136. Taxing the cryptocurrency traders
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Deciding where to invest can be a tricky decision – and one that will change over time, as we get older and our priorities and financial goals change.
Here, we take a look at how different generations could take advantage of different tax-efficient investment wrappers, and some funds they may like to consider.
The youngest of generations, Generation Alpha, is made up of children who are born between 2010 and 2024. At the moment that means newborns to 10 year olds.
The obvious tax-wrapper choice for this age group is the Junior ISA (Individual Savings Account). Parents, grandparents and family friends can invest up to £4,368* a year via the wrapper and the proceeds will be free from tax. And when the child reaches 18 years of age, it becomes their money to either spend or continue to invest.
A Junior pension is another option – just remember your child will not be able to access this money until they are at least 57 years of age. However, over that time period, even a small investment could be worth a great deal. It is currently possible to pay in £2,880* a year into a junior pension and that will be topped up to £3,600 by the government in tax relief. While free from capital gains tax the eventual pot of money will be subject to income tax when it is withdrawn in retirement.
Hermes Global Emerging Markets SMID Equity is a fund that invests in small and medium-sized companies across global emerging markets. Smaller companies and emerging markets tend to be higher risk than larger companies or developed markets, so this fund is top of the risk scale. But there is huge potential to tap into exciting growth stories over the long-term.
Alternatively, Investec Global Environment is a unique fund investing in companies that are contributing to the decarbonisation of the global economy. The portfolio invests in just 20-40 companies that are doing their best to protect the planet and our children’s futures.
The youngest of Generation Z could also have a Junior ISA or pension wrapper, while older Gen Zs could consider an adult ISA and should hopefully be contributing to a work place pension.
ISAs are a useful way for adults to invest up to £20,000* each tax year and keep the tax man at bay. There is also the Lifetime ISA, which allows adults under the age of 40 to invest up to £4,000* a year and also get a 25% government bonus. You can open one between the ages of 18 and 39 but also keep contributing until you reach 50. The only catch is that this money can only be used to buy a first home, or for retirement when you reach 60.
Employers are now obligated to provide a pension for employees. So for older Generation Zs this is also a no-brainer – it’s free money to invest. Your employer will contribute a certain percentage of your salary each month and you can top it up if you wish. Both contributions will also get income tax relief.
AXA Framlington Global Technology is a great fund for engaging older children with their investments – after all, it invests in things even they use and understand, like Apple and Facebook and no doubt a company that will invent something they’ll be using in the future.
Lazard Global Equity Franchise might appeal to older Gen Zs. It invests in companies from all around the world that have an edge in their respective sectors. Its managers are looking for industry leaders and there is a natural bias towards larger-sized businesses.
A big financial goal for this age group is often to buy their own home. So the Lifetime ISA mentioned earlier is an option, with the adult ISA also an option for those with more than £4,000 available to invest each year.
Some Millennials may also have a young family and extra outgoings to consider, so spare cash may not be plentiful. So a good habit may be to make monthly savings at this stage of life: just like monthly bills, you can set up an ISA to take a small (or large) monthly amount from your bank account.
All Millennials should at least have their workplace pension working for them at this point – and ideally be contributing a small amount monthly themselves too.
Run out of New York, Schroder US Mid Cap has a focus on small and medium-sized companies in the world’s largest economy. US companies can be very dynamic and, with thousands to choose from, there are always plenty of opportunities.
Being an entrepreneurial generation, Millennials may also find a fund like Marlborough UK Micro Cap Growth attractive. It invests in small and micro-sized UK companies, starting off with relatively small positions initially, but the managers will then run their winners aggressively, adding to them as their story unfolds.
People in this age group are likely to be at ‘peak earnings’ – the stage of their careers when their salary is highest, and hopefully financial demands are starting to lessen.
So it makes good sense for Generation X to invest as much as they can into both an adult ISA and their pension while they can – especially higher tax payers who can currently get extra tax relief on their pension contributions*.
With some time left until retirement – and hopefully a good couple of decades to enjoy in retirement – the time horizon for Generation X is still pretty long, so it’s still worth investing in equities. Artemis Global Income invests in companies around the world, with a bias towards those of medium size and with a modest but growing dividend payment.
GAM UK Equity Income stay closer to home, investing in UK companies of all sizes. The manager believes dividends are the most important driver of total returns and, while he is targeting a yield higher than that given by the UK stock market, he is also looking for steady dividend growth.
ISAs still have a valuable role to play once you’ve reached retirement age – or an age when you can access your pension pot if you want to.
Younger baby boomers, with a decade or so until they actually retire, could still invest in equities, although a mix of assets or dialling down the risk may give more comfort.
Older baby boomers could also consider some cash savings at this stage to make sure they preserve the capital they have worked so hard to accumulate. They may also like income-producing funds from which they can take an extra income, without necessarily having to sell any holdings.
Either way, all baby boomers can now take advantage of the 25% tax-free lump sum they can withdraw under pension freedom rules*. This money could be spent to pay off a mortgage or on something nice. It could also be reinvested into an ISA – either cash or stocks and shares.
It’s also worth remembering that there is an attractive inheritance element to ISAs: married partners can inherit each other’s ISA [tax-free] if one dies.
Bonds are generally considered to be less risky than equities. M&G Corporate Bond invests mainly in sterling-denominated investment grade bonds – the debt of companies that are deemed to be of a high quality and less likely to default on their repayments.
Close Managed Income invests in a broad mix of assets and a yield of 4% at the moment***. The fund invests in other actively-managed funds and exchange traded funds. It sits on the conservative side of the risk spectrum, with preservation of capital a strong focus alongside income generation.
*Maximum allowance for the tax year 2019-2020. (For information on the 2020-2021 tax allowance view our Spring Budget 2020 update)
**As at 26 Feb 2020
***Source: fund factsheet, 31 January 2020