To ensure that I maximise the annual return on my retirement investing strategy I am constantly focused on three key elements:
1. Ensure I have the right asset allocation in place
2. Minimise the fees that I pay by buying index linked investments wherever possible
3. Minimise the tax that I pay
To minimise the tax that I pay I use one tax friendly investment and two tax wrappers.
I have written in the past about the tax friendly investment I use to help me minimise tax – Index Linked Savings Certificates.
Today I’m going to talk about one of the tax wrappers I use which is Individual Savings Accounts (ISA’s). The other tax wrapper I use is a personal pension which I will discuss in the not too distant future.
I’m not going to go into great detail about how ISA’s work as most people are aware of them and you can find plenty of information on the internet including here.
My current retirement investing strategy holds around 9.7% of its assets in Stocks and Shares ISA’s. I do not use Cash ISA’s at this point in time. Providing that you find a Stocks and Shares ISA provider that does not have any fees for the privilege of using the ISA tax wrapper I cannot find any negatives to using them. At the very worst you are break even and neither better nor worse off.
For me the Stocks and Shares ISA is performing a powerful function. To minimise fees for some of my asset classes I am buying offshore based exchange traded funds (ETF’s) which are categorised as non-distributing funds by HM Revenue & Customs. In very crude terms if I was not holding these within the ISA and I chose to sell to rebalance my portfolio the capital gain would be taxed as income rather than as a capital gain. This also means that I could not use my capital gains tax allowance either. As all income (dividends and interest) and all capital gains are tax-free within an ISA I am sheltered from this problem.
As always DYOR.