Investing in uncertain times

Be tax efficient – take your helping hand

Aaron Gibbs, Investment Writer

While uncertainty and volatility are two trending topics across financial markets right now, other areas of our finances look a bit more certain, but not in a good way – the cost of living is on the rise.

The 'cost of living' is a measure of people's 'real' incomes. It covers a range of different things, from inflation and household bills, to wage growth and taxes. So, why is it rising?

Inflation is playing a big role. That's the price you pay for everyday goods and services, like petrol, food and other essentials. It's risen at its fastest pace in 30 years to 6.2% in the 12 months to February with expectations it could rise above 7% in April (when the energy price cap goes up by 54% on average). And inflation could go even higher as the Ukraine crisis continues to escalate.

UK taxes have risen too. The government has announced a rise in National Insurance and dividend tax. The new rules are effective from 6 April 2022, squeezing incomes further for many households.

In times like these, it's more important than ever to make the most of the tax advantages available. The government currently offers generous incentives that encourage us to save and invest for our future, but there's nothing to say they'll be around forever.

So, where it's right for your circumstances, make sure you take advantage of any help you can get. This is where ISAs and pensions come in.

There are no guarantees with investing, but you can improve your chances of success by not paying more tax than you need to. The more money you can shelter away from tax, the harder it can work for you.

Investing is best for the longer term, but remember to regularly review your investments. By compounding more of your money for longer, you could improve your returns. Watch our short video to see how compounding works and how powerful it can be.

Unlike cash, all investments can fall as well as rise in value, so you could get back less than you invest. Tax rules can change, and benefits depend on personal circumstances.

This article isn't personal advice. If you're not sure what's best for your circumstances, ask for financial advice.

The figures shown in this video aren't guaranteed. And they don't take inflation or charges into account.

Stocks and Shares ISAs

By making your portfolio as tax efficient as possible, you're actually improving your returns before you even start investing.

One of the easiest ways to start investing tax efficiently is to invest in a Stocks and Shares ISA. All investments in an ISA are free from UK income and capital gains tax.

The vast majority of investments can be held in a Stocks and Shares ISA. This offers investors plenty of variety and choice on where to invest, as well as the means to build a nicely diversified portfolio. Whether you're a conservative investor looking for a steady income, or seeking a more adventurous way to grow your wealth, you can invest with the confidence of knowing any profits or income are sheltered from tax.

You may need to rotate your device or scroll across to view the full table below.

The table refers to the tax year 2022/2023. Tax rules can change, and benefits depend on individual circumstances. *This example assumes an individual has fully used their personal allowance and none of the interest falls within the starting rate for savings.

Each tax year (6 April to 5 April), there's a limited amount of money you can put in ISAs. This tax year the ISA allowance is £20,000. It's not possible to carry forward allowances from previous tax years. So if you haven't already, make the most of this year's ISA allowance before it's gone.

MORE ABOUT THE HL STOCKS AND SHARES ISA

Pensions

Another way to benefit from tax-free investing is to invest in a pension for your retirement.

One key advantage is that you can get tax relief on what you put in. The government will top up your personal pension contributions by 20%. So, to have £100 in your pension, you'd only need to contribute £80. Those who pay tax at a higher rate might be able to claim back even more.

Your pension contributions, including any made by your employer, are limited by the annual allowance which is currently £40,000 each tax year for most people. You'll only get tax relief on personal pension contributions up to 100% of your UK earnings, or £3,600 if this is greater (if you're a low or non-earner).

Similar to ISAs, you'll benefit from growing your money free from UK income tax and capital gains tax. However, with a pension you can't normally take money out before you're 55 (57 in 2028).

It's worth pointing out that on average, over the very long term with dividends reinvested, the UK stock market has grown by 9.1% a year to 31 December 2021. By investing in a pension and getting at least 20% back in tax relief, you're effectively giving yourself a head start. Past performance is not an indication of what will happen in the future as nothing is certain.

The chart below shows how much you'd have made when the FTSE All-Share index began, just over 33 years ago. If you'd invested £8,000 or £10,000 in a pension (£8,000 plus the current basic-rate tax relief of 20%). Remember tax rules can, and will, change.

Chart showing the FTSE All-Share with £8,000 v £10,000 invested

You may need to scroll across or rotate your device to see the full chart below.

Past performance isn't a guide to the future. Source: Lipper, 31/12/2021.

The chart is an illustration based on a lump sum, which excludes charges and inflation. Please note you can usually take 25% of your pension pot tax-free with the rest taxed as income.

In this case, the difference between receiving basic-rate tax relief and not is more than £46,000. And those who pay more than basic-rate tax could've received thousands more through further tax relief as well.

Modern pensions, like the HL Self-Invested Personal Pension (SIPP), tend to offer more investment flexibility than traditional pensions – you can choose when, where and how you invest. This kind of flexibility gives you the ability to tailor your portfolio to suit your needs and wants, and help you achieve your long-term investment goals.

Unlike a lot of things, pensions typically get better with age – the earlier you start, hopefully the bigger the pot.

Find out more about THE HL SIPP

Fund ideas

HL Fund Research team

If you think you'll need the money in the next five years, it's sensible to hold cash.

But if you're putting away money for the long term, and are happy with the extra risks involved, investing could give you a better chance of growing your money.

These fund ideas could help but they won't be right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.

These ideas are not personal advice. If you're not sure of the suitability of an investment for your circumstances, contact us for financial advice. We're mindful that there's plenty of uncertainty around at the moment, so keep in mind all investments can go down as well as up. You could get back less than you invest.