Saving for retirement

Author: Stephen Hall

  1. People have traditionally used bank accounts as a secure and accessible home for savings.  Accruing interest tax free is attractive and so Cash ISAs should be a sensible place to save. However, in this low interest rate environment it is hard to achieve a meaningful return on deposits and interest credited on many cash ISAs accounts does not even keep pace with inflation, meaning that the spending power of savings actually diminishes over time. The Cash ISA market arguably failed to stay competitive and higher interest rates have been widely available via internet savings accounts or through the high street if savers were prepared to lock in for a fixed term.
  1. Banks now pay all interest gross and the first £1,000 of interest received will be tax free for basic rate payers. This levels the playing field tax wise for most, however, people choosing not to use the ISA allowance for their savings are exposed to future changes. Care should be taken.
  1. If the purpose of saving is long term capital growth and you do not need swift access to your money, consider transferring all or some of your cash ISA holdings to an investment ISA. Although investing money normally comes with a higher degree of risk than a deposit account and capital is normally not guaranteed, over the longer term investments have always outperformed cash. It is important that savers with little no investment experience seek guidance or independent financial advice before opting for an investment ISA as the choices on offer across the whole risk spectrum can be bewildering. No one should take more risk than they are comfortable with and their capacity for investment loss is as important as their aspiration for investment growth.
  1. For those of you with a high tolerance to risk seeking to maximise returns or you’re seeking an investment which may help with Inheritance Tax planning, an AIM ISA may be attractive. AIM is the Alternative Investment Market and contains shares of small companies not listed on the main market. Some shares can qualify for Business Property Relief once held for two years and become exempt for Inheritance Tax.  This can be useful as, unlike many other forms of estate planning, the investor still owns the assets and can have access if required. Gains made and income produced are sheltered from tax as with other ISAs