Tax wrappers to save you thousands
Filed under: Investing, Savings and Accounts, Taxes
Investors continue to lose out by not using the right tax wrapper on their investments.
Even though the underlying investment might be the same, (say for instance the M&G Corporate Bond fund) how the fund is packaged with regard to a tax wrapper - (an ISA, onshore bond, offshore bond or unit trust/investment trust) could make a huge difference to the actual returns.
According to fund provider Fidelity International, using the right tax wrapper to suit your own financial and tax position, can return up to 161% more on an investment.
To help IFAs and investors recognise the tax benefits of each investment made, Fidelity has enhanced its Tax Wrapper Analyser software which is able to compare the ISA wrapper alongside an onshore bond, an offshore bond and a collective fund. The analyser also takes into account the 50% tax band - in line with changes coming in next April for individuals earning over £150,000. It is also able to compare charges and total expense ratios to give a more precise idea of what returns will be once all the additional costs are taken out.
Paul Kennedy, head of tax and trust planning at Fidelity International, insists investors should no longer be throwing money away by being non-tax efficient.
"It is a simple fact that the choice of tax wrapper affects what goes back into the client's pocket. It's such a shame that hours can be spent in selecting the right assets and funds with the client to then be 'robbed' of some of that underlying investment return through poor tax planning. One of the first tests I did on the new Tax Wrapper Analyser showed a return of 161% more on one wrapper compared to another. I find it staggering when you consider it's exactly the same fund, the same manager, the same performance and that difference arises solely because of the tax wrapper."
Kennedy continues:"An inefficient tax wrapper simply means giving part of the investment return to the Government where that was not necessary. Tax wrapper planning is a way of adding tremendous value and increasing the return for a client."
Research conducted by Fidelity indicates that an estimated 33 million UK tax payers are confused about tax and less than half the nation believes tax planning relating to savings and investments can make a difference to their tax liabilities.
Martin Bamford IFA with Informed Choice agrees that too often investors are losing money unnecessarily.
"Tax can have a major impact on investment returns over the longer term. The selection of a suitable tax wrapper is very important to ensure your investment decisions are suitable. Too often we see non-taxpayers being advised to invest in Investment Bonds when an 'unwrapped' portfolio of collective investments might make more sense from a tax perspective."
He warns though: "You should, however, never allow the tax-tail to wag the investment dog. There are many reasons for making investment decisions in addition to the tax considerations. Access to money, the range of investment options available and how plans integrate with your wider financial planning objectives are all important factors."
Simon Lewis IFA with Partridge Muir & Warren takes a similar stance and stresses that there is never a one-size- fits- all solution to investment, rather every investor is different with their own specific requirements. He adds that all investment and tax issues must be part of an ongoing review process – rather than a result of an initial box ticking session that years down the line may be completely out of context with an investors new financial needs..
Jason Witcombe, IFA with Evolve Financial Planning, believes pension investments are an area that are frequently handled clumsily with investors losing out because of it.
"For me, the biggest opportunity is with pensions. Take someone who is currently a 20% taxpayer but expects to be a 40% taxpayer within the next few years. They would be much better off delaying pension contributions and then just making slightly larger payments into their pension at that point. That way, for every £100 that comes out of their pocket, £166.57 gets invested into a pension rather than £125."
To help IFAs and investors recognise the tax benefits of each investment made, Fidelity has enhanced its Tax Wrapper Analyser software which is able to compare the ISA wrapper alongside an onshore bond, an offshore bond and a collective fund. The analyser also takes into account the 50% tax band - in line with changes coming in next April for individuals earning over £150,000. It is also able to compare charges and total expense ratios to give a more precise idea of what returns will be once all the additional costs are taken out.
Paul Kennedy, head of tax and trust planning at Fidelity International, insists investors should no longer be throwing money away by being non-tax efficient.
"It is a simple fact that the choice of tax wrapper affects what goes back into the client's pocket. It's such a shame that hours can be spent in selecting the right assets and funds with the client to then be 'robbed' of some of that underlying investment return through poor tax planning. One of the first tests I did on the new Tax Wrapper Analyser showed a return of 161% more on one wrapper compared to another. I find it staggering when you consider it's exactly the same fund, the same manager, the same performance and that difference arises solely because of the tax wrapper."
Kennedy continues:"An inefficient tax wrapper simply means giving part of the investment return to the Government where that was not necessary. Tax wrapper planning is a way of adding tremendous value and increasing the return for a client."
Research conducted by Fidelity indicates that an estimated 33 million UK tax payers are confused about tax and less than half the nation believes tax planning relating to savings and investments can make a difference to their tax liabilities.
Martin Bamford IFA with Informed Choice agrees that too often investors are losing money unnecessarily.
"Tax can have a major impact on investment returns over the longer term. The selection of a suitable tax wrapper is very important to ensure your investment decisions are suitable. Too often we see non-taxpayers being advised to invest in Investment Bonds when an 'unwrapped' portfolio of collective investments might make more sense from a tax perspective."
He warns though: "You should, however, never allow the tax-tail to wag the investment dog. There are many reasons for making investment decisions in addition to the tax considerations. Access to money, the range of investment options available and how plans integrate with your wider financial planning objectives are all important factors."
Simon Lewis IFA with Partridge Muir & Warren takes a similar stance and stresses that there is never a one-size- fits- all solution to investment, rather every investor is different with their own specific requirements. He adds that all investment and tax issues must be part of an ongoing review process – rather than a result of an initial box ticking session that years down the line may be completely out of context with an investors new financial needs..
Jason Witcombe, IFA with Evolve Financial Planning, believes pension investments are an area that are frequently handled clumsily with investors losing out because of it.
"For me, the biggest opportunity is with pensions. Take someone who is currently a 20% taxpayer but expects to be a 40% taxpayer within the next few years. They would be much better off delaying pension contributions and then just making slightly larger payments into their pension at that point. That way, for every £100 that comes out of their pocket, £166.57 gets invested into a pension rather than £125."
