Wrap your investments carefully this Christmas! Breaking down tax-efficient investing and how it can help build long-term financial resilience
interactive investor
The award-winning investment platform that helps you take control of your financial future. ii is an abrdn business.
The festive season isn’t just about wrapping presents - it’s the perfect time to “wrap” your investments too. Why? With inflation eating into savings and taxes on the rise, making your money work harder has never been more important.
Whether you’re new to investing or a seasoned pro, using tools like Individual Savings Accounts (ISAs) and Self-invested Personal Pensions (SIPPs) to protect your investments from tax can give your wealth the boost it needs.
More of us are saving (hooray!) but unfortunately there still aren’t enough people investing, with a lack of confidence, market uncertainty, and the allure of headline-grabbing cash rates keeping many on the sidelines. As of September, cash ISAs accounted for 40.5% of the ISA market. While cash ISAs offer security, the data shows they’re no match for inflation over time, meaning your money could quietly lose value.
Investing doesn’t just help to outpace inflation, but it also lets you shield your gains from tax.
Tax stole the spotlight in 2024, and with all the changes, many of us are paying more than ever before. Protecting your investments has gone from a nice-to-have to a must-have. And it is simpler than you think.
No-nonsense guide to wrapping
The idea of ‘tax efficient investing’ might sound fancy, but it can be very straightforward. Don’t let the financial jargon intimidate you, there are simple steps you can take to build your wealth over time, without the government taking a slice.
Individual Savings Accounts (ISAs) and Self-invested personal pensions (SIPPs) are both tax wrappers. Again, the terminology makes them sound more complicated than they are – they’re designed to help you build wealth. Think of them as protective layers, like wrapping paper, for your money.
Benefiting from tax-free growth
ISAs and SIPPs each have their own set of benefits, depending on investor’s individual needs and circumstances, but investments held in these accounts will be shielded from tax, and this helps grow your money over the long-term.
For example, you can put up to £20,000 into ISAs every year, and any growth and interest (including dividends) are sheltered from tax, so you get to keep more of your money.
Compared to savings and investments held outside tax wrappers, the taxman could grab up to 20% on gains, 39.35% on dividends, and 45% of your interest.
More tax-free saving can only be a good thing for consumers, which is why it is fantastic that ISAs have a £20,000 allowance each year, and although few will be in the fortunate position to make full use of the annual allowance every tax year, making the most of your annual allowance is a great way give your wealth a boost.
For experienced ISA investors, choosing the right type should be reasonably straightforward. But if you’re new to saving and investing, the process might pose a headache.
At interactive investor, we’re vocal about simplifying the ISA landscape because too many options can overwhelm investors - The Financial Conduct Authority recently said that 8.6 million people in the UK have more than £10,000 sitting in cash, and that half of them could possibly benefit from investing. Unsurprisingly, research consistently shows that the ISA market isn’t well understood, and complexity disenfranchises investors. We’ll continue to call for ISA simplification for the benefit of consumers, but until then here are a few quick tips to help.
Firstly, if you are unsure, start small and build confidence as you go. Secondly, choosing the right wrapper depends on your financial goals, risk appetite, and time horizon.
For accessibility, an ISA is a great pick
With most ISAs you can get your hands on the money whenever you like, without penalty. However, some types do charge for early withdrawals so it’s important to understand these before investing. You’re also not restricted to one type of ISA during the tax year. You could take out one of each, provided you stay within the prescribed annual limits.
When choosing an ISA, carefully consider your financial goals (and how far away they are), your appetite for risk, and your stage of life.
Taking the example of a stocks and shares ISA – here, you’re investing in the stock market which gives you potential to grow your money significantly faster than inflation and savings accounts, albeit with higher risk (so always bear this in mind). Plus, you’ll be doing this within that all-important ISA wrapper which will shield gains from tax.
With investing, it will always depend on your individual circumstances, and the value of investments can fall as well as rise, but if you're in it for the long-term, your investments will have longer to recover if the market takes a dip. Remember – investing is a long-term game, the longer you can allow your pot to grow – the better.
For less confident investors, consider managed ISAs. interactive investor, for example, has its own Managed ISA which gives investors all the tax-free benefits of a Stocks and Shares ISA, but with our experts choosing the investments which align with each individual investors’ stage of life, investment preferences, and risk appetite. A great option if you want minimal faff with your investments. The benefit of our flat-fee subscription model, too, is that you could have a managed ISA and self-managed ISA all within one subscription fee; the best of both worlds.
For retirement savings, you could consider a SIPP
A Self-Invested Personal Pension – A.K.A a SIPP is a type of tax-efficient pension account offering you a wider choice of investments and more flexibility. SIPP tax relief is essentially a government contribution to your pension. Also, a SIPP puts you in the driver’s seat, which can help you feel more in control of your retirement savings.
With a SIPP, you call the shots how and where you invest, and you’re not restricted by the choice provided by your pension provider. With interactive investor, for example, you have plenty of expert guides and you can choose from ready-made funds selected by experts, or hand-pick your own investments from the UK and global markets.
‘All weather’ ISAs and SIPPs
Now let’s look within the wrapper. It’s important to make sure your bundle of investments are diversified. This means spreading your investment across asset classes, regions, and sectors, to build a ‘weather-proof’ portfolio and give you a better chance of finding strong returns.
Need inspiration? interactive investor offers plenty of tools and educational resources to help you make informed decisions. Knowledge is power, and we’re here to help you become the best investor you can be.
Are you overpaying?
Lastly, don’t let sneaky fees get in the way.
Many platforms charge a percentage of your wealth, meaning the more you make, the more you pay. At interactive investor, we offer a flat-fee structure, so you’re never penalized for growing your investments.
Take a moment to review your fees - you might be surprised. Investing isn’t free, but it doesn’t have to be expensive. Don’t let unnecessary charges undermine your tax-saving efforts.
Many platforms charge a percentage of your wealth, meaning the more you make, the more you pay. At interactive investor, we offer a flat-fee structure, so you’re never penalised for growing your investments.
Take a moment to review your fees — you might be surprised. Investing isn’t free, but it doesn’t have to be expensive. Don’t let unnecessary charges undermine your tax-saving efforts.
Wrap it up
This Christmas, give your finances the gift of growth and protection. By using ISAs and SIPPs to shield your investments, you can build wealth, outpace inflation, and keep the taxman at bay. Ready to start saving smart? Explore ISAs and SIPPs with interactive investor today and take control of your financial future.
This is just a guide, as we want to help consumers navigate this space, but if you’re in doubt you could consult a financial adviser.
ENDS
interactive investor (ii), an abrdn business, is the UK's number one flat-fee investment platform, offering ISA, SIPP, Junior ISA and general investing accounts, plus leading investment content, tools, choice and service. Customers pay a flat monthly fee, even as their investments grow, meaning they keep more of their money. interactive investor is an award-winning platform and proud to be rated ‘Excellent’ on Trustpilot, along with being a Which? Recommended SIPP Provider for the third year running. ii is authorised and regulated by the Financial Conduct Authority and FSCS protected.
interactive investor has over 430,000 customers and over £70 billion in assets under administration.
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