Earning any serious interest on cash savings these days is nigh on impossible. With rates at an all-time low, savers are doing pretty well if they’re able to just grow their savings in line with the cost of living. Let alone see any real investment growth. The situation is pretty disheartening to say the least.
And the picture gets even worse once you take into account that even relatively modest savings of £17,500 will bust your annual £500 tax-free allowance on interest accrued.
Higher-rate taxpayers have to pay 40% income tax on any interest over this allowance. That means that anyone holding cash in a traditional savings account at their bank or building society will almost certainly be seeing their savings reduce in value month by month.
The quickest and easiest thing you can do to improve your returns is to cut the amount of tax you pay on your gains. Here’s one way that you can keep the taxman’s hands off your savings. But you’ll have to be quick because your annual allowance will expire on 5th April. After that it’ll be lost forever…
Income tax stacks up your losses every month
Is the fact that you could be paying your bank to keep your money news to you? Maybe, or maybe not. But don’t feel bad if that does come as a surprise.You see you’re not alone. The sheer intensity of the banks’ advertising campaigns is testament to the fact that people keep cash in a normal savings account (or interest-bearing current account). Indeed, many of our new clients come to us with very significant savings in this type of account.
So what’s so bad? Why is tax such a real issue?
The fact is that paying tax is always bad for your wealth. But it’s a particular problem right now because interest rates are so low, and inflation is picking up.
The best-buy savings account on MoneySavingExpert.com at the time of writing pays out 1.1% AER. Some current accounts pay more, but there are strict limits on how much can be deposited into these accounts.
So, £25,000 held in these accounts will yield £275 interest before tax every year. Factor in inflation which is running at 1.6% pa at the time of writing, and your 1.1% returns fall to negative 0.5%. The real value of your savings has thus fallen by £125 in a year. You’re making a small loss every single month.
Paying 40% tax on your interest would put you into the red even further because your net losses are now 0.94% pa. The real value of your savings has now fallen by £235!
I’d be surprised if you feel comfortable with that.
The New Individual Savings Account Can Help
The New Individual Savings Account (NISA) can transform the plight of cash savers, turning real losses into potentially significant gains. There are three key advantages of holding your money in a NISA:
There’s no tax liability on gains made in NISAs
You’ll not need to pay any income tax or capital gain tax on returns you make in a NISA Account. They’re shielded from the taxman.
In our example above, you’d be £110 a year better off by holding your money in a NISA account, rather than a traditional savings account. Compounded up over 10 years that £110 would be worth £1,031 in today’s money.
NISAs open up a broad range of investment opportunities
Once you have your money in a NISA account, you’re able to choose from a wide range of alternative investments. You don’t have to resign yourself to only getting cash returns.
The world is – quite literally – your oyster in terms of investment opportunities. You can invest in government bonds, equities, property and much more.
Clients who use our portfolio management service are delighted by the gains they get from their money. The funds in our balanced portfolio averaged a return of 22.3% in the year to 17 January 2017. That’s very different from the 1.1% AER available from the best-buy cash saver.
You can move your investments around inside your NISA account
One thing that’s for sure is that life has a habit of throwing up the unexpected. Things change. You might suffer a long-term illness, lose your job or perhaps get a better job.
When stuff like this happens there’s invariably an impact on your finances. And when it does your investment goals will likely also shift.
NISAs are a very flexible vehicle that can adapt to your changing needs. If you want to want to take a more adventurous approach to investing, it’s okay to move your money into higher risk investments. If you want to play it safe and move everything back to cash, that’s also okay. And unlike your pension, there are no restrictions out in place by the government on when you can access your money invested in a NISA.
Time is short: Use your annual ISA allowance before you lose it
The tax perks that come with investing in a NISA are very generous. So it’s not surprising that the HMRC places restrictions on how much money you can put into an account.
You can invest up to £15,240 into a NISA this tax year and can transfer money into your account as lump sum or as a series of smaller payments. Once it’s gone, you can’t carry it forward or transfer it to someone else. Your allowance disappears forever at midnight on 5 April 2017, so it is a case of ‘use it or lose it’.
If you’re interested in opening up a NISA or want to top up an existing account, we’ll be happy to talk through the options with you. Click here to request a call back.