Ignore all the madness (scary as it is). Here’s how to build wealth for the future
ALTHOUGH you might not agree with me given what has been happening to stock markets, investing for the future remains one of the best ways to accumulate long-term wealth. Forget cash that should primarily be put aside to meet financial emergencies or fund some of life’s luxuries – a holiday here, a new settee there. And yes, think property, whether it’s a main home or a family residence plus a buy-to-let property or three.
Yet, for most people bar those lucky enough to inherit large sums from family (if only), investing in the stock market is the route through which a healthy chunk of financial security can be achieved in retirement.
It means investing through thick and thin, even when markets – as they have done in the United States and parts of Asia – turn into ‘bear’ territory. Investing as regular as clockwork, through market highs and lows. Metronome-like.
While we can all have a good old moan about the failings of government, what all governments of all persuasions (even Labour) have acknowledged over the years is that encouraging us to invest for our future is in everyone’s best interests.
It stops us from a dependency on the state in our dotage and it means the state doesn’t have to bail us out with benefits – meagre individually but collectively expensive for (often) cash-strapped governments to provide.
They do this through offering us attractive tax breaks through investment vehicles such as pensions and Individual Savings Accounts (the creation of a Labour Chancellor). Vehicles that encourage us to build our own financial fortresses. Tax wrappers that should be the foundation of most households’ long-term financial planning.
Pensions remain the retirement fund builder of choice for most people, primarily because of the tax relief that savers enjoy on the contributions they make.
Put £100 into a pension as a basic rate taxpayer and it only costs you £80 – the Government provides the rest (£20). For higher rate taxpayers, the tax relief means a £100 payment into a pension only costs £60. It’s a little more complicated for additional rate taxpayers – despite changes made by Chancellor Rishi Sunak in last Wednesday’s Budget (see our personal finance pages) – but it still pays most high earners to invest in a pension.
Add in the fact that employers are also obliged to pay into your pension on your behalf – an attractive work perk – and it becomes a no-brainer. Invest into a works pension – through thick and thin. As I said, regular as clockwork. I hope you are getting the picture by now.
Yet, increasingly, investors are turning to Individual Savings Accounts as part of their long-term wealth-building strategy. Not to replace pension saving, but to complement it.
Although pensions and Isas are both wealth creation vehicles – investing primarily in stocks and shares – they are like chalk and cheese. Unlike a pension, there is no tax relief boost on the money you can shuffle inside an Isa wrapper. Instead, the tax ‘attraction’ comes when the money is sitting inside the Isa – and later when you want to extract cash from it.
All gains and income generated within the Isa – for example, from rises in share prices and dividend payments on shares – are tax-free. Furthermore, all withdrawals are tax-free – the taxman is not bothered with them. So forget nasty capital gains tax on share profits, tax on dividend income or income tax on withdrawals. They are not issues to worry about.
This contrasts with a pension where typically only 25 per cent of withdrawals are tax-free. The rest are subject to income tax – it’s the price you ultimately pay for having enjoyed the tax relief boost on the way in.
Furthermore, you don’t have to wait until the age of 55 to access your Isa – as with a pension. In theory, it’s accessible 24/7 although Isas are best viewed as generators of long-term wealth, not to be touched unless absolutely necessary. In short, Isas are mini – and legal – tax havens. They are yours to build and access whenever you want.
I urge you: use them, embrace them, nurture them.
Every adult can invest £20,000 in an Isa in the tax year that ends next month (April 5). They then have the opportunity – confirmed in the Budget by Sunak – to invest a further £20,000 in the 12 months beginning April 6. This is an entitlement that most people planning for the future should exercise and maximise – of course, without jeopardising their standard of living.
Investing in an Isa makes great sense, however little you can afford to contribute.
