Investors need to use their allowance now
THE individual savings account (Isa) is a force for good for investors and savers. This year you can put up to £11,280 in a stocks and shares Isa or £5,640 in a cash Isa, and can protect that money from taxation on dividends, interest and capital gains. But Isas are shrouded in misunderstanding. The most common error is to view an Isa as a product in itself, when it’s just a wrapper to protect investments from taxation. And with the deadline for using this year’s allowance approaching on 5 April, investors should take advantage before it’s too late.
Nick Blake of Vanguard Asset Management highlights a handful of principles that can help deliver investment success – including creating clear goals, developing a suitable asset allocation, and minimising cost.
SETTING YOUR GOALS
If your aim is to set aside some rainy day money, or if your time horizon is so short that your investments won’t have time to ride out market volatility, a cash Isa should be your first port-of-call. Contrary to popular belief, an Isa account is no more complicated to open than a regular savings account. But any interest earned is tax free. However, with inflation at 2.8 per cent in February on the consumer price index and at 3.3 per cent on the retail price index, and top Isa rates only circling the 2.5 per cent mark, the real value of your savings will be eroded. Banks are currently on a drive to lure savers with special bonus rates for a limited period. Make the most of this: jot down when the rate expires, and shop around to make sure you’re getting the best deal. Transferring previous years’ Isa savings across is easy. There’s no need to stick with poor returns when a few forms could let you to move.
THE LONG-TERM APPROACH
If you choose to use an Isa as a long-term financial planning tool, an equities Isa will give you the potential for better growth. Many investors worry that equities Isas are too risky. Certainly, there are thousands of funds to choose from, but you can keep your portfolio simple, and diversification will significantly dilute risk. However, the younger you are, and the more risk you’re willing to take, the more of your portfolio should be directed towards higher-risk equities like emerging markets, where the prospect for returns is high.
Where you invest will dictate how you invest. If you invest with a single lump sum, you are exposing yourself to timing risk. A good way to smooth out exposure to market ups and downs is by investing monthly. “This is also a good discipline to ensure you keep saving through the good times and the bad, taking the emotion out of it,” says Jason Hollands of Bestinvest.
While charges are an important consideration, don’t let cost have too much influence on your decisions. “There is little point buying a low fee investment if it delivers poor returns,” says Hollands. If you don’t need personalised advice, invest through an execution-only broker, like Hargreaves Lansdown. Its Vantage Isa charges 0.5 per cent annually to hold share and other investments, and offers discounts on many funds. But also be aware that actively-managed funds can carry a considerable running cost.
So before 5 April, get your Isa open – even if you initially hold the money in cash ready to invest in shares later on. But, says Darius McDermott of Chelsea Financial Services, “do not commit money to an investment Isa that you might need in the near future”.