This document has been prepared for your training day, and the
focus is on the different types of regular savings plans that private clients
can utilise when saving money over the longer term.
expect from this document
Different types of products: including Summary, Risk, Taxation and
Ways of Investing
Regular savings can be crucial to your future financial situation.
And could increase your wealth significantly if done correctly.
There are however a number of
different areas you need to consider when making a regular savings
contributions. Risk and attitude to risk, Accessibility/ liquidity, taxation, suitability,
pound cost average.
What is the clients attitude to risk (ATR). How much risk is the client willing to take.
understanding the balance between how much risk to take versus the
reward. According to SJP “Almost all
types of investment carry the risk that their value could fall, particularly in
the short term. This may be due to stock market fluctuations, changes in interest
rates or other factors.” (SJP Website,2018)
According to Royal London the “Risk attitude has
more to do with the individual’s psychology than with their financial
circumstances. Some clients will find the prospect of volatility in their
investments and the chance of losses distressing to think about. Others will be
more relaxed about those issues” (Royal London Website, 2018)
There are a few different types of risk:
Conservative ( Low Risk )
Balanced (Lower-Medium risk)
Moderate (Medium Risk)
Dynamic (Upper-Medium Risk)
Adventurous (High Risk)
What accessibility dose
the client have to the funds. Are they easily accessed or are the funds locked
away for a certain period of time.
How are the funds treated within the product. In terms of taxation
Is the product suitable and affordable for the clients current
situation. Does it make financial sense for the client to utilise the product.
pound cost average. According to the Beaufort Group “‘pound cost
averaging’ – or, in laymen’s terms, regular saving – can come into play. Pound
cost averaging works on the basis that putting smaller amounts of money into an
investment reduces the overall risk of investing at the wrong time. Compared
with sinking one large sum in a single transaction, the risk is mitigated by
the fact your smaller, regular sums will buy in over a period of time at a
variety of prices.” (the Beaufort group website,2018)
It is very
important to look at the asset classes which you have exposure to, as this will
affect the risk which you face as well as the return which you are likely to
achieve. What we want to do in this Document is show you
how to diversify assets provide a healthy income as and when you want/need to
access your assets.
The key with any investment is that you must diversify the assets which
you hold. When I say assets there are really 5 different areas which you can
invest in within most regular savings products:
Equities/Shares – investments into companies from across the world.
These will carry risk and the values will change on a daily basis but over the
long term they tend to outperform most other asset classes.
Bonds/Gilts – These are essentially a loan to a company for which you receive
a return, they are generally lower risk than shares.
Commodities – Refers to raw materials such as gold, copper, coffee etc.
They can all go down in value.
Property – Commercial property such as an office building. The growth
comes from the increase in the value of the building and the rent which the
tenants pay. Property can go down in value.
Cash – No risk to the value of the investment however your money may be
eroded by inflation (the rate at which goods increase in price). For example
interest rates are currently at 0.25% and according to BBC “inflation is at 2.3%”(
The BBC website) so keeping cash will mean that the purchasing power of your
money is decreasing.
Asset classes 1 to 4 all carry risk to the value of your initial
investment and you may get back less than you invested. However, they are the
only way which you will be able to beat inflation and ensure that you make a
meaningful return. It is very important that any investment you make is
diversified across all of these asset classes as this reduces the risk you
face. We will touch on this in more detail in a later section.
types of products: including Summary, Risk, Taxation and suitability
based- Bank Accounts: According to
Wikipedia “A deposit account is a savings account, current account or any other
type of bank account that allows money to be deposited and withdrawn by the
account holder.”(Wikipedia2018) as mentioned above although cash has little or
no risk your cash savings may be eroded by inflation. However it is a good
place to keep an emergency fund ( easily accessible cash incase of an
Pension Schemes: according
to the Pensions Advisory service “a pension scheme is just a type of savings
plan to help you save money for later life. It also has favorable tax treatment
compared to other forms of savings” (Pensions Advisory Service 2018) while a
pension scheme is a long-term regular savings plan here is a brief example of
how a pension works:
If you were
to have a pension pot of £1M at retirement it would be taxed as Follows:
Pension Pot £1,000,000
25% Tax Free Cash £ 250,000
5% tax free income from tax free cash £ 12,500
Amount Remaining for Income £ 750,000
5% Income £ 37,500
Tax on income £ 5,380
Net Income £ 44,620
Marginal Rate of
The point here is that if managed correctly you will receive 40%
tax relief on pensions, tax free growth and you will only pay 10.76% when
taking money out of your pension. Therefore using pensions as a long term
regular savings product makes a lot of sense. The downside is you will not have
access to the funds until the age of 55.
savings accounts (Isa’s): according to GOV.UK “there are 4
types of ISA’s”
Stocks & Shares Isa
innovative finance ISAs ( mix between cash and Stocks &
Isa are really the first starting point from a Long term savings
standpoint as they allow you to invest with the possibility of tax free growth(
Maximum you can invest is £20,000 per year). They come in two forms; cash and
stocks & shares. The great thing about an ISA is that is grows tax free so
it makes sense to put something in there that will have an opportunity for
growth. By doing this you will be exposing yourself to assets which do carry
risk (if investing in stocks and shares) but will undoubtedly outperform cash
in the long run. overtime equities will outperform cash – the key is to hold
the investment for a minimum of 5 years.
