A savings revolution is just around the corner. Next April, PEPs anddual savings accounts are set to replace PEPs. Tessas will be scrapped and replaced by the government’s Big Idea – individual savings accounts (ISAs). For those who are building up a portfolio of tax-free PEP savings, there will be little change. You can use your #5,000 annual ISA allowance (#7,000 in 1999/2000) to buy collective funds in the same way as through a PEP. Providers will simply convert software to make investments into ISAs instead of PEPs.
All your existing PEPs will continue to grow tax-free and you can move them around between managers if the fund performance starts to slack off.
But overall, the annual tax-free investment limit in shares will drop from #9,000 (#6,000 in a general PEP and #3,000 in a single company PEP) down to #5,000.
Make the most of this year’s allowances, but choose your PEP carefully: there’s plenty of information in the press. Money Management magazine (monthly #5.95), for example, has performance figures and regular PEP surveys. Internet users have access to some excellent general sites (such as Moneyworld at www. moneyworld.co.uk) which have links to providers’ sites.
Every adult can also have a tax-free Tessa savings account with up to #9,000 invested at maturity after five years. You’ll be able to open a Tessa until next April and the maximum investment in year one is #3,000.
If you are short of cash (perhaps with a tax bill looming in January), some banks and building societies let you open a Tessa with #100 and top it up before the end of your first investment year.
Almost all Tessas are variable rate deals, so you can expect diminishing returns in future as interest rates drop, but the tax break is worthwhile.
The ISA rules will allow you to roll the capital from a maturing Tessa into an ISA fund, without affecting your overall investment limits. So during one tax year you will be able to save #14,000 tax-free rather than the usual #5,000.
Another bonus is that a Tessa account with a building society will put you in line for a substantial cash windfall if the society demutualises during the next five years. Maximise your chances by opening an account with a medium-sized to large building society, but check the policy on windfalls for newer society members. Some have tightened their rules to discourage carpet baggers. The Nationwide BS, for example, would ask you to pay your windfall to charity if it were to be taken over.
The Norwich & Peterborough BS is offering an excellent 8% on its Tessa.
Interest on the account is compounded (not all Tessas offer this). City insiders tip the Britannia BS as a good takeover prospect. It is paying 7.85% on its Platinum Tessa but you must invest the full #3,000.
It’s worth looking beyond the heavily advertised products to consider more complex tax-efficient schemes. ‘I think venture capital trusts (VCTs) are greatly under-rated,’ says David Wells, manager in the personal financial planning department at Arthur Andersen. ‘People think they are very risky, when in fact they spread the risk across a number of companies. If you invest when the shares are offered, you apply for 20% tax relief, and you can use the subscription to defer capital gains already realised. That’s effectively another 40% tax relief.’
Income from dividends paid on VCT shares is tax free, which Wells points out would be a useful income stream for accountants coming up to retirement who are prepared to take an equity risk.
You get the best tax breaks by buying into a fund at launch. Singer & Friedlander has a VCT open for investment which will mainly invest in established companies quoted on the AIM junior stock exchange. National Savings Children’s Bonds are currently paying a measly 4% gross interest (plus a 6% bonus at maturity) but are useful for parents who have already set up other savings plans for their children. The usual rule is that parents have to pay tax on their children’s investment income of more than #200 a year (there’s a #100 limit for each parent). So you can buy up to #1,000 worth of bonds (per issue) and incur no tax liability.
Isabel Berwick is personal finance editor of the Independent on Sunday
Britannia BS: 0800 132304
National Savings: 0845 3005959
Norwich & Peterborough BS: 01733 372372
Singer & Friedlander AIM VCT (open until mid-December): 0171 292 0825
Changes in the area of capital gains tax and inheritance tax (the fact that retirement relief is being phased out, for example) have added to the complexity of personal investment, but with careful planning, there are still advantages to be gained.
Enterprise investment schemes
The enterprise investment scheme was introduced in 1993.
It was designed to attract private investment into small unquoted companies owning less than #10m in gross assets, but because it was ringed by restrictions, initial take up of the scheme was quite low.
Since then, various measures have been taken to make the EIS more attractive.
The annual investment limit has been raised from #100,000 to #150,000 and relief stands at 20% of the sum invested. The EIS rules are being merged with the rules for re-investment relief.
Enterprise investment schemes are occasionally advertised in the press, but they are not a simple option and are best pursued with the help of an advisor.
Venture capital trusts
Like the EIS, venture capital trusts are useful in that they afford both income tax relief and capital gains tax relief (see above). In his Budget announcement this year, Gordon Brown made it easier to participate in VCTs, and the fact that the funds are made up of quoted securities means that investors can assess their performance more readily.
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