It's called an ISA season but I don’t know why, as we have all year to invest in our ISAs (Individual Savings Accounts). I assume, as we have a sell by date of the 5th April, most people have the ‘use it or lose it approach'.
But what are the key bits of ISA advice you need to consider before making that last minute investment?
Tax advantages: An ISA is tax efficient. An investment bond isn't. It is one of the most sold investments yet it attracts basic rate tax as it grows, is heavily charged and there is the potential for you to become a higher rate tax payer because of the gains. An ISA means the returns grow free of capital gains tax and when you encash the ISA you are not assessed against your income tax for the gain.
Are ISAs high risk? No, an ISA is simply a tax wrapper which determines the taxation of the product. Within an ISA you can invest into cash, property, equities, fixed interests etc. Each of these have varying degrees of risk and that is what will determine the potential return or loss of the investment.
When is the best time to invest in an ISA? With a cash ISA the earlier the better as it’s free of tax and you benefit from the growth immediately. With an equity or stocks and shares ISA it’s slightly more sophisticated than that. With a stocks and shares ISA you are investing into a fund. That fund invests into lots of shares, for example. Your capital is pooled along with others' and you buy into a spread across all the shares in that ISA. Therefore, ideally you would want to buy into it when it is low and sell again when it is high. This is the reverse of how most people might think as the media often portray the market as 'bad' when it is down and 'good' when it is up, thereby ensuring you are encouraged to buy at the wrong time. If you aren’t inclined to time the market, it’s good idea to set up a monthly savings ISA. With a monthly savings ISA you are taking advantage of a moving market and buying during lows and highs. If, during the year, the market plummeted you could take advantage of that by using up the remaining allowance for the year with the newfound cheaper price due to the low market.
How do I make the best returns on my ISA? That depends on the risk you are prepared to take so you will need to discuss that with your independent financial adviser. The greater the risk the greater the potential reward and vice versa. The key, however, is to choose the funds you invest into wisely. All too often investors make an investment into an ISA and leave it and forget about it. There is considerable difference between the best and worst funds. In the UK all companies sector for example the best fund has returned 114.7% over the last five years and the worst fund has returned -20.3%. Over the last year alone the best performer has returned 46.8% and the worst performer has returned 0%. (1)
You should review the funds you are invested into each year to ensure their ongoing suitability from both a risk and return point of view, remembering that markets change as do fund managers and the fund you are invested into may no longer suit you.
Can I access my ISA? Yes, at anytime.
Can I use my ISA to pay my mortgage off? Yes. It’s a very common way to repay a mortgage particularly if you have a buy to let mortgage where you want to retain the mortgage for its tax breaks and then save the extra capital in a tax free manner.
Can a child invest into an ISA? Not yet but junior ISAs are on the way.
For a list of the best ISA funds call Peter on 0845 230 9876, e-mail firstname.lastname@example.org or take a look at our website.
The value of shares and investments can go down as well as up
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'