1st May 2014
Savers with an appetite for risk were well rewarded over the last year according to new research from Moneyfacts, the statisticians writes Kara Gammell.
According to the data, the average stocks and shares Isa posted a return of 9.42pc in the last tax year, meaning an investment of £10,000 became £10,942 over the 12-month period.
In comparison, the average interest rate on cash Isas during the same period was a paltry 1.69% – meaning a return of just £169 on the same investment.
It is the second year in a row that stock market investments have beaten cash, with the average stocks and shares Isa returning 13.7pc in 2012/13. What’s more, stocks and shares Isas have beaten cash Isas nine times in the last 15 years.
Yet the majority of Isa investors have missed out on the better performance of shares, preferring the safety of a cash Isa.
According to HMRC figures for the 2011/12 tax year, nearly half the UK adult population has an Isa, worth an average of £16,490. Out of this, only 2.7 million adults hold a stocks and shares Isas, compared to more than 16 million with a cash Isa.
“The vast majority of investors who opted for a stocks and shares Isa rather than a cash Isa will have been rewarded for their decision,” says Richard Eagling, head of pensions and investments at Moneyfacts.
“With signs of economic recovery and no significant improvement in cash Isa rates, we would expect to see the popularity of stocks and shares Isas increase further this tax year,” he says.
But how can savers who are fed up with derisory cash Isa rates make the leap into stocks and shares?
Dipping your toe into the stock market for the first time can be daunting, so it is essential to do your math before you take the plunge.
A stocks and shares Isa is a tax-efficient investment account that lets you put money into different types of investments, including unit trusts, investment trusts, open-ended investment companies (OEICs), as well as government bonds and corporate bonds.
You can also buy individual company shares and put them into your Isa.
Currently, the Isa limit stands at £11,880, of which up to £5,940 can be held in an equity Isa. However, from 1 July 2014, it will be possible to top up Isas for the 2014-15 tax year to a new limit of £15,000. Under new rules, you can invest the full amount in stocks and shares if you wish.
Financial experts agree that any investment you make should really be long-term and held for a minimum of five to ten years. If you think you will need the money sooner, you should stick to cash.
Keep in mind that stocks and shares Isas are a form of investment and their money can go down as well as up. With cash, inflation may erode its value in real terms, but if you put £1,000 in, you can get your £1,000 back.
You can buy a stocks and shares Isas in a number of different ways – for instance, a bank/building society, an online investment platform, a fund manager, a stockbroker or an independent financial adviser.
The investments you place into a stocks and shares Isa can come with charges to cover administration costs and pay fund managers – minimising them can make a big difference to your returns over the long term so it is essential to do your sums in advance.
“Charges should always be an important consideration, although it would be a mistake to compare the charges between cash and equity investments,” says Patrick Connolly, a certified financial planner at Chase de Vere.
“It most important to consider whether cash or equities is the most appropriate choice from a risk and return perspective and then charges should be a secondary consideration once that decision is made,” he says.
So you want to make more from your money, but where do you start? How do you chose a fund?
You need to think about your risk tolerance, your goals and your time frame first,” says Darius McDermott, managing director of Chelsea Financial Services.
“Only when you have these things in mind should you then think about which asset class might suit your needs best.
Mr McDermott tips a strategic bond fund like Jupiter Strategic Bond as a good starting point for the risk-adverse investor.
Mr Connolly warns first-time investors not to be swayed by investments just because they are at the top of the performance tables.
“Strong recent performance should be seen as a warning sign, as investment gains have already been made, rather than as an opportunity to buy,” he says.
“If you are starting out then look to invest regular premiums on a monthly basis rather than putting in a lump sum,” says Mr Connolly.
“By investing regular premiums you negate the risk of market timing because if the stock market goes down you simply buy at a cheaper price the following month.”
A good low cost option for a novice investor is a UK tracker fund such as HSBC FTSE All Share Index fund which will give broad exposure to the UK stock market tips Mr Connolly.
Those who want to adopt a more cautious approach should look to Schroder Multi Manager Diversity fund.
Mr Connolly says: “This fund spreads risks by investing one-third into shares, one-third into fixed interest and one-third into other investments such as property or commodities.”