAs mentioned above, and benefit from £7,000 being invested in various investment funds that we would recommend for your particular circumstances and risk profile. You can elect to take an income if you wish, and this is tax free, or you can choose to reinvest the income to achieve capital growth, the choice is up to you.
There are many companies offering both Cash ISAs and Equity ISAs and it is important that you get financial advice before you commit to one, as they will all offer different things and it is important that you pick one that offers good value for money, good investment returns, and offers competitive charges.
For advice, and a quotation on the right investment for your tax free cash, and any other lump sum investments, email us today at the address below, and we will make contact with you, and make a recommendation for you based on the information that you give us.
