Driving your Isa allowance into an Isa park can be very useful – but don’t forget to move it
AS THE Eurozone crisis rumbles on and Chinese growth starts to slow, many people are understandably concerned about the state of UK and world stock markets. When equity markets are volatile, bonds tend to be where investors turn, but there are concerns about these too, with developed market governments so heavily in debt. So, as the tax-year end fast approaches, what is an Isa investor to do? You can’t put as much money aside in a cash Isa as in an investment Isa and the rates aren’t great – but if you don’t use your allowance at all this year you’ll lose it – so waiting for better times isn’t an option.
THE LONG VIEW
Many experts, including myself, will encourage you to look beyond the short-term uncertainties, and take that leap of faith to invest now for your longer-term goals. If you are investing for a long period of time you can afford to ride out the market’s lumps and bumps.
And for the new tax year we will also suggest that regular monthly savings may be a good idea and extol the virtues of pound cost averaging: investing small amounts on a regular basis means you do not need to panic when markets fall, as you will be buying more of your chosen investment, and when markets are up you buy less. Although there is not enough time left in the current tax year to opt for monthly savings, this is something to consider for next year.
PARK AND RIDE
If you are feeling the pressure of the looming deadline and just don’t have the time to research and select the funds you want, there is another solution. Many Isa providers offer a cash holding facility, usually called a Cash Park or Cash Reserve, which you can use to place your money within an Isa today – thereby securing your tax allowance – but letting you decide where to invest at a later date when you are more confident about the economic and market outlook.
There’s no time limit on how long you can hold money in an Isa cash reserve, but the Inland Revenue does expect you to treat it as a temporary facility and ultimately invest the money into stocks or funds. As the interest rates on these facilities are barely above zero in most cases, and what interest you do receive is taxed at 20 per cent, there is also little incentive to leave your money there too long. You should also be aware that, while I can’t think of any Isa provider that imposes an initial charge on the use of the facility, some may charge you to switch out of it into a fund, so it’s best to check beforehand.
The important thing is not to forget you have money in an Isa cash reserve. If you have long-term goals it’s not timing the market but time in the market that counts, and therefore its best to get back on track as soon as possible and make your investment.
They are a useful facility though, and widely used as last year’s Isa season proved: from 1 January to 5 April 2011, the Isa cash reserve was the best selling Isa investment on at least one fund supermarket. And they are also useful for existing Isa investments as they can be used to switch all or part of your Isa portfolios into cash if you believe markets are toppy and likely to fall. You can then move your portfolio back into funds when you are more optimistic that markets will rise – crucially, while retaining the all important tax advantages you have built up over the years.
Darius McDermott is managing director of Chelsea Financial Services.
ISA cash park
This is a facility that allows you to hold your equity Isa in cash, temporarily, and earn interest until you are ready to invest.
These are likely to appeal if you:
■ Are seeking temporary shelter from stock-market exposure and don't want to lose your annual allowance.
■ Want to make full use of your stocks and shares ISA allowance without immediately committing your money to equity or bond markets.
■ May prefer to shift some of your ISA investments into cash temporarily during times of market uncertainty, even though research shows you will usually be better off if you avoid making short-term changes to long-term investments
Source: TQ Invest