As this is the 3rd stage you will have already: –
– Protected your biggest asset – YOU – against illness or death.
– Repaid any short-term debts.
– Built up a sufficient emergency fund in cash (6 months expenditure) in cash, which can be easily accessed.
The foundation is in place to cover costs that we don’t know about; the car breaks down.
So, what’s next?
Now is the time to make the best use of your money and plan for the things that we know are going to happen or we want to happen; University Fees, Retirement, Moving to A New House, Starting your own business. All the good stuff in life!
At this stage you will be looking to ‘invest’ any savings you have in something other than a bank account or you will be languishing in the land of 1% returns forever.
Investing outside of ‘Cash’ means you are starting to take more risk with your money in order to get back a higher return, so it has to be money that you don’t need for any purpose, in ideally, the next 5 years. Remember if you have followed Steps 1 and 2 you are protected against illness and death and you have an adequate emergency fund set aside so you know the unknowns are covered.
Consider the following questions; –
1. the amount you can afford to invest which may be a lump sum or it can be a regular monthly amount?
2. how long you want to invest for? Is there a specific objective in mind?
3. how much risk you are prepared to take?
4. if your priority is Tax Efficiency or Accessibility?
Tax Efficiency or Accessibility
A Defined Contribution pension is simply an investment that is held within a Tax Efficient Wrapper.
Pensions do 3 things tax efficiently:-
1. Any personal contributions you make are tax relievable at your higher tax rate
Example: If you are in the 20% tax band you may contribute £100 per month but it only costs you £80 per month. (up to a maximum allowance of £50,000 per annum)
2. Whilst your funds are invested within the pension, they grow free of tax.
3. You are entitled to a Tax-Free Cash Lump Sum when you retire up to 40% of the pension depending on the type of pension you have.
Tax efficiency is important because it allows your money to grow faster, by reducing the tax drag.
However, under IOM pension legislation you cannot access your pensions funds until at least the age of 50 and for some people accessibility or a short investment term will be a higher priority. In which case you can sacrifice the tax efficiency and set up an investment directly outside of a pension.
Either route allows you to start benefiting from compound interest, making your money work harder and building your wealth quicker.
The value of investments, and the income from them, can go down as well as up and an investor may get back less than the amount invested. Past performance is not a guide to future results.
This article is written for IOM residents.
