‘Don’t let the tax tail wag the investment dog’
What does this mean to investors looking to maximise their enjoyment of life? What does it mean for you?
I came across a prospective client recently who had a well funded pension, hundreds of thousands of pounds with a well known investment house. The only problem was, it was ‘invested’ in cash. All of it. 100% in cash. And this cash was probably paying an interest rate less than a half of the rate of inflation.
This investor had made some very sensible decisions to invest in a pension, year after year, making use of spare funds they had available and making use of the Pension Annual Allowance. It made perfect tax sense. Invest in a pension, don’t pay tax. Brilliant!
The only problem was that once the money was in the pension they did nothing with it. No shares, no funds, no gold or property – nothing. It just sat there in cash, for years. Losing money against inflation.
This is a classic example of letting the tax tail wag the investment dog.
Investment decisions should come first: –
- Why am I investing this money?
- How much risk am I willing, able and need to take with this money?
- What investment strategy am I going to use with this money?
- Do I need to pay for advice for this investment?
- Which provider am I going to use?
Then, and only then, should you consider which tax wrapper (Pension, ISA, General Investment Account, Bond) is right for you.
I am absolutely for pensions. I think pensions are great. Just about everyone should have one.
But what matters even more than having a pension, more than having any kind of investment tax wrapper, is what you put into it.
Don’t let your tax wrapper tail wag your investment decision dog.