What to do if you've missed the ISA deadline
What are the alternatives to investing in an ISA?
So the 2011/12 tax year is now over.
But all is not lost - Cash ISAs aren’t the only vehicle you can use to save for your future. So let’s look at the alternatives:
Pensions are a great way to save tax-free. If you or your employer pay money into a pension pot, the tax man tops up your cash with tax relief.
For every £80 a basic rate taxpayer pays in, the tax man adds an extra £20. For a higher rate taxpayer, the tax man will still pay the extra £20, and the taxpayer can then claim back a further £20 at the end of the tax year.
On the downside, you will have to pay income tax when you take money out of the pension when you’re retired (apart from a 25% tax-free lump sum you can withdraw from 55 onwards).
Pensions are also inflexible as you can’t take any money out until you’re 55. And some pensioners have been disappointed by the level of income they’ve been able to withdraw from their pension pots.
That said, the tax relief is generous, so I think that pensions are, on balance, attractive investment vehicles. This is especially true if your employer is also contributing to your pension pot. Read more in Become a pensions expert in five days.
2. Premium bonds
The big attraction of premium bonds is that all prizes are tax-free. And, of course, there are lots of small prizes, so most holders do get some cash back sooner or later.
That said, the average return is on the low side at 1.5% a year, and your chances of winning a million are extremely slim. Read more in Why Premium Bonds are a rubbish investment.
3. Stocks and Shares ISAs
When it comes to ISAs, don’t forget that Cash ISAs aren’t the only game in town. You can also invest in Stocks and Shares ISAs. These enable you to invest in the stock market tax-free.
In the 2012/13 tax year, the total ISA allowance will be £11,280. You could put all of that allowance into stocks and shares if you wish, or you could put up to £5,640 in a Cash ISA, and put the remaining portion of your total allowance into stocks and shares.
Read more in The UK’s best Stocks and Shares ISAs.
4. National Savings & Investments
National Savings & Investments (NS&I) is the savings arm of HM Treasury. If you put your savings into NS&I, you’re lending to the Government.
NS&I also often offer index-linked savings certificates. These normally offer a tax-free return which is guaranteed to beat inflation over a fixed term, perhaps three or five years. Unfortunately, NS&I isn’t offering any index-linked certificates at the moment, but they’ll almost certainly come back at some point. When they do come back, snap ‘em up. They’re great tax-free alternatives to Cash ISAs.
5. Investment bonds
Some financial advisers recommend ‘investment bonds’ as a useful vehicle to reduce your tax bill.
These bonds are life insurance policies in which you can invest a lump sum. They’re not the same as corporate bonds, premium bonds or fixed-rate bonds. They’re not really insurance vehicles either, they’re effectively an investment fund. The best known kind of investment bond is a with-profits bond.
Investment bonds can help accountants do some clever tax planning in certain circumstances, but the benefits are smaller than is often suggested. What’s more the bonds have high charges and pay plenty of commission to financial advisers who recommend them.
Steer well clear.
6. Venture Capital Trusts (VCTs)
If you’re well off and don’t mind taking a lot of risk, VCTs can be attractive vehicles.
VCTs are funds that invest in very small companies, often start-ups. That makes them risker than your average investment fund. You can invest up to £200,000 in a VCT each year.
To compensate for the risk, the Government gives a 30% rebate for investing. So if you invest £100,000, you can knock £30,000 off your tax bill. The only limit is that you can’t get relief greater than your total income tax bill. So if your tax bill is £5,000, you can’t get more than £5000 in relief.
You can only get this income tax relief if you invest in the trusts when they’re launched. You can sell your holdings on the stock exchange at any point, but the purchaser of your shares won’t get the income tax relief. You’ll need to stay invested for five years to get the income tax relief.
You also won’t have to pay any capital gains tax when your sell your holding.
The tax breaks are generous but VCTs are high risk and you need to stay invested for at least five years to get all the reliefs. So these investments are really only suitable for experienced, sophisticated investors. You should probably speak to an independent advisor before you buy.
So there you have it, some tax-free alternatives to Cash ISAs. Make sure you don’t pay more tax than you have to!
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