Mak­ing tax ef­fi­cient in­vest­ment decisions

The Wokingham Paper - - NEWS - With Tim Em­ble­ton from Time Fi­nan­cial Plan­ning TIM EM­BLE­TON

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.

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