As my late father, Stan The Man, used to say to me while I was juggling the household finances in the 1990s with three young sons eating us (me and wife Susan) out of house and home: ‘Slowly, slowly, catchy monkey.’ In other words, invest a little on a regular basis and you will eventually achieve your goal. This essential 16-page guide to Isas should give you all the tools necessary – as well as a huge dollop of confidence – to go out and join the Isa army. If you are already part of the Isa battalions, the guide should also provide you with enough fresh investment ideas to make your Isa experience a better one.
Key is ensuring you have the ‘right’ Isa. For the vast majority, that means setting up an account online via a ‘fund platform’.
Website Boring Money’s Holly Mackay, an expert in analysing the merits of such online Isas, gives her verdict on the best of the bunch on page 64. For some people, it may pay to transfer an existing Isa to one of these. Transferring Isas is relatively pain-free and can in the long term save money (in terms of costs) and make your Isa journey more enjoyable.
Financial consultancy The Lang Cat has produced a couple of guides to ‘Isa pricing’ and ‘Isa investing’ that are essential reading – langcatfinancial.co.uk/ isa. Armed with such a flexible Isa, the investment world is your oyster.
You can invest in shares, investment funds, stock market listed investment trusts, bonds and cheap exchange traded funds that track specific indices.
You can fuel your Isa whenever you want, investing when you have money at your disposal – or on a regular basis by setting up a direct debit from your bank account. You can even put money into your Isa now (counting towards your Isa allowance for this year) and then choose your moment as to when you want to commit money to the stock market.
In investment circles, it’s referred to as phasing. With markets as they are – as volatile as my late paternal grandmother was temperamentally – there has never been a better time to phase away, or for that matter to invest on a regular basis.
You can also spill existing shares held outside an Isa into an Isa – through a process called ‘bed and Isa’. The shares are sold and then bought back within the Isa with the sale proceeds. Although there are costs involved, it means more of your investments sitting inside a taxfriendly wrapper.
Nearly all of these free-ranging Isas allow you to assemble whatever portfolio you wish. So, on page 66, we get some of the leading investment experts to opine on what investors should do with money available to invest in an Isa. We also ask them to reveal what they are doing with their own Isas in the run-up to April 5.
Then on pages 68 we get our brilliant Midas columnist Joanne Hart to identify shares ideal to hold within an Isa – while on pages 78 we look at ESG (Environmental, Social and Governance) friendly Isas.
Yet these online Isas also embrace those investors who do not regard themselves as competent do-it-yourself investors – offering a helping hand through ready-made Isa portfolios.
Again, The Lang Cat’s guide on Isa investing is useful in identifying the best Isa providers.
Of course, the Isa world is not all about investing. Those who prefer cash can shelter it in a ‘cash’ Isa – typically operated by a bank or building society.
Any money squirrelled away this tax year – or the next – in such a cash Isa counts towards their £20,000 annual allowance. Contributions can be made alongside a free-ranging Isa, provided the £20,000 annual allowance is not exceeded.
The best available interest rates on cash Isas are currently north of three per cent, although last week’s dramatic cut in Bank Base Rate from 0.75 per cent to 0.25 per cent means these rates will not be around for long. Websites moneyfacts.co.uk and savingschampion.co.uk should enable you to keep on top of the best cash Isa deals.
For those thinking about a cash Isa, remember that current rules allow basic and higher rate taxpayers to receive £1,000 and £500 of savings income per tax year tax-free.
So, it might be better utilising these personal savings allowances first for cash savings, freeing up the Isa allowance for investments.
Money can also be invested in a socalled ‘innovative finance’ Isa. This means your money is used to provide loans to individuals or small businesses – with interest then received on the lending.
Although some providers such as Ratesetter have built sound track records in this area, investors should tread extremely carefully. It’s risky.
Finally, anyone with children should look to take advantage of the Chancellor’s surprise decision on Wednesday to raise the Junior Isa allowance from £4,368 for this tax year – to £9,000 from April 6.
It means parents with financial means have the opportunity to squirrel away sizeable amounts of money for their children that can then be accessed from age 18 when university, a career and home buying begin to appear on the radar.
Page 80 gives some essential help on maximising opportunities from this bolstered Isa allowance.