Maximising Investment Returns in a Challenging Economic Climate

Rising interest rates and inflation in the current economic environment make careful planning essential when deciding where and how to invest.

FPM’s Private Client Tax Team and AAB Wealth can help you on the implementation of a tax efficient financial plan tailored to your individual situation and goals.

 (L to R) Paddy Harty, Private Client Tax Partner at FPM with Alastair Moore Chartered Financial Planner at AAB Wealth

“Just two years ago the Bank of England base rate was 0.1%, it now sits at 5.25%. This has brought interest rates to the forefront of people’s minds, whether it be the impact on monthly mortgage costs or the return on cash deposits. While rising interest rates can lead investors to question why they should invest capital and expose it to additional risk, it’s important to remember the impact that inflation has on the real return on cash savings, says Alastair Moore, Chartered Financial Planner at AAB Wealth.

“Yes, interest rates have increased, and savers may now be able to achieve interest of 4-5% on cash savings, however, with inflation currently at just under 7%, any return of less than inflation results in a real terms loss and an erosion of the purchasing power of investors’ capital. Individuals invest or save surplus capital because they have no need to spend it now but will need to spend it in the future. In the meantime, they want it to grow so that its purchasing power is not eroded by inflation. We know from decades of academic research that investing within a properly diversified portfolio can achieve growth above inflation and cash deposits over the long term. By investing your surplus capital rather than holding it in cash savings, you are providing it with the opportunity to beat inflation over the long term and yourself with the opportunity to use that capital in the future to further your desired lifestyle and fulfil your lifetime goals,” says Alastair Moore.

Mortgage Holders

In the current environment, rising interest rates are also impacting mortgage holders, particularly those who are coming off fixed rates secured several years ago which were typically around 3% or lower.

“For mortgage holders with cash available, the first priority is to clear down as much debt as they can,” says Paddy Harty, Private Client Tax Partner at FPM.

“A higher rate taxpayer with a £100,000 mortgage coming off a 2.5% fixed rate and moving to a 6.5% variable rate must find an extra £6,666 per annum to service their loan. The effective cost of their mortgage is 10.83% as there is no tax relief for mortgage interest in the UK. So, in this example, the mortgage holder would need to find a gilt-edged investment guaranteeing 10.83% to justify retaining their mortgage and investing their cash,” says Paddy.

The only Government guaranteed investment for the retail investor is from National Savings & Investments whose premium bonds currently yield 4% tax free (6.67% gross) for higher rate taxpayers.

Tax Relief

Having addressed debt reduction, investors should seek to enhance their rate of return by securing tax relief on their investment. While products such as EIS and VCT investments confer Income Tax, Capital Gains Tax and Inheritance Tax benefits, these come with risks that cannot be reduced to a level acceptable enough for some investors, says Paddy who suggests cautious investors should instead focus on pensions.

Pensions

“With the lifetime pension cap removed and the annual pension allowance now increased to £60k per annum, UK taxpayers across the three tax brackets can considerably enhance their return by investing in a pension,” says Paddy, adding that the wide class of investments available also gives investors more control over their risk profile.

There is evidence that certain UK taxpayers can earn a guaranteed 60% return on a risk-free pension investment by just availing of the tax relief on offer. Rules that in the past deterred people from investing in pensions—such as having to buy an annuity at age 75—have been largely eradicated. The UK now allows flexible access to pensions savings and enables people to pass on pensions to their dependants in a tax efficient manner.

ISA

The most popular tax-free investment which provides no tax relief upfront is the ISA which can either comprise cash or stocks and shares. The annual investment limit for ISAs is £20k.

Investment Choice

Once you have decided to invest, the next consideration is investment choice. This is important as it drives the return on your investment. AAB Wealth’s globally diversified investment strategy gives our clients access to over 12,000 unique holdings and draws on decades of academic Nobel prizewinning research on where investment returns come from. Our team can advise you on the implementation of a tax efficient financial plan tailored to your individual situation and goals. For details, contact us

Succession Planning

Finally, keep in mind that as well as maximising your investment returns, it’s important to put a plan in place to protect and preserve your family wealth for the benefit of future generations. FPM and AAB Wealth will host an exclusive event, Succeeding at Succession at The Merchant Hotel, Belfast on 21 September 2023 where our speakers will explain how to balance your desire to maintain your standard of living while providing for future generations in a tax-efficient manner.

Further information and registration details are available here