As we approach the end of the 2010/2011 tax year and the end of this year’s annual ISA allowance, it makes sense to use the ISA investment allowance and not lose it. With interest rates still at an all time low, savers and investors are, as always, looking for the best returns on their hard earned money. Whether it is for regular savings or a lump sum, unbiased.co.uk, the professional advice website has put together some top tips from their panel of independent financial advisers on how to make the most of your ISA allowance in the current market.
1. Karen Barrett, Chief Executive at unbiased.co.uk – Get ISA advice
“Especially in the current low interest rate environment, it is important to make sure your savings are working hard for you. There are still far too many people that are not saving and investing in a tax efficient way and a total of £36 million is set to be wasted this year alone by people not making use of their ISA allowance.
“Savers can easily feel overwhelmed having to choose the right type of savings and investment vehicle, let alone picking the right provider of these wrappers and accounts. The good news is that there is help at hand – an independent financial adviser will look at your finances as a whole and choose the best product and provider for your individual circumstances from all the products available. Just go to unbiased.co.uk and search for an independent financial adviser close to your chosen postcode!”
2. Patrick Connolly, AWD Chase de Vere – Don’t be swayed by what you read
“When deciding where to invest your ISA don’t be swayed by short-term market sentiment or hype.
“You should remember that your ISA investment will become a part of your overall investment portfolio and so should be treated as such. You should evaluate what you are looking to achieve, consider the risk you are willing to take and examine the investments you already hold.
“Despite the current negative sentiment surrounding them, for some investors this could mean investing in fixed interest or commercial property.”
3. Gordon Brown, Quainton Hills Financial Planning Ltd – Time for bed
“If you do not have new money to invest in an ISA consider a ‘Bed and ISA’ strategy. Existing investments or assets might have increased in value greatly over time. Each individual has a Capital Gains Tax allowance of £10,100 for this tax year. Gains of up to this amount are free of capital gains tax but the allowance is lost if it is not used. Selling assets subject to CGT which are in profit could crystallise this gain. The proceeds could be reinvested in an ISA to shelter future returns from all tax. Take care to ensure that dealing costs do not negate the tax benefit.”
4. Colin Jackson, Baronworth Investments Ltd – Saving for the kids
“It is anticipated that in autumn 2011 Junior ISAs will be launched. With this in mind, any monetary presents given to children over Christmas should be, temporarily, placed into an easily accessible account to enable the money to be put into a Junior ISA at the earliest opportunity.
“Although the figures have not yet been formally announced, we expect an annual allowance of between £3,600 and £5,600. There will be a choice of Cash or Stocks and Shares ISAs. The good news is that the money is not accessible by the child until he/she turns 18 which means, particularly for very young children, a Stocks and Shares ISA could be favourable giving sufficient time to iron out the ups and downs of the equity market.”
5. Scott Gallacher, Rowley Turton Ltd - ISA tips for retired income investors
“Those prepared to accept investment risk should consider investment into equity income funds (within a Stocks and Shares ISA). These invest into a range of UK and international companies, and currently yield between 3% and 5%. This would give an initial income better than deposit rates with the prospect of both a rising income and capital growth over the longer term.
“Whilst the value of shares may rise and fall, the dividend income from a broad spread of top quality UK and international companies tends to remain fairly stable and has trended upwards over time. Hence if you focus on the income statements as opposed to the valuation statements shares look a very sensible investment from an income perspective.”
6. Neil Shillito, SG Wealth Management- Consider ISA and pension planning
“Of all the features and advantages of ISAs, one important and crucial aspect is often overlooked and that is the tax efficiency of income as part of income planning in retirement. Although it might be generally understood that ISAs are ‘tax-free’, the advantages are not always obvious. Investments in ISAs are free of Capital Gains Tax, although with a personal CGT allowance of £10,100 the size of the portfolio generally has to be significant to appreciate the benefit. Income is also perceived to be tax free, but this is only applicable to interest not dividends. Dividends are subject to a 10% credit which is not reclaimable.
“Where ISAs can really benefit the investor in terms of income planning is that any amounts withdrawn from the ISA are tax free in the investor’s hands. This can be contrasted with say a pension, which although it may have the benefit of tax relief on money invested, has the disadvantage of income being taxed on receipt. The fact that all the capital is available is also attractive compared to a limit of 25% from the pension at retirement.
“Investors should sensibly consider both pension and ISA investment as part of a coordinated retirement planning strategy.”
7. Danny Cox, Hargreaves Lansdown - Don’t wait until the end of the tax year to open your ISA.
“Leaving your ISA subscription to the last minute of the tax year, means you miss out on up to 12 months tax efficient growth and income per contribution. A couple could miss out on as much as £204 of income tax savings this year, rising to £213.60 next year and risk missing their allowance completely (assumes basic rate tax payers investing in fixed interest funds with a 5% yield).”
8. Graeme Mitchell, Lowland Financial – It’s all about timing
“If you are cautious of investing new money into a Stocks and Shares ISA because of a possible stock market correction or you find interest rates on cash ISAs are not very appealing, how about spreading risk by drip feeding (phased investment) your money over 6 or even 12 months. Most companies allow this automatically.
“That way you are not putting all of your ISA money into the market at one time, but longer term you are invested for the potential of much better returns that are only possible with Stocks and Shares.
“It’s an old trick – but you can invest your full ISA £10,200 allowance in this way (or look at switching existing cash ISAs) into Stocks and share ISAs if you can afford to think longer term, this reduces risk whilst making sure you are invested when things improve.”
9. Peter McGahan, Worldwide Financial Planning – tax efficient investments
“Believing an ISA is good or bad based on performance, is a common mistake. An ISA is simply good because the growth is free of tax and that’s where it ends. You don’t have to think annually about reallocating cash from your investments like you might have to with unit trusts/investment bonds. Each of these changes can incur extra switching charges etc. An ISA allows you to leave the growth and not have to worry about tax. The performance of the ISA is something completely different and depends on the fund you or your adviser has chosen. Investors need to review that and review it regularly.”
10. Adrian Lowcock, BestInvest - Don’t buy a fund simply because it’s a top performer
“Take the time to understand why a fund has performed well: is it in a booming, but potentially high risk, sector? Or was it due to an exceptional manager who no longer runs the fund? If you’re then still attracted, remember to make sure that the fund meets your investment objectives and fits with the level of risk you’re comfortable with.”
Anna Schirmer/Anna Moulds/Emily Falla, Lansons Communications: 020 7294 3682
For expert commentary or case studies from over 150 media-friendly IFAs, journalists should visit www.unbiased.co.uk/bluebook.
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