- On July 28, 2017
We all know that ISAs offer a tax efficient place to put our savings, even if the current rates of interest offered by many are pitifully low.
You can put up to £20,000 a year into an ISA knowing that the interest you get will be completely free from tax. You also have the flexibility to choose between a cash or a stocks and shares product, as well as a mix of the two.
But once you’ve used up your annual allowance you’re stuck with having your remaining money in a poorly paying bank account where you’ll struggle to get more than 0.25% interest right? Wrong.
A way to avoid having this ‘dead money’ is to set up what’s known as phased ISA purchase.
This is where you use an unwrapped account, ie one which is subject to tax, that is invested in the stock market which then feeds into your ISA account when your annual allowance becomes available again at the start of each new tax year in April.
An example of this would be a unit trust, which is a popular form of investment. A unit trust manager buys a blend of shares or bonds in companies listed on the major stock markets and the fund is then divided up into units.
4-6% return feasible
You, the investor, then buys these units, the price of which will depend on how well the fund’s underlying investments are performing.
It’s important to point out that the value of the investment can go down as well as up, but it’s perfectly feasible for you to see a return over time in the region of 4-6% per annum.
There are tax consequences of selling funds from an unwrapped investment, such as Capital Gains Tax on profits and income tax on dividends, but if you correctly use your capital gains allowance and the annual dividend allowance the chances are you will pay no tax.
Each year you can use this investment to fund your ISA allowance allowing all your money to be invested, rather than part of it effectively sitting dormant.
This means you can gradually convert your taxable savings into tax free income over a period of time while still making them work for you.
An ISA in itself can be arranged so that it is invested in a portfolio of assets which match your appetite for risk.
By funding your ISA through a feeder investment account you are doing it in a way that manages the tax consequences while maximising the potential return on your money.
Remember, the value of your investments can do down as well as up, so you could get back less than you invested.
For a free consultation about your financial needs call 0118 974 0159 or email email@example.com.