For ordinary investors looking to build wealth, it’s depressing news! The Pandora Papers scandal reveals that mega-rich world leaders have been avoiding taxes and using tax loopholes to get even richer! But is there a way that ordinary investors can build wealth too?
Here, I rip open the Pandora Papers and take a look at how these greedy leaders got rich. I also take a look at some legal methods ordinary investors can use to build wealth.
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What have the Pandora Papers revealed?
The Pandora Papers have revealed that mega-rich world leaders have been using their own rules to dodge taxes and hide their wealth.
Using off-shore companies to buy up UK properties, these fat cats have saved millions of pounds in taxes and pushed up UK house prices for ordinary buyers.
According to the BBC, “The files expose how some of the most powerful people in the world – including more than 330 politicians from 90 countries – use secret offshore companies to hide their wealth.” They show that these people used secret companies set up in tax havens to squirrel away investments and avoid paying taxes.
The International Monetary Fund estimates that the use of tax havens costs governments worldwide up to £440 billion in lost taxes each year.
How can ordinary investors build wealth?
If you’re fed up with seeing how the already wealthy just get richer and richer, then what can you do? Is it possible for us normal folk to build wealth? Or is it out of the reach for ordinary people?
Well, the good news is that it is possible for ordinary investors to build wealth by following four simple tips.
1. Use your ISA allowance
Everyone in the UK gets an ISA allowance of £20,000 per year. It allows you to save in shares or cash without paying tax on any interest or dividends. It’s a great way to build wealth without giving a chunk of the extra growth to the taxman.
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2. Pay into your pension
Paying into your pension has a double tax benefit. If it’s a company scheme, then you’ll get extra tax-free money from your employer. And it’s a well-known fact that your own pension payments are also tax free. If you use salary sacrifice to contribute to your company pension scheme, then you’ll save on National Insurance as well.
If you pay £250 per month into your pension from the age of 20 and your employer contributes £100, then you can build a pension pot of £308,000 by the age of 65 (according to the Pensionbee pension calculator).
3. Use the power of compounding
Compounding means that each time your investment grows, a little bit extra is added on top. That’s because you also get extra growth on top of your previous growth. This snowballs over time so that you can end up with a much bigger investment fund than the cash you contributed.
Historically, stocks and shares are streets ahead of cash as a long-term investment. Though you should be warned that your capital is at risk with any type of investment and returns are not guaranteed.
In my example above, as a 20-year-old that ended up with a pension pot of £308,000, you would only have contributed £189,000 in cash. It’s actually even better than that because some of the contributions would have been from your employer. So you would actually only have contributed £135,000 yourself.
4. Don’t get ripped off with fees
Just like everyone else, pension companies need to make a profit, and they make their money by charging fees. But these fees vary a lot between providers. A 1% charge doesn’t sound like much, but it has a big impact on your long-term wealth. After all, it’s £1,000 per year on a £100,000 pension pot. You may not have much choice if you are in a company pension scheme, but if you can, try to find a low-fee pension provider. Some pension companies charge platform fees of only 0.35% which could save you £650 per year on a £100,000 pot.
Note that tax treatment depends on your individual circumstances and may be subject to change in the future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
