As 5 April looms we’re reaching that time of year when money floods into tax breaks such as pensions and individual savings accounts (ISAs). Taking advantage of tax benefits before the end of tax year may well be sensible, but making a rushed purchase could prove a costly mistake..
As there’s nothing like an enforced deadline to close a sale, this time of year leaves you especially at risk from unscrupulous financial advisers as there’s less time than usual to find a good adviser you can trust. And, if you're making your own decisions time is running out to make an informed choice.
If you don’t already use a trusted adviser and are unsure what to do then how can you avoid a costly last minute mistake? I think there are two key considerations:
1. Will you miss out by not using this year's tax breaks?
Ask yourself whether missing out on this year’s allowances will leave you worse off? If not then making a more informed decision next tax year could make sense, provided the Chancellor doesn’t introduce any nasty surprises in his Budget next week (24 March).
ISAs
Skipping this year’s ISA allowance makes little difference if you’re not planning to invest more than £10,200 (£5,100 in cash ISAs) in total over this tax year and next. Just invest after 5 April.
Pensions
It’s rare for pension contributions to reach anywhere near the allowed annual limit (in general, your earnings) so you may not lose out by delaying. However, those at risk of losing out include non-taxpayers benefitting from 20% tax relief on pension contributions of up to £3,600 gross, and higher rate taxpayers who could have to wait up to a year longer to reclaim the additional tax relief.
Venture Capital Trusts (VCTs) & Enterprise Investment Schemes (EIS)
Inappropriate for the vast majority of investors anyway. Missing your allowance is unlikely to matter unless you’re hell bent on maximising the 30% VCT income tax rebate this year and next or desperately wish to defer some capital gains using an EIS – although both could be Budget targets.
2. Invest carefully and, if in doubt, choose the safest option for now
If it does make sense to invest now but you’re unsure what to do and can’t find a good adviser in time, consider harnessing the allowances in as safe a way as possible with the option to make straightforward adjustments later on.
ISAs
If you want to invest in a stocks & shares ISA but are contributing no more than £3,600 (£5,100 if aged 50 or over), you could use an easy access cash ISA - giving the option to transfer across to a stocks & shares ISA in future when you’ve made up your mind.
Or, if you want to invest more, consider using a fund supermarket or stockbroker that offers a short term cash option within its stocks & shares ISA. For example: FundsNetwork has an ‘ISA Cash Park’ and Cofunds a ‘Cash Reserve’. Don’t expect much interest and what is paid will be taxed at 20%, but it bides you a month or two to decide where to invest.
Pension
If you don’t have an occupational pension and are not sure what to choose then you probably won’t go far wrong with one of the better stakeholder pensions, such as Legal & General or Scottish Widows. Charges are low and you’re not tied into making any future contributions. Plus, you won’t be penalised for transferring elsewhere later on if you decide another pension is better for you. Again, if you don’t want to rush an investment decision then choose a cash option within the pension for now.
Good luck whatever you decide and remember you can always ask me questions here.
Useful links
Read our end of tax year checklist to find out which tax benefits and allowances you might benefit from using by 5 April.
Find out more about ISAs here
Find out more about Pensions here
Find out more about VCTs & EISs here
Read this article at http://www.candidmoney.com/articles/article77.aspx
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