It’s a simple matter of improving returns by reducing the impact of tax on your investments, using the annual investment allowances available each tax year.

Whether you’re looking at a self-invested personal pension (SIPP) for your retirement savings, an Individual Savings Account (ISA) for more accessible investments, or a Junior ISA for the youngsters in your life, the money you invest could grow over the years and you won’t have to pay any tax on the any growth or income generated by the money you invested.

Tax relief variations

SIPP investments enjoy an additional boost, in that your contributions (up to the annual limit) receive full tax relief - so there is more money available from the outset to put to work in the markets.

For investors in ISAs (who have a £20,000 annual allowance) and Junior ISAs (£9,000 annual allowance), the benefit comes at the other end of the process, in that although contributions are from taxed income, withdrawals are completely free of income or capital gains tax.

Indeed, whether you opt for a one-off lump sum withdrawal or a steady income stream – perhaps to supplement your pension – you don’t even have to declare the proceeds of an ISA on your tax return.

Decades of tax-efficient growth

These tax-efficient wrappers are a no-brainer from the outset, but they become more critical in protecting your investments as the decades pass and their value hopefully grows.

To put that into perspective, let’s say you’re a basic rate taxpayer and you start investing into an investment trust held within an ISA. You make an initial contribution of £20,000 and then pay in £100 a month. Your money could grow by an average of 5% a year after all costs.

After five years, there is only around £300 difference between the value of the tax-efficient ISA investment and its value if it had been held as a taxable account (£32,500 versus £32,200).

After 20 years, however, the gap has broadened to around £8,000 (£95,000 versus £87,000). If you had become a higher rate taxpayer during that period, as you might well have done, the differential would be even wider, with reductions due to tax of up to around £20,000, depending on how long you were in the higher-rate bracket.

If you’re in a position to open or contribute to a Junior ISA for a young child, the long-term benefits of investing in global stock markets through investment trusts become potentially even more significant.

A Junior ISA cannot be accessed until the child is 18, but at that point it rolls over to become an adult ISA that they could put towards buying a car, pay university fees or even put a deposit down on a first home: a valuable nest egg at precisely the time of life when it’s most needed. And if it’s not used at that time, it can carry on being invested for tax-free growth, through the decades.

A robust investment option

For many adult investors, of course, one of the most rewarding ways to utilise their tax-free allowances is by drawing an income after retirement, using an equity income investment trust that aims to provide both capital growth and some dividend income.

But even if you’re still very much mid-career, equity income-focused trusts are a popular choice for a well-balanced portfolio - and with good reason.

First, they tend to be rather less volatile in challenging times, because the managers seek out more established, resilient businesses that can use their earnings to pay decent dividends to shareholders (rather than having to prioritise growth and reinvestment).

And secondly, those dividend payouts mean investors usually receive some compensation, even when times are tough and share prices have fallen, although of course as with any form of investing the income is not guaranteed.

Aberdeen’s UK equity income choices

Aberdeen’s stable of equity income-focused investment trusts includes several with a UK mandate, each with its own specific approach.

Aberdeen Equity Income Trust focuses on the team’s best ideas from across the full spectrum of UK companies, large, medium and small. They seek undervalued companies that aim to deliver on their dividend promises, grow those payouts over time, and potentially see a valuation rerating as other investors recognise their attractions.

Murray Income Trust’s team look for high-quality dividend paying companies. Up to 20% of the portfolio can be invested overseas, providing additional diversification for risk-averse investors.

For investors keen to take the sustainable route, the team of Dunedin Income Growth Investment Trust seek out dividend-paying UK companies that meet its responsible investing criteria.

Finally, Shires Income aims for a high income, plus potential for growth of both income and capital, complementing its UK equity portfolio with holdings of fixed income securities.

Each one has different qualities and will suit different investors, but if you’re planning to use this year’s investment allowances with an eye to the long term, Aberdeen’s range of UK equity income trusts could be a good place to start.

Remember of course that tax rules can change, and the tax benefits described above may depend on your personal circumstances.

Important information

Other important information:

Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London, EC2M 4AG, authorised and regulated by the Financial Conduct Authority in the UK.

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