Investment-Based Accounts

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If you want your money to start working for you over and above inflation, then to make real gains you have to look at taking some risks. You are almost certainly already taking some risk with the money in your pension, so why wouldn’t you do it with the money outside of your pension?

The most obvious way to do this is to use your NISA allowance. Your NISA is not just for cash savings; it can also hold low-risk and high-risk investments. Know that NISAs may give you a higher yield than cash and inflation, but doing so can take a little more time.

The advantage of pensions is that you get tax relief on the money at the outset. The problem is that this simply defers the tax, as you then pay tax on the income as you draw it. The advantage of NISAs is that whilst there is no tax relief at outset, when you come to draw the money out, it is tax-free. Therefore, a blend of NISAs and pensions allows you to minimise the tax you pay in retirement.

If you want to save more than the allowance, do not be alarmed. You can use the same investments as you would have put into the NISA, just unwrapped. By holding these funds unwrapped you will pay some tax on the growth, but as most of this growth will be capital growth, it is taxed through the Capital Gains Tax regime. The other advantage of this strategy compared to other investment types is that if you have years where you cannot save the full NISA allowance, you can transfer the money from unwrapped into the NISA wrapper to avoid losing the allowance.

You should also be aware of two other kinds of investment groups.

The EIS And Friends

post2Once you’ve built up a good foundation in NISAs, cash, pensions and possibly some unwrapped investments, some of the wealthier amongst you may be looking for other options. Particularly if you are fully funding your pension, then you may be looking for long-term saving alternatives. This is where the EIS, SEIS and VCT might come into play.

The Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) are investments in unlisted companies. Venture Capital Trusts (VCTs) are funds that invest in a portfolio of unlisted companies. These all offer very attractive tax breaks, both in ways that are similar to pensions and NISAs, but also in that VCTs can offer some additional savings in the areas of deferring or reducing Capital Gains liabilities, while also reducing Inheritance Tax.

Unregulated Investments

As enthusiasm for pensions wanes, more people are willing to risk their pension in risky unregulated investments. These tend to take the form of more obscure investments into ‘teak forests’, ‘foreign property’, ‘secondhand endowments’, ‘land banks’ or ‘foreign exchange’.

I am not saying that all investments in this area are rubbish, but what I will say is that many so far have cost their investors their shirts. When regulated, if mainstream investments go wrong they might fall by no more than 10%; even in a financial disaster, you can get back 50% through a compensation scheme. When unregulated investments go wrong, it usually means you lose everything.

Because these investments are unregulated, you cannot make a complaint to the Financial Ombudsman, so if a problem arises, you have to go through the courts, which is a much more complicated and costly process. Avoid these investments like the plague. One final, but vital, point worth making: Never buy shares from anyone who approaches you on the phone!

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