Inflation is soaring: how experienced investors could target higher returns

By Jo Bentham11th August 2021

For the 12 months leading up to June 2021, the Consumer Price Index puts inflation at 2.4% – but interest rates are not keeping pace, with the Bank of England deciding to keep its base rate at a record-low of 0.1% for the foreseeable and “until the economic outlook in Britain is more certain”.

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As the Bank of England also predicts that inflation will have reached 4% by the end of 2021 – and with products such as the instant-access Cash ISA offering rates of up to just 0.65% at present – the outlook for those investors holding cash is not promising. 

This rising cost of living means saving in cash runs the risk of capital being eroded over time. Therefore, for experienced investors with the appropriate appetite for risk, now could be the time to consider investing into assets with the potential to generate inflation-beating returns – and doing so in a tax-efficient manner to maximise returns further. 

 

Consider adding alternative investments to your portfolio

The current economic backdrop is uncertain and ever-evolving, with mainstream investments such as equities showcasing their volatile nature, whilst holding cash amidst rock-bottom interest rates and soaring inflation could in fact be losing investors money. 

As a result, experienced investors could consider rebalancing their investment portfolio, increasing its weighting towards alternative investments that are uncorrelated with factors affecting most mainstream options.  

And with alternative assets such as property bonds and venture capital proving their resilience and increased demand throughout the Coronavirus pandemic, there has never been a better time for investors to harness their potential for considerable growth. 

With the housing market at its busiest in over a decade – as 1.5 million homes are expected to change hands in 2021 totalling circa £461 billion in sales – the discussion surrounding the UK’s housing shortage has been reignited.

To help tackle this, the alternative finance provided to small and medium-sized housebuilders by property bonds is crucial and required now more than ever. And in supporting these SME housebuilders, experienced investors have the potential to target inflation-beating returns of between 4% and 8%.

Moreover, as more than a record-breaking £5.1 billion was invested into UK startups and scaleups in Q1 of 2021 – a 25% increase on the previous high of £3.9 billion in Q4 of 2020 – with both Prime Minister Boris Johnson and Chancellor Rishi Sunak encouraging investors to back the next wave of early-stage, high-growth British businesses, it’s clear there is utmost confidence in alternative investments.

 

Utilise tax incentives to maximise returns

In addition to investing into alternative assets, experienced investors should look to utilise the generous tax incentives on offer when doing so – aiding in maximising returns and reducing often significant tax bills. 

The tax incentives available will depend on the asset held. For example, some property bonds can be held in an Innovative Finance ISA (IFISA), rendering all returns free from both income and capital gains tax. 

The tax-efficient nature of holding property bonds in an IFISA becomes all the more apparent when considering that to achieve a return equivalent to 7% within the IFISA wrapper, additional-rate taxpayers would need to be targeting a return of over 12% outside of it.

Alternatively, experienced investors with a Self-Invested Personal Pension (SIPP) or Small Self Administered Scheme (SSAS) may also be able to hold property bonds within their retirement portfolio. 

The result of this is opportunities to benefit from both the attractive potential returns offered by the asset, as well as tax advantages associated with the pension schemes such as up to 45% tax relief on contributions and the option to withdraw 25% of the fund tax-free as a lump sum or in separate withdrawals. 

For experienced investors looking to invest into high-growth startups, the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) exist to provide generous tax reliefs that help to maximise returns and mitigate some of the risks associated with investments of this kind. 

When investing into an EIS-eligible opportunity, experienced investors receive up to 30% income tax relief, loss relief, capital gains deferral and no inheritance tax to pay once the investment has been held for two years. 

The tax incentives offered by the SEIS are even more generous – as to be SEIS-eligible, businesses must be younger and therefore higher risk – resulting in up to 50% income tax relief, 50% capital gains reinvestment relief, no capital gains tax to pay on profits and loss relief, too.

 

Targeting inflation-beating returns

As inflation is far outstripping the interest rates offered on most savings accounts at present, it’s imperative that experienced investors who are willing and able to take on more risk in the search for higher returns consider their options.

And with the popularity of alternative investments on the rise paired with their often inflation-beating potential returns, property bonds and venture capital alone could be key considerations for experienced investors amidst the current low interest rate environment.