The findings suggest that many DIY investors, those who self-select the majority of their investments, are failing to consider important taxes and charges when making investment decisions. Almost half (44%) admit they don’t know which wrapper product would be most appropriate for their circumstances, a further 37% aren’t sure how to avoid tax traps, and a fifth (19%) aren’t confident they’ll keep under their annual Capital Gains Tax threshold.
When questioned about DIY investments that fail to perform as expected, more than a fifth (21%) cite their lack of clarity around product or fund charges as the main reason for the underperformance.
Using the CGT threshold correctly helps investors maximise returns in a tax-efficient way. However, despite most DIY investors (81%) saying they understand CGT, only 28% know the allowance is £10,600 for 2012/13, with 13 per cent overestimating it.
While wealthy DIY investors, those with over £250,000 invested, are more likely to know the CGT limit, over half (56%) of them still don’t know the exact figure, showing they’re unlikely to be maximising the tax-efficiency of their returns. Furthermore, just 7 per cent of DIY investors claim to use their capital gains tax allowance each year, rising to 15 per cent for high net worth investors.
Matthew Stephens, tax expert at Prudential, commented:
“Investing in a tax-efficient way is not something that happens automatically. Investors can save substantial amounts by maximising exemptions and limits, using ISAs and the CGT annual exemption, for example, as well as other tax-efficient investment vehicles. But this can be complicated and will usually be more successfully achieved with advice from a professional financial adviser.
“Investing without advice from an expert may be cheaper initially. However, without a clear understanding of all the relevant considerations, it could be very costly in the long-run.
“Many DIY investors say they’re confident about making financial decisions on their own, but our research highlights a worrying lack of understanding. We can’t stress enough that it’s vital to understand clearly the costs/charges, risks and tax implications applying to an investment, before making a commitment.”
