Everyone can have both an Isa and a pension – and as each type of tax wrapper has advantages and disadvantages, investors should try to make the most of both products.
One of HM Revenue & Customs’ favourite sayings at this time of year is that “tax doesn’t have to be taxing”, but with the UK tax code 10 times longer than the complete works of Shakespeare, there are countless tricks and traps to navigate.
1) Capital gains tax on main residence
A common misconception is that the sale of your main home is exempt from capital gains tax (CGT), but this is not always the case.
Inheritance tax (IHT) is widely disliked as a double levy on assets built up from taxed income over a lifetime of work.
In fact only 4-5% of UK estates currently pay it. However, as the baby boomer generation dies, leaving homes that have soared in value, many more families will be caught. IHT receipts could rise by a third, from £5.2 billion in 2017 to £6.9 billion in 2024, according to the Office of Budget Responsibility.
Last year was a year of economic disruption and political upheaval. In the investment arena, this uncertain climate is most vividly reflected in $17 trillion (£13.2 trillion) of bonds worldwide that currently yield negative returns. Investors are paying governments and, in some cases, companies for the privilege of lending them money – a far cry from buying bonds for income.
A diagnosis of dementia, in whatever form it might take, is a tough time for any family, one full of uncertainty about the future. However, the financial aspects are one area where you can take back control and reduce stress levels by planning ahead.
Like everything to do with pensions, the state pension is fiendishly complicated – and the goalposts keep moving.
In 2016, faced with escalating costs, the government decided to overhaul the system and introduce what it called a new ‘flat’ rate state pension. However, it is not in fact flat at all and depends on the national insurance (NI) record an individual builds up over their working life.
Over the summer, expectations of an economic slowdown and political threats such as the US-China trade war created such high demand for secure investments that more than 30% of the world’s bonds (£13 trillion worth) fell into negative yield territory. This means that investors such as pension funds and insurance companies are now willing to buy bonds for more than their face value and take a loss, because they need the security and liquidity government and high-quality corporate bonds provide.
Conmen have always tried to cheat people out of their money. But investment frauds have become more sophisticated in recent years, and activity has soared ever since the Pension Freedoms of 2015 opened up the potential for criminals to dupe people out of their entire life savings in one swoop. Last year alone, Britons lost almost £200 million to scammers.
The gating of Neil Woodford’s flagship Equity Income fund in early June has alarmed investors. However, Woodford invested the fund in small and unquoted stocks that are difficult to sell quickly, listing some stakes in unquoted companies in Guernsey simply to circumvent the regulator’s rule that caps at 10% of net asset value (NAV) the proportion of unlisted securities an open-ended fund with daily dealing can hold.
Income tax rules
The income tax you must pay varies according to your income in a given tax year, which runs from 6 April to 5 April. Everyone receives a personal allowance – £12,500 for the 2019/20 tax year. You pay no tax on income up to this threshold.