BLOG: Five New Year resolutions for investors
Plan ahead for the new dividend tax and personal savings allowance
From 6 April 2016, the taxation of both dividends and cash changes. The first £5,000 of dividend income will be tax free; however dividend income above this will suffer a higher tax rate, an increase of 7.5 percentage points. All savings income will be paid without income tax deduction. This includes interest on cash deposits, gilts and corporate bonds, and interest from P2P lending. Basic rate tax payers will have a tax-free personal savings allowance of £1,000 a year and higher rate taxpayers £500.
Investors should plan ahead to make the most of these new tax free allowances to minimise the tax on their savings and investments.
It continues to make sense to fully use your ISA and SIPP allowances. It also makes sense to shelter income-producing assets in your ISA and SIPP before growth assets. This is because the rate of tax paid on income is generally higher than on capital gains and capital gains tax can be avoided altogether if profits are less than £11,100 a year. Furthermore, you can hold more low yielding assets outside of ISA before exceeding the dividend allowance. For example a £140,000 equity income portfolio yielding 3.5% would pay just under £5,000 a year in dividend income, tax-free within the dividend allowance. However investors could shelter a £500,000 portfolio yielding 1% before paying tax on the dividends.
Don’t hold too much cash
Recent FCA Cash Savings Market Review found 1/3rd of money in easy access accounts had been there for more than five years. The interest earned on cash deposits is almost certain to remain in the dumps for most of 2016 and beyond. Longer term the markets tend to produce better returns than cash. Consider that yields from equity income are currently around 3% to 4% which compares very favourably to best buy savings accounts and provides growth potential.
Many investors question whether they are taking too much risk, but few ask if they are taking enough risk. Risk and return are related and taking less risk is fine if that suits you. It is important to hold cash, just not too much as it is likely to lead to lower returns over the long term.
Conduct an annual portfolio review
All investors should review their portfolio at least once a year. This way there are no nasty surprises waiting for you when you finally come to cash in your investments. Investors should keep an eye on how their funds are performing and weed out any serial underperformers. They should also make sure they are on course to meet their savings goals, if not they may have to top up along the way because investment markets don’t ever go up in straight lines. The easiest way to review a portfolio is by holding it on an investment platform. This gives you a bird’s eye view of your holdings and easy and low cost trading when you need to switch.
Finally investors need to consider whether their portfolio is still appropriate for them in light of any changes in their personal circumstances, such as their employment status and dependants.
Choose properly active or the right passive funds
Too many funds are closet trackers which charge fees for active management but provide an index-like return.
Investors should rid their portfolio of this deadwood, and replace these funds either with proper index trackers at a fraction of the price, or a truly active fund run by a talented and proven fund manager. It is absurd that some investors are paying more to invest in closet trackers than they would to invest with the UK’s foremost fund managers like Neil Woodford.
HL Vantage investors can invest in CF Woodford Equity Income for a net ongoing charge of 0.60%, or Legal & General UK Index fund for a net ongoing charge of 0.06%.
Getting all your investments under one roof will help you to make them more manageable. Being able to look through your portfolio online 24 hours a day, seven days a week is a convenience which is now available to investors today, but there are plenty of savers who still run their portfolio from an overstuffed drawer full of paper. The Christmas and New Year break might provide an opportune time to get rid of the paperwork and go electronic. Transferring to an online ISA, SIPP and investment account is a straightforward process once you know where your existing investments are held. Once you’ve done it you can look over your savings at the click of a button, and you can use that drawer for something else.
Danny Cox is a chartered financial planner at Hargreaves Lansdown