Investors should not miss probably the most generous annual tax concession of all – the Individual Savings Account or ISA – but speedy decisions need to be made as there is little time left.
There are just 13 days until the end of this tax year but owing to Easter only seven are business ones. Unlike pension contributions, if any part of the £20,000 allowance is not used by April 5, it cannot be carried over.
There are several key benefits in using an ISA:
Money grows free of income tax
No capital gains tax to pay
No tax on withdrawals
No entry to be made on tax return.
The cumulative effect of squirreling away as much as possible in an ISA can reap good rewards. The Association of Investment Companies using Morningstar statistics has calculated that if the full allowance of £186,500 had been invested in the average investment company since ISAs were introduced in 1999, the value by the end of February would have grown to £436,894, equivalent to an annual 8.31 per cent.
Clearly, some funds have done even better than these impressive figures. Over five years to the end of 2017, a £10,000 investment would have grown to £42,110 for the best performing unit trust (Legg Mason’s Japan Equity) or £50,285 for the top investment trust (3iGroup). However, with derisory interest rates, the best cash ISA could only achieve £11,472 (United Trust Bank on 2.75 per cent fixed).
The ISA choice used to be straightforward – either on a deposit or stock market basis. It is still possible to use either of these mainstream routes and both can be taken in any proportion provided the total annual sum does not exceed £20,000. Do not forget that if any saving is under-performing, it can be transferred either way.
Whilst a cash version brings certainty, with the Retail Prices Index at 4.1 per cent, even the best fixed rate offer will not keep up with inflation, effectively therefore eroding the value of your savings.
Instead opt for the stock market which is likely to greatly outperform cash over the long term. Several brokers and wealth managers are offering promotions, such as Fidelity which is giving those who open an ISA online by March 31 the chance to win back the amount initially invested.
Besides the two main forms, there are several other types of ISA:
Help to Buy: a cash form to help first-time home buyers
Innovative Finance: peer-to-peer lending
Junior: for a baby upwards (maximum £4,128pa)
Lifetime: 18-39 years can open to save for retirement or deposit on first home.
A Lifetime ISA can be started with just £100 and up to £4,000pa can be invested (as part of the annual allowance) until just before the 50th birthday. The Government adds 25 per cent, meaning that £5,000 annually can be saved which must be held until 60 years without incurring a penalty unless for a first home costing up to £450,000 or medical evidence of life expectancy of less than a year.
Skipton Building Society offers a cash one but only pays 0.75 per cent and so a stock market version is the answer which is available from Hargreaves Lansdown, Nutmeg, OneFamily, Share Centre and app-based Moneybox.
It does not have to be with the same provider as for your main ISA.
If you already hold a Help to Buy ISA, it can be transferred to a Lifetime one but needs to be done before April 6 to not affect this year’s allowance. The rules allow for the £4,000 maximum plus the cash saved in the Help to Buy ISA. Those who started at its launch in December 2015 could now have £4,400 which will bring an extra bonus of £1,100.
If the transfer is delayed to the next tax year, it will mean using the 2018/19 allowance and no additional bonus.
There is one anomaly on the ISA restrictions. A teenager aged 16 and 17 years can invest for those two years in both a Junior and an adult ISA.
A Junior ISA cannot be opened if a Child Trust Fund is running and so transfer the latter into the ISA version. Among top providers is OneFamily, which accepts from £10 monthly, and offers an international fund with State Street Global as the adviser.
To comply with ISA regulations, your holding needs to be held in a tax wrapper. For a cash version, this is provided free by the chosen bank or building society. For a stock market one, the ‘platform’ or ‘fund supermarket’ makes a charge which may be every quarter or year plus possibly a fee per trade or assessed on the portfolio value (such as 0.45 per cent with Hargreaves Lansdown).
One tip when buying a collective is to purchase through a discount broker, like Chelsea Financial Services, to gain their negotiated rate rather than a higher sum charged by the fund management group. Although there will be the platform fee in addition, this could still be advantageous.
Model portfolios are widely available. One of the best is 71M which offers five stages from ‘cautious’ to ‘adventurous’ on risk as well as a pure income approach.
Although most banks are quiet about offering ISA choices, it is worth enquiring as an alternative to stockbrokers and wealth managers. Santander, for instance, has four suggested portfolios from £500 which are run by the experienced duo of Toby Bourne and Tom Cadick.
When looking at stock market options, ensure a diