12th February 2016
The end of the tax year is approaching and investors should make sure they make the most of their ISA allowance.
According to The Share Centre fund manager Andy Parsons, there are five ISA essentials that investors should consider when putting money into savings.
‘In a life where the only two certainties are death and taxes, why do so many people choose not to participate in an investment vehicle where all the profit and income is free from any further taxation – an ISA,’ said Parsons.
‘As the clock counts down to 5 April, investors will be urged to utilise their current £15,240 ISA allowance before the tax year runs out, based on the premise that once it’s gone, it’s gone forever.’
He said the first thing to consider is the deadline because if you don’t use the allowance, you lose it.
‘It is so important to reiterate that any unused allowance doesn’t roll over – so if you don’t use it, you’ll lose it,’ he said. ‘Investors will get a new allowance the next tax year, but won’t be able to contribute anything to their old ISA allowance.’
Parsons added that investors that stay within the tax-free ISA wrapper ‘will continue to rise and fall until you withdraw the money’.
The second ISA essential Parsons stated is that ‘anything is better than nothing’ when it comes to saving.
‘Many investors will ask how much do I invest and when should I do it? Whilst the focus is on the magical value of £15,240, for the vast majority of personal investors, the ability to afford such a large sum is beyond our means,’ he said.
‘To that end, is that why so many investors still shy away? Is it the thought that investing anything less could be seen to be indicative of being less well off? Quite simply put, anything is better than nothing and from little acorns can grow large investment pots.’
Thirdly, he urged investors to think about risk versus reward and ‘be realistic in your expectations’ for your investments.
‘If you are saving for a specific reason and need to achieve a certain level of capital, you need to consider the approximate level of return that will be needed,’ he said.
‘Does this mean you would be considering a higher degree of risk taking than you are comfortable with? If the answer to this is yes, then the investment is likely to be unsuitable as it will make you feel uncomfortable and have sleepless nights. Always ensure you are comfortable with the risk taken and if needed, realign and appraise your objectives.’
Costs are fourth on the list of things investors need to think about and Parsons said while short-term cost savings are attractive, investors need to consider the costs over time.
‘The administration costs are often stated as either a percentage of the holdings or a flat fee. Remember that with a flat fee, you’ll always know the total cost each year. Whereas with a percentage based arrangement it’s determined on the value of the underlying portfolio and if that grows, so does your charge,’ said Parsons.
Flexibility is the fifth ISA essential to consider, not only with contributions but on how you take your money out.
‘Don’t think that your annual ISA allowance has to be paid as a lump sum. With the markets clearly demonstrating how volatile they can be, then the ability to drip feed money into your investment is an ideal way to help navigate such conditions,’ he said.
‘By setting up a monthly contribution, the payment will simply become a standard outgoing and you’ll get used to it. It also aids those who fear that they are not able to save enough.’
From 6 April 2016 there is also increased flexibility in the way you can access your ISA savings and allow individuals to access savings and then reinvest the money back into an ISA up to the same amount.