27th January 2014
The Isa allowance is £11,520 per person for the 2013-14 tax year – if you have a partner, it effectively doubles. You can invest up to half that – from £1 to £5,760 into a cash Isa with a bank or building society. The balance can go into an investment Isa – a very wide range of assets including shares, bonds, OEICs and other collectives, and more recently listings on the Alternative Investment Market (AIM). The Isa can go international with stocks and bonds issued by any company officially listed on any recognised stock exchange as well as unit trust style investments from European fund managers.
Cash Isa is out of fashion
Cash Isas are sold across the counter, by post, phone and online by banks and building societies. companies. There are no extra charges – costs are built into the product. The indications this year is that demand will be underwhelming. Far fewer new cash Isa savings accounts have been launched at the start of the “Isa season”, according to analysis by data provider Moneyfacts this week. If the cash Isa season may be a “damp squib”, calculating that in December 2012, there were a total of 73 cash Isas that were either new launches or new issues of fixed rates. Last month, in comparison, there were only 24.
Why? The interest rates – even tax free – are unappealing. The best instant access cash Isa – from National Savings & Investments – pays 1.75% while Nationwide’s 1.5% offering falls by 1% next January. A one year fixed rate deal from Britannia pays 1.85% while a three year deal from Virgin Money (the re-badged Northern Rock) or Principality Building Society offers 2.4%. Only the three year fix is above current inflation.
Investment Isa action
You can only buy via an Isa provider – most fund management companies but also intermediaries who use one of the fund supermarket platforms. It is better to buy earlier rather than last minute – you can make a more considered choice and as this tax year ends on a Saturday, many will not stay open until the final moment. Investment trusts and some other funds may close up to a week before the deadline even for online applications. You should also allow time for money laundering checks.
The market may continue to move upwards so earlier rather than later could make sense. There is little point in investing in the stock market if you expect it to fall sharply.
No investment should be made purely on tax grounds. But if your Isa is part of a wider portfolio, find the best fit for your own purposes.
Isa bangs for Isa bucks
If side-stepping income tax on dividends is most important, then a higher yielding bond fund gives the most Isa bangs for your investment bucks. A portfolio offering 5% in an Isa is only worth 3% in a taxed form to a higher rate taxpayer. But looking at the longer term, capital gains tax freedom via a more aggressive growth fund might be more worthwhile – though you cannot offset Isa capital losses against taxable gains elsewhere.
Investment Isa buyers have three Isa provider routes in practice.
Individual shares – a number of stockbrokers feature this. For instance, Share Centre offers an individual share Isa. Past history from that broker shows that the most popular stocks have been blue chips with higher than average dividend yields such as GlaxoSmithKline, BP, AstraZeneca, Sainsbury and Vodafone. You can put as many stocks as you wish into your Isa portfolio consistent with charges on purchasing small stakes and any fees for the account. Stockbrokers will also sell investment trusts as part of an individual share Isa portfolio.
Collective funds – unit trusts (Open Ended Investment Companies – OEICs). Most major fund managers promote Isas where you can spread your money across several of their funds. These have no additional costs but may be more expensive than purchasing via an IFA. The IFA route also offers greater choice and the ability to switch easily from one fund group to another. IFAs market Isas via one of the consumer fund supermarkets such as CoFunds, Fidelity Funds Network or Hargreaves Lansdown’s Vantage. RDR pressures have provoked a price war which should benefit consumers. But watch out for costs such as annual fees, exit fees, and additional expenses if you want annual accounts on paper. It might be worth looking for “clean share class” unit trust options. As RDR now bans ‘trail commission’ (an annual percentage payment) to the broker, fund managers have set up this class with lower annual charges, giving both transparency and the potential for a better return.
Investment trusts – the days when they did everything for nothing are generally over so expect an annual Isa handling charge, generally around £30 a year no matter the size of the holding. This works best for larger amounts, perhaps built up over time. Investment trusts often have lower annual management charges than unit trusts which can enhance returns. If you wish to sell your holding, it is via the Isa provider and not a stockbroker.
Free help but individual advice is priced out
Some unit trust IFAs will offer individual advice. Generally this is expensive now that commission has been banned. But most bigger IFAs have on-line guidance. This is not advice or a personal recommendation – rather suggesting a number of funds in various sectors – perhaps 100 overall – which the adviser most likes. You select them according to your needs and risk profile.
Alternatively, some IFAs offer ready made portfolios. For instance, Chelsea Financial Services has a series of risk rated vehicles called EasyIsa. Here you choose from cautious, balanced and aggressive growth, income and global income. Currently the cautious fund has six dividend income or bond funds with equity exposure limited to 50%. The aggressive fund also has six funds but with a global equity and special situations bias. https://secure.chelseafs.co.uk/modelportfolio.aspx?FT=ISA1&transfer=
Turning cash into investments
But you may not be limited to £11,520. Many investors have old, and now perhaps unloved, cash Isas. These can be transferred into investment Isas (but you can’t do it the other way around or move back). Any transfer has to be via the new Isa home – individuals cannot encash and then switch their money because this loses the Isa benefits. This can take up to four weeks although the transfer can be made at any time – irrespective of tax year.