Making tax efficient investment decisions
When a client comes to us with a sum of money to invest they generally want to know where they can get the best returns and what the tax implications are likely to be. I’ve always said that you shouldn’t let the tax tail wag the investment dog. What I mean by this is that you shouldn’t make a bad investment decision just because it’s tax efficient. Make a good investment decision and then try and make it tax efficient. Over the next five weeks I’m going explore the various investments that should be held in a balanced portfolio, after which we’ll spend some time examining the best tax environment to use. Firstly, we’re going to look at perhaps the simplest part of anyone’s portfolio - cash. The first rule of anyone’s finances is that they should have an emergency access fund, otherwise known as rainy day money. I believe you should have at least three months net salary or £10,000 in cash, depending on your income, before you even consider investing. Your cash should be held in an easy access bank account and a quick online search will provide you with many sources of information about choosing the one suitable for you, just make sure you understand the difference between an instant access and a notice account. However, what a lot of people don’t realise is that it’s possible to hold cash within your existing investment or pension wrapper. When the pensions freedoms were announced three years ago I received a flurry of phone calls from people asking me to help them cash in their pension funds. I would ask why and invariably they would tell me that they felt the investment wasn’t doing much so they wanted their money. When I asked what they were going to do with it I was often told that they were going to put it in the bank where it would earn some interest. Fortunately, I was able to explain that it’s possible to hold a bank account within a pension fund and earn a little bit of interest without having to cash it in and suffer the tax consequences and save a lot of headaches! Returning to your rainy day fund - as I’ve said this will be dependent on your salary. So, for example, if someone’s got a net salary of £600 a month they probably only need £1,800 as an emergency access fund because their lifestyle will be such that the biggest emergency that’s likely to befall them is say the washing machine going wrong. But for someone who’s earning £100,000 a year even a £10,000 emergency fund is not a great deal of money given their likely level of expenditure. Ultimately it’s all relative to what your standard of living is and remember these are minimum figures - minimum non-negotiables – so whether you’re earning £600 a month or £100,000 a year you really do need to have these minimums saved and maybe a bit more. The bit more is what you’re comfortable with. Some people are much more comfortable with bigger sums of money. Equally some people are comfortable with having no emergency access fund at all but personally I just think that’s nuts. Having a fund set aside is essential and prevents you from relying on short term finance, such as credit cards and payday loans. There are lots of things you need to look out for in terms of the account you use for your emergency access funds, but the key is to ensure that the funds are immediately accessible. If you’re unsure about what you’re doing you can always seek advice. Next week I’ll answer a question I’m frequently asked – ‘What is a bond?’. I’ll also explore the reasons for it being an important part of any balanced portfolio.
INVESTMENTS – THE VALUE OF UNITS CAN FALL AS WELL AS RISE, AND YOU MAY NOT GET BACK ALL YOUR ORIGINAL INVESTMENT Taxation advice is not regulated by the Financial Conduct Authority. Time Financial Planning Limited is an appointed representative of The On-Line Partnership Limited which is authorised and regulated by the Financial Conduct Authority.