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January 25, 2013

3 Investment Traps that could drain your saving

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Here we have three tips to help you avoid the common pitfalls that affect many of today’s potential investors.

Anti-Diversity

When you are preparing your portfolio it is vital that you don’t over-concentrate in one industry sector. Backlashes such as the technology crash in 2000, or the banking crisis of 2008 saw many investors, whose portfolios focused on these areas, end up financially crippled. Ensuring that your portfolio is smartly diversified is a key aspect in reducing overall risk.

Extreme Charges

The charges you pay on your portfolio directly affect your total returns. If you had £10,000 to invest and were to choose between one fund (A) that delivers a return of 6% a year with an annual charge of %1.5 or another fund (B) that offers the same return but with 1% annual charge, after 20 years Fund A would be worth £2,419 less. Do your research!

Tax, Tax and more Tax!

The more tax you pay on your investment, the lower your annual returns will be. Luckily, the government offers a number of different tax breaks that actually encourage investments. Two of the most popular breaks are ISAs and Pensions.

ISAs – By placing your funds or shares within an ISA, you will not be taxed on any capital gains and no additional taxes will be payable on any income. Each tax year you will be provided with an ISA allowance (£11,280) which allows you to build a significant portfolio of tax sheltered assets. Also, on the majority of funds, the ISA comes with no extra charge and you are able to withdraw your capital at any time, allowing for maximum flexibility.

Pensions – Pensions offer similar tax benefits with additional and important extras. When you add funds to a pension, you automatically receive income tax relief (the rate is determined by how much tax you pay). However, you are unable to access the funds until you retire and when you do you are only able to take up to 25% as a tax free lump sum as the remainder are used to provide you with taxable income in retirement.

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