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1 – My wife and I have quite a lot of money in cash and various investments. This supplements our income in retirement and we occasionally withdraw additional money to pay for items of capital expenditure. How can we reduce the amount of income tax and capital gains tax we pay on this money?

It is possible, and often desirable, to shelter a large amount of your money from income tax and capital gains tax. Most people already know about Individual Savings Accounts (ISAs) and the associated tax advantages of these investment wrappers. Each person can invest up to £7,000 each tax-year into an ISA and this increases to £7,200 from 6th April 2008. Money invested within an ISA is exempt from income tax, with the exception of the tax on dividend income on UK shares which can no longer be reclaimed, and capital gains tax.

It is also possible to shelter large amounts of money from tax within products from National Savings & Investments.

Index-linked savings certificates are tax-free and offer protection against price inflation. This happens because the returns are a combination of a set rate of interest and retail price inflation (RPI). You can invest up to £15,000 in each certificate and there is usually two ‘issues’ of these each year, allowing a couple of shelter up to £60,000 each year from tax.

You can also invest up to £30,000 each in Premium Bonds. These are also free from income tax and capital gains tax, with the opportunity to win prizes (including two £1m jackpots a month). This is a bit like the National Lottery, but you get to keep your stake and can access your investment at any time. The value of your capital within this product will not go down but the purchasing power may be eroded by the effect of inflation if you are unlucky and do not win any prizes.

Saving more income tax and capital gains tax usually requires a higher risk investment option, such as Venture Capital Trusts (VCTs). These invest in the shares of private companies and offer generous tax-breaks to investors. There is income tax relief of 30% and no capital gains tax to pay when you sell shares, as long as the investment meets certain conditions.

As you are reliant on income from your cash and investments you need to take care about how you structure your money for tax purposes. It is important that you do not let the ‘tax tail wag the investment dog’. This means that tax planning is important but not at the expense of adopting a sensible investment strategy.

Martin Bamford is Joint Managing Director of award-winning Independent Financial Adviser (IFA) firm Informed Choice Ltd (www.informedchoice.ltd.uk).

He is also author of best selling personal finance guide, The Money Tree (£9.99, Prentice Hall Business). His second book, Brilliant Investing, will be published in November 2007 (£12.99, Prentice Hall). This article is provided for general consideration only and the information contained herein is not to be acted upon without professional independent financial advice.