The Individual Savings Account or ISA is the most popular tax-efficient and flexible investment wrapper available. Everyone, even a baby, can open one with an annual allowance, giving the opportunity to build up a useful sum.
Unlike a pension which usually cannot be accessed until 55 years, an ISA can be closed or funds partially withdrawn at any time, only subject to conditions imposed by the chosen provider. Whilst there is no tax relief at inception – unlike the generous terms available with a pension – no income tax or capital gains tax is liable.
The money can be invested in any proportion in a deposit account or the stock market. In the current tax year, up to £15,240 can be sheltered by each adult, commencing at 16 years for the cash element and two years later for stocks and shares. An ISA is personal and so a couple can enjoy two separate accounts.
Children can hold a Junior ISA with a £4,080 allowance this year, unless they have a Child Trust Fund. For flexibility and charges, it is better to switch out of the latter into a Junior ISA.
The ISA allowance cannot be used in any other tax year unlike a pension. If the permitted sum is not invested, the concession is lost forever. Therefore, there are just over five weeks available to maximise for this financial year, ending on April 5.
Most banks and building societies provide a cash ISA. Whilst there is security with such a saving, the current interest rates – even for fixed deals over several years – are extremely low. The Bank of England introduced a 0.5 per cent rate, the lowest in its history, almost seven years ago. To judge by the comments of its Governor, rates are not likely to rise for a long time to come.
There is a good and viable alternative: opt for a stock market ISA. This applies not only for this year but for any prior ones where money is languishing in low rated deposit accounts and can be transferred.
The current turbulence in stock markets worldwide should not be a disincentive to invest. Lower prices should be regarded as a buying opportunity, perhaps the best time this decade. The weakness of commodity and oil prices has depressed the FTSE 100 as energy and mining companies form such a large proportion. A wider index better reflects the UK. Last year the FTSE 100 fell whilst the FTSE 250 gained 8.4 per cent.
For a fund in this area, consider Threadneedle’s UK Mid 250 whose joint managers make many company visits. It grew 5.1 per cent last year and yields five per cent.
Time invested in the market counts. Private client broker Hargreaves Lansdown has examined the FTSE All-Share Index. With dividends reinvested, investors made money on 269 out of 349 occasions, taking different time frames, which is 77.1 per cent of the time. Increasing the time frame to five years boosted the chance of profit to 88 per cent.
Yet the IMF forecasts global growth at 3.4 per cent this year and 3.6 per cent next. To achieve this, some markets will greatly exceed these predictions.
China’s lower forecasts – still well above advanced nations – have caused a wave of selling. Jason Hollands of broker Tilney Bestinvest says that as the country tries to remain competitive as a low-cost exporter, it could devalue to avoid losing its markets.
China is likely to move to a consumer-based economy and a single country fund there may not be timely. Instead go for either a well managed emerging markets fund or select one of the key buoyant states, such as India. The statistical office in Delhi reports GDP growth of 7.3 per cent in the last quarter of 2015. As a major importer of metals and oil, India will benefit by the slump in prices.
Emerging markets have shown 6.4 per cent annual growth in the last decade – almost double Government bonds at 3.4 per cent. Yet, as research from JM Morgan shows, the sector’s shares are volatile. From annual growth of 28.8 and 33.6 per cent in 2006 and 2007 and a massive 62.8 per cent in 2009, there have been loss-making years like 2008 and 2011 (down 9.7 and 12.5 per cent).
By sector rather than geography, banks should currently be avoided. Whilst the Bank of England carried out strength tests some time ago, few could envisage negative interest rates as now prevailing in such diverse countries as Japan and Sweden. Lenders to markets which depend heavily on oil – notably Nigeria, Russia and Venezuela – are likely to come unstuck.
The cannon fire of central banks – interest rates and quantitative easing – has been applied and still there is gloom. Yet there are bright rays of hope. Much of Europe looks stable, led by Germany. Look at top collectives like BlackRock Continental European and Schroder European.
The CBI, which represents 190,000 businesses, predicts the UK economy will grow by 2.3 per cent this year and by 2.1 per cent next with continuing low unemployment.
Income seekers could opt for a low cost tracker. Currently, the FTSE 100 yields 4.2 per cent but this is likely to fall as dividend reductions take effect. This applies not just to mining and oil firms but to supermarkets like J Sainsbury and Tesco.
Rolls-Royce has cut its dividend for the first time in 24 years. Instead of an index which cannot be selective, go for a managed equity income fund. Both Legal & General and Standard Life yield over seven per cent and are likely to keep their dividends intact. Utilities (from Pennon and Severn Trent to United Utilities) should also prove a stable base.
Home construction should also prove a solid foundation, notably Redrow to Taylor Wimpey. A variation on this would be landlords: Grainger is the largest listed with rental growth of 7.8 per cent on new lettings whilst Unite is a student accommodation specialist.
With the accent on yield, consider Jupiter’s new Asian Income fund which experienced manager Jason Pidcock estimates will achieve 4.2 per cent. For growth, North America, Schroder’s US Mid Cap should be a good long-term bet.
FundCalibre clients have been buying UK equities this year, followed by global, and within each opting for smaller and medium-sized choices. Asia, emerging markets and bond funds have fallen out of favour.
Diversity continues to be the watchword. Away from geographical and sector spreads, some investors follow a successful manager. Among those favoured are James Anderson (Scottish Mortgage Investment Trust), Mark Slater (MFM Slater Growth) and Neil Woodford (Woodford Equity Income).
Finally, to keep ISA costs down with a collective, gain the favourable rates likely to have been negotiated by a good broker over buying directly from the fund manager.
Conal Gregory is Headline Money Regional Financial Journalist of the Year.