‘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.