After pensions, ISAs are a brilliant way to be tax efficient and
as described above this can be a really efficient use of savings income and it
can provide you with flexibility to access the capital should you ever need it.
Income from pensions is liable to tax however income from an ISA is completely tax
free. Therefore this is a great way for you to top up retirement income without
every paying higher rates of income tax. With regular contributions you can
actually benefit from volatility as it means that you are picking up units in
investment funds at a lower price. (as mentioned above pound cost average)
Trusts: After ISA’s and Pensions the next place to be saving is into a
According to David Burnell Financial Services “A unit trust is
a collective investment created under trust. The trust pools the money of
numerous individual investors to create a fund with a specific investment
objective – income, growth, or both.(David Brunell 2018)
When making an investment you usually make your return in two
Growth in the value of the share price/asset price
Dividends or Income which is paid out to investors
Each return is taxed in a different way ‘Growth’ and ‘Dividends’.
A Unit Trust is another way in which we can shelter the majority of returns
After an ISA allowance you should look at using your Capital Gains
Tax (CGT) allowance. Everyone in the UK has a CGT allowance of £11,300 a year
which means you can make gains from investments up to £11,300 and pay no tax on
this growth. CGT allowances are like ISA allowances in the fact that you lose
them each year, therefore some assets are only measured against your CGT
allowance when you come to disposing of the asset, for example property.
However by investing into more liquid assets, such as unit trust funds, you can
get into the habit where you are using this allowance every year. The way in
which this works is as follows:
You hold a unit
trust fund and at the end of the tax year we calculate the gain over that year
We then instruct
you to make a fund switch to ‘crystallise’ the gain
We then file this
on your tax return and as long as the gain is under £11,300 it is all tax free
If you make a
loss in a year we can crystallise this and you can offset this loss against
After 30 days you
can rebuy your original funds and the gain is washed away
essentially they are washing away their gains each year so they
never have a large taxable gain as you would with a buy to let. This means that
a £100,000 gain over 10 years could pretty much be completely tax free whereas
with other assets this could be as much as losing £17,780 (20% rate) or £25,000
(28% rate) to tax.
In addition, new rule changes mean that the first £5,000 of
dividends earnt each year will be free of any tax. This therefore means that we
can set up a Unit Trust investment which, if managed correctly, will grow tax
free up to £16,300 per annum. Assuming a growth rate of 5% pa.
Bonds: After maximising
ISA allowances, Pensions, Capital Gains Tax allowances and Dividend allowances,
we then need to look at what other regular savings investments that
are tax efficient. Bonds are a great product
to look at. When it comes to the taxation of bonds there are two options you can
look at.Onshore and offshore
Sanlam “Comparison of onshore and offshore bonds This document compares
onshore and offshore bonds and how they differ in areas such as taxation
treatment. Our comments are confined to UK resident investors. Offshore bonds
are generally issued by subsidiaries of well-known UK life offices in financial
centres such as Ireland, Luxembourg, the Channel Islands or the Isle of Man.
One of the major differences between onshore and offshore bonds is that
taxation is deferred within an offshore bond due to low (or no) tax on gains
and income arising on the underlying investments during the term of the
investment.” Sanlam website 2018)
deferred withdrawals up to 5% per annum
dividend income is received net of 10%
tax. This is non recoverable, but
the provider’s corporation tax liability in
of the dividend.
Investment funds are subject to tax on interest and
gains realised within the funds.
surrender, the fund is deemed to have already
at 20% (even if the effective rate in the
below 20%). For a higher or additional rate
any chargeable gain will be subject to
difference between basic rate and higher or
rate income tax. A basic, starter or nil
taxpayer pays no further tax unless the gain,
added to their other income, takes them into
higher rate tax bracket (in which case ‘topslicing’
chargeable excesses arising from part
or part assignments, the ‘top-slice’ is
by dividing the gain by the number of
years since the policy commenced or,
lower, the number of years since the previous
Corporation tax relief applies during the term on
therefore £100 of expenses costs an
deferred withdrawals up to 5% per annum
Dividend and other income may be subject to withholding
which is non recoverable.
Income and realised gains in the funds are not taxed
or may suffer a low rate of tax.
surrender, a higher or additional rate taxpayer pays tax
higher or additional rate on any chargeable gain.
rate taxpayer pays 20% on any chargeable gain
starter rate taxpayer 10%. Top-slicing relief will be
to basic rate taxpayers who become higher rate
on receipt of the bond proceeds, or higher rate
payers pushed in to the additional rate band.
chargeable excesses arising from part surrenders or
assignments, the ‘top-slice’ is calculated by dividing
by the number of complete years since the policy
even if there have been previous chargeable
surrenders or assignments.
compounding effect of income and gains rolling up
can make a big difference to the overall return,
over the longer term.