If you’re working towards a set of financial goals for the future, investing in tax wrappers can be a highly beneficial route to take.
Whether you’re leaving an inheritance, retirement planning, or building wealth for a rainy day, these types of investments can be an effective method of growing your savings tax efficiently.
So how can this be done? Read on for a closer look at tax wrapper investments.
What are tax wrappers?
Tax wrappers is the term used for certain investment accounts that provide shelter from tax. By investing in these accounts, you can shelter all or a portion of your money from tax charges, including Income Tax, Capital Gains Tax (CGT), and more.
Various accounts are classified as tax wrappers, but it’s important to look at the specific rules of each, as the amount of savings you can grow tax efficiently may differ.
Two of the most common tax wrappers chosen by investors are a Self-Invested Personal Pension (SIPP) and an Individual Savings Account (ISA).
Investing in a SIPP
A SIPP is a tax wrapper account that allows you to grow your savings tax efficiently for retirement.
When investing in your SIPP, you can contribute a certain amount of money each year, which is sheltered from tax until you decide to access your funds when you retire.
As of the 2023/2024 tax year, the amount you can contribute tax-free each year is £60,000 – known as the annual pension allowance.
Tips for investing in a SIPP
- Financial advice – We recommend seeking professional advice from an expert, so you have the right structure for your SIPP investments. This involves finding the right risk level for your portfolio, so you can grow your savings towards retirement whilst also aligning each investment with your financial situation.
- Retirement planning – A good way to structure your SIPP investments is with retirement planning. You can outline all your financial goals in a comprehensive plan, so you have more direction for how you should design your investments to reach them.
- Utilising your full allowance – Make sure you use up your full allowance each tax year, as this cannot be rolled over. If you have a partner who you plan to retire with, you can both do this to help build a significant sum for retirement.
Investing in an ISA
When investing in an ISA, you can grow your savings in a tax-efficient account to withdraw at any time.
Your ISA allowance for the current tax year is £20,000, and this money can be saved and withdrawn tax-free.
There are four types of ISAs you can invest in – a cash ISA, Lifetime ISA, innovative finance ISA, and a stocks and shares ISA.
When you grow your savings in a stocks and shares ISA, for example, your returns will also be exempt from CGT.
Tips for investing in an ISA
- Use a financial adviser – As with a SIPP, speak to a financial adviser who can help you find the right ones to invest in to reach your future goals most efficiently.
- Diversify your investments – If you can, try and invest in more than one type of ISA, to not only help reduce your investment risk but also increase your growth potential.
- Track your wealth – Use online wealth-building tools to monitor the performance of all your investments from every type of ISA, so you can accurately adjust your approach where necessary.
Now you know a bit more about how tax wrappers can work for your investments, will you be investing in a SIPP or ISA anytime soon?
If so, make sure you seek guidance from a professional for the right approach to your tax wrappers.
Please note, the value of your investments can go down as well as up.