How do wealth managers work?
Welcome to the first in a series of six guides written and produced in partnership with Dozens. These guides will set out everything you should consider as you set up your savings and make investments for the future – and, most importantly, how to take action today.
Part two: How much to invest
Part three: Saving, investing, and trading
Part four: Rebalancing your portfolio
Part five: Choosing a provider
Part six: Pensions and retirement
These guides contain some specific tips for British Finimizers. If you’re in the US or somewhere else, never fear – we’re hoping to bring you your own special content very soon 😉
What if you had to live for twenty years without any income – only what you had saved in the bank, plus whatever you could find down the back of the couch? Paying for housing and essentials might become a struggle; and you could probably forget about ever eating out or going on holiday again.
It’s a question more and more people in the UK have to answer – we’re living longer than ever. Today, the average Brit is expected to live another 20 years beyond the current retirement age of 65. And just squirreling money away – either under the bed or in the bank – probably won’t be enough to see you through, thanks to a pesky thing called “inflation”.
Inflation is the rate at which the prices of goods and services are increasing. Rising inflation means one pound buys less, and is therefore worth less, with each passing year. In other words, unless they’re earning interest, your savings will lose their value over time. For example, annual inflation of 3% would halve the value of your cash in just 24 years – so if whatever you’ve saved is earning little or no interest, it’ll fall dramatically short of what you need come retirement.
Inflation doesn’t just risk eroding the value of your retirement kitty: if you were saving towards a house deposit, £10,000 would be worth only £8,600 after just five years of 3% annual inflation.
True “saving” involves preserving (and perhaps even growing) the value of your money – and that means making sure its value is rising by at least as much as inflation. Achieving that will always involve some level of “investing” – either on your part or on someone else’s (like a savings account provider). So here are a few steps that you can take to make your money work harder:
It may sound daunting, but never fear – Finimize is here. And over the coming months, we’ll be guiding you through each step in detail. By the end, you’ll have a clear idea of just what to do with your savings – as well as how to go about it.
In this first of six guides, we’ll dig into step one – investment wrappers.
Investment wrappers – a.k.a. “tax wrappers” – bring together several investments under one roof and reduce the amount of tax payable on any gains. In the UK, there are several tax-efficient wrappers to choose from. The two most popular are ISAs and pensions.
Any money you make from an ISA is, crucially, completely tax-free. You’re allowed to invest up to £20,000 each year into this sort of tax-free account – and there are different types, depending on your goals:
A last word on the ISA: use it or lose it! Your annual ISA allowance can’t be carried over to the following tax year – so if you don’t use part of it, it’ll disappear when your allowance resets each April.
One rule of thumb when deciding your tax wrapper is: if you have an ISA allowance available, use that first.
Once you’ve exhausted your ISA allowance, the next-best tax wrapper is your pension – as long as you don’t need access to this money before retirement, of course.
Contributions you make to your pension come straight out of your paycheck and don’t attract any income tax up front, making them “tax efficient”. However, when it comes to withdrawing your cash in retirement, you’ll have to pay some tax. This will probably be less than if you were still working – and your “personal tax allowance” will let you get at least some of your money out each year completely tax free.
Many companies offer employees the opportunity to have their pension contributions matched each month. Depending on the amount of influence you have over it, your pension can be thought of as just another investment: that money is put into a fund and managed on your behalf.
You may well be better off maximizing your pension contributions before you do any direct investing yourself – and you may want to consider looking at putting these contributions into a Self-Invested Personal Pension (SIPP), which gives you more control over how your money’s invested.
A SIPP allows you to pool together pensions from previous jobs, as well as any private policies you may have, and invest that money however you’d like. You can select and manage your investments yourself, or instead have a professional investment manager make the decisions for you. Managing your pension in this way can become expensive, however – so mind you aren’t stung by high fees.
A General Investment Account (GIA) might be a good fit if you’ve maxed out your annual ISA allowance and still have cash kicking around, but only if you want to get access to that money before retirement. That’s because investments within a GIA incur taxes on any returns you receive – i.e. dividends and interest – as well as on any gains made if the value of your investments rises – a.k.a. “capital gains”.
There are some allowances: depending on how much tax you already pay elsewhere (e.g. on your salary), you might be eligible for a Personal Savings Allowance, which relieves you of tax payments on some or all of your savings’ interest income. The same is true of the Dividend Allowance, up to a certain limit.
If you’d prefer to avoid the risk of losses involved with a GIA – perhaps because you’re saving towards financial goals within the next three years (the “short term”), you may be better off putting money into a non-ISA savings account. These too attract the tax man – but only for any interest earned beyond your Personal Savings Allowance. As we mentioned earlier, keep an eye out for savings accounts that offer inflation-beating interest.
Step one in figuring out your future finances is protecting the value of your money from inflation. We’ve considered some options for doing that in a tax-efficient way, while making sure you can get access to your cash if and when you need it.
Remember these rules of thumb:
That’s it! But you can discover more in part two of this series…
Part two: How much to invest
This guide was produced in partnership with Dozens.
Dozens is not a bank. They are authorised by the Financial Conduct Authority as an e-money institution (FRN 900894) and also as an investment firm (FRN 814281).
The card is issued by Wirecard Card Solutions Ltd pursuant to licence by Mastercard International.