The biggest ISA mistakes

There are only a few more days to take advantage of tax-free savings in the 2013/14 financial year. If you’re doing some last-minute saving, here are some common pitfalls to avoid. 

Saving-money-in-an-isa

1.    Not making use of the ISA allowance

Not sheltering investments within an ISA will nearly always result in paying more tax than you need. This year you can shelter £11,520 into ISA of which £5,760 can be in cash. Used every year, the ISA allowance allows savers and investors to build a significant portfolio of tax-efficient investments. Investing in an ISA often costs no more than buying a taxable investment, so the tax benefits of ISA can be free.

“If you are unsure or lack time take independent financial advice – good financial advice is well worth paying for”

2.    Being too cautious

Around three-quarters of ISA accounts opened last tax year were cash ISAs. A healthy cash cushion and short-term savings are important. But over the years inflation erodes the spending power and value of your cash savings. Over the long term, a stocks and shares ISA are more likely to provide an inflation-beating return. But it is a riskier option.

3.    Investing in last year’s winners

The phrase “past performance is not a guide to future returns” holds true and it is impossible to accurately predict which areas will deliver top returns in the short term. That’s why in my view investors should look to the long term and build a diversified portfolio of investments they believe will flourish.

4.    Time in the market not timing the market

It is notoriously difficult to predict the short-term direction of the stock market. Therefore investors, who move their money in and out of the market, attempting to time their sales when prices are high and purchases when prices are low, are taking additional risk which all too often does not translate into superior returns.
 
5.    Eggs in baskets

It’s an age old saying, never more true than with ISA investment planning. Diversification is an important part of good portfolio and financial planning: it reduces risk and should improve the long term performance of your ISA portfolio

6.    Don’t become an ISA ostrich – if in doubt take independent financial advice

It is all too easy for an ISA portfolio to become fragmented, over exposed to certain markets, or simply have too many holdings. It’s important to review your ISA portfolio regularly – weed out the poor performers and realign where necessary. If you are unsure or lack time take independent financial advice – good financial advice is well worth paying for.

Please remember tax rules can change, and the value of any tax benefits will depend on your circumstances. The value of investments can fall as well as rise so, unlike cash, you could get back less than you invest.

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About the author

Danny Cox is the Head of Advice at Hargreaves Lansdown. He has worked in the financial services sector since 1989 and is among an elite group across the UK to hold both the prestigious Certified Financial Planner and Chartered Financial Planner status.