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Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
magazineInvesting through the generations
The start of a new tax year is a great time to review your investments and ensure you’re building up money in the most efficient way possible.
Thanks to the wide range of tax wrappers available, it’s possible for every generation to shelter their hard-earned savings from the taxman – and benefit from some generous Government allowances.
This easy-to-read article will help you to determine which investment strategy will help you to reach your financial goals. Simply skip to the relevant section that matches your age and/or that of your children or parents if you want to invest on their behalf or give them some guidance.
GEN ALPHA (approx. age 1-5)
It’s never too early to start planning for your children’s future. There are specific tax wrappers aimed at children which make it possible to build up a decent sized nest egg without paying any tax.
You can open a Junior ISA as soon as your child is born and pay in up to £4,260 each tax year under the 2018/19 allowance.
‘This is tax efficient as the pot will grow tax-free and can then be used for a variety of goals including university fees or a house deposit,’ says Anna Sofat, managing director at financial advice firm Addidi Wealth.
DIFFERENT TYPES OF JUNIOR ISAS
There are cash Junior ISAs and stocks and shares Junior ISAs. A stocks and shares Junior ISA enables you to invest in the stock market and benefit from market growth. Your child can’t access their money until age 18, which means there is plenty of time to ride out any market volatility.
If you open a Junior ISA at birth and invest £355 a month (£4,260 a year), the portfolio would be worth £112,035 by the time the child reaches 18, assuming an annual growth rate of 4%. Even investing £50 a month is worth it, as this would produce a pot worth £15,780 at that level of growth.
Another way of investing for your child’s future is through a Junior SIPP (self-invested personal pension), which they can access after age 55 under current rules.
You can pay in up to £2,880 into a Junior SIPP each tax year and the Government will add tax relief of 20% to make this up to £3,600.
Because the investment time horizon is so long, you may want to consider investing in higher-risk assets such as shares in smaller companies or an emerging market fund containing shares in companies from such countries as Brazil, India and South Korea. These types of assets could potentially generate higher returns
than lower-risk assets.
iGEN (approx. age 6-23)
Children in the iGen generation still have a long investment time horizon, which means equities should typically be the focus of any investments.
‘Equities have the potential to deliver the strongest returns over a long period and the time allows the impact of short term volatility to be less relevant,’ explains Ryan Hughes, head of active portfolios at AJ Bell.
‘By having a long time period, it also makes it viable to save on a regular basis, perhaps through a monthly savings approach, which can be very effective even if you can only afford to save a small amount each month.’
TAKING THE PASSIVE ROUTE
A tracker fund or exchange-traded fund could be one way to start investing for the iGen generation, acting as a core investment which is another way of saying it is one of the backbones of a portfolio.
A product like Fidelity Index World (GB00BJS8SJ34), which tracks the MSCI World Index, would provide exposure to the biggest and best known companies in the world. This broad-based market exposure would act as the core, so you can then think about adding more opportunistic holdings alongside it in the future.
As your child gets older, reducing their Junior ISA’s equity exposure and moving towards cash could be a wise move if they want to use the money for something specific.
Switching to cash in the period close to the point at which they need to access the money effectively locks in any gains and eliminates the risk of the portfolio losing value should there be a period of stock market weakness.
However, you would have to consider the impact of inflation on any cash savings eating into the real value of the money. And they would also lose out on any market gains in the period in which the money is held in cash.
Once your child turns 16 the Junior ISA becomes their property, but they can’t withdraw money until age 18. At this point, there is nothing stopping your child blowing the lot.
‘Putting an investment into trust gives much more flexibility and control to the parent/grandparent as they are able to control when the child receives the money,’ says Hughes. ‘This also enables them to give money in phases which could be helpful for funding university fees, a deposit for a house or maybe a gap year.’
MILLENNIALS (approx. age 24-38)
Reaching your mid-20s is an exciting but daunting time. You have complete freedom over your life choices, but it’s likely you’ll no longer be able to rely on your parents to bail you out.
Most millennials are focused on paying off debts and other short-term objectives like financing next year’s holiday and building that important emergency cash fund.
As you move towards the end of your 20s, getting on to the property ladder, marriage and having children are common life goals for many people.
HOW THE LIFETIME ISA WORKS
The Lifetime ISA can be an attractive way of saving up for your first home. Anyone aged between 18 and 39 can open an account.
You can invest up to £4,000 a year and benefit from a 25% bonus from the Government until you turn 50. Once you turn 50, you can’t make additional contributions but your savings will still earn interest or investment returns.
If you don’t use the money to buy your first home, you can keep it as a retirement fund and withdraw money once you hit 60.
There is a 25% charge to withdraw cash or assets from a Lifetime ISA if you withdraw money before aged 60 with the exception of buying your first home or if you are terminally ill.
Some popular funds among Lifetime ISA investors are Fundsmith Equity (GB00B41YBW71), Scottish Mortgage Investment Trust (SMT) and Vanguard Lifestrategy 100% Equity (GB00B41XG308).
Even if buying a house is your priority, it’s a good idea to think long-term as well.
‘Millennials should ideally also be focusing on longer-term financial objectives, such as saving for retirement,’ advises Patrick Connolly, certified financial planner at Chase de Vere, a financial advice firm.
‘As a minimum this should involve joining a company pension scheme; even if they can’t afford to make large contributions it is important to get started. The days when people can rely on the State or their employer to look after them as they get older are largely gone.’
HOW TO USE THE DIFFERENT SAVINGS ACCOUNTS
The ideal approach would be to invest in pensions for retirement planning, a Lifetime ISA to get on the property ladder, a stocks and shares ISA for short to medium term financial goals, and cash savings for day-to-day emergencies.
Most people probably won’t have enough money to invest in all of these, so you may need to make some compromises.
The great thing about investing for retirement is that you have a long investment time horizon and so can afford to take on risk. While this may mean investing mostly in equities, don’t be tempted to take unnecessary risks.
Connolly suggests opting for equity-based funds that spread your money across different sectors and geographies, rather than individual shares or specialist funds.
XENNIALS (approx. age 33-43)
Once you’ve got your foot on the property ladder, your thoughts may now turn to building up money to pay for your children’s education.
A stocks and shares ISA is a great vehicle to use because it shelters your money from tax, including any growth and dividend payments you receive. You can withdraw money whenever you need it without paying tax.
You’re currently allowed to pay £20,000 each tax year across all the different types of adult ISAs (stocks and shares, cash, Innovative Finance and Lifetime).
INVESTMENT GOALS
Your 30s and early 40s are also an ideal time to start thinking seriously about your retirement. ‘It might seem early to start thinking about retirement but we see all the time the benefits of starting to save for this earlier rather than later,’ says Matthew Coppin, manager, financial advice at Castlefield Advisory Partners.
‘The impact of compound growth over the longer term on regular pension savings is profound, if the investment strategy is suitable.’
Pensions are a great way of saving for retirement. Your money is protected from income tax and capital gains tax, and you’ll get 20% tax relief on your contributions.
This means that if you’re a basic rate taxpayer and want to contribute £100 to your pension, it would only actually cost you £80. The Government adds an extra £20, which is the amount that you would have paid in income tax.
Higher-rate taxpayers can claim an additional 20% tax relief through their self-assessment tax return, meaning they only need to pay £60 into their pension to achieve the same £100 of pension contributions.
In addition to workplace pensions, it’s possible to save for your retirement through a SIPP (self-invested personal pension). SIPPs give you complete control over which investments you
want to make.
THE BENEFITS OF INVESTMENT FUNDS
‘Diversification is important in managing risk and volatility and by using investment funds you gain exposure to a wide range of companies in one investment product,’ suggests Coppin.
‘These can be used to build a diverse portfolio holding a wide range of assets – equities, bonds, property, cash and so on.’
Some funds you may want to research further include Vanguard Lifestrategy 80% (GB00B4PQW151), Jupiter European (GB00B5STJW84) and Stewart Investors Asia Pacific Leaders (GB0033874768).
GENERATION X (approx. age 38-53)
Generation X is the group born between approximately 1965 and 1980. Your children, if you have any, are likely to be growing up and may have moved out and got their first job, freeing up more of your money.
If you’re still working, this could be a good time to start saving for your lifelong dream – whether it’s a conservatory or even a Harley Davidson motorbike.
If you save £230 a month over three years you could build a savings pot of £10,000, assuming an annual return of 2%.
Saving over a longer period can make these monthly payments a lot more manageable. For example, you could save £75 a month over 10 years to build the same £10,000 nest egg, again assuming a 2% annual return.
INVEST IN CASH OR THE MARKETS?
ISAs are a great way to save for shorter-term financial goals because you can withdraw money whenever you like. We would suggest keeping your savings in cash if you want to hit a specific goal in a period of three years or less, so as to avoid the risks of negative stock market performance which could damage the value of your savings.
A longer savings horizon does warrant putting your money into the markets. Indeed, if you’re at the peak of your earnings power – which many Gen X-ers are – this is a great time to make full use of the £20,000 annual ISA allowance.
It’s also worth maximising your pension contributions to benefit from Government tax relief. Each year you can make contributions from UK earnings of up to £40,000, which applies to all contributions – by you and by your employer.
The rules are more complicated if you earn over £150,000.
INVESTMENT IDEAS
‘For a medium risk investor, looking to European equities could be interesting,’ says Ryan Hughes at AJ Bell. ‘The European economy has been recovering strongly during 2017 with every sign that this is likely to continue through 2018 as corporate earnings continue their good momentum,’ he says.
One of his top picks is CRUX European Special Situations (GB00BTJRQ064).
Higher risk investors could look towards Asia, which has been a strong performer in recent years as Chinese growth fuels demand in the region.
Invesco Perpetual Asian (GB00BJ04DS38) looks to outperform the MSCI AC Asia Pacific Ex Japan Index, predominately through a bottom-up research process focusing on contrarian ideas.
For lower-risk investors, Hughes suggests opting for a multi-asset solution with an absolute return mind set. For example, Troy Trojan (GB00B01BP952) looks to deliver growth over the long term and focuses on protecting capital.
BABY BOOMER (approx. age 54-72)
Whether you’re a young baby boomer who is 10 years away from retirement or already in retirement, pension planning should be at the forefront of your mind.
Peter Chadborn, director at financial advice firm Plan Money, says your investment strategy should be primarily driven by your risk appetite – and less so by your time horizon.
If there is a specific date by which you need capital, such as funding a home move or buying an annuity, then your equity weighting should be gradually reduced as the end-date nears.
‘If the investment objective is changing from capital growth to income provision, but is still going to stay in the same investment vehicle, then there should be only modest change to the equity weighting,’ says Chadborn. ‘This is because the investment is not ending and income is then derived from the continued capital growth; the profit going forward.’
ACCESSING YOUR PENSION
Once you reach age 55 you can start withdrawing money from your pension. You can withdraw 25% of your pension pot tax-free and the remaining 75% is subject to income tax.
When you’re planning withdrawals it is worth bearing in mind that spending in retirement isn’t usually linear.
Chadborn says many people want a higher income in their early years of retirement so they can enjoy an active lifestyle while permitted by their health. The advantage of income drawdown over annuities is you have complete flexibility over how much money you withdraw and when.
ISAs can also play an important role in funding your retirement. There are no age restrictions, so if you want to stop working before age 55 you can withdraw money tax-free from your ISA instead.
Don’t forget that you’ll also be entitled to the State Pension once you hit the State Pension age, which is currently 63 for women and 65 for men.
AGE-RELATED BENEFITS
Other benefits after age 60 include free prescriptions and eye tests; a free Oyster travel card if you live in London; and a free bus pass if you live in Scotland, Wales or Northern Ireland.
In England, women can get a free bus pass when they reach State Pension age, while men qualify when they reach the female State Pension age.
If you were born before 5 January 1953, you could be eligible for the tax-free Winter Fuel Payment.
SILENT GENERATION (approx. age 73-93)
Once you reach age 70 it’s time to start thinking about de-risking your investment portfolio. This is because you potentially have a shorter investment time horizon.
Zulekha Abdulla, consultant at Mattioli Woods, a wealth management firm, says this is more difficult than in the past because gilts (UK Government bonds) and other forms of sovereign debt have moved from offering risk-free returns to offering ‘return-free risk’.
‘We recommend a diversified, multi-asset portfolio to navigate this unconventional market backdrop,’ she says.
PASSING ON YOUR WEALTH
Your 70s are also an ideal time to start thinking about estate planning, so that you don’t burden your family with a large inheritance tax (IHT) bill when you die.
‘IHT planning can be as simple as gifting your assets to your beneficiaries during your lifetime to insuring your IHT liability,’ says Abdulla. ‘Or it can be as elaborate – from investing in stocks and shares that benefit from IHT relief to trust planning.
‘Each method can be used together or in isolation, and is dependent on the individuals’ estate and their personal circumstances.’
Unlike ISAs, pensions don’t count as part of your estate for IHT purposes. If you die before age 75, your beneficiary can access the pension via a lump sum or by taking income tax-free. If you die after age 75, the lump sum or income is taxed at the beneficiary’s marginal rate of tax.
One perk to look forward to once you reach age 75 is a free TV licence, saving you £150.50 a year.
DISCLAIMER: Editor Daniel Coatsworth has personal investments in Fundsmith Equity and Scottish Mortgage referenced in this article
Important information:
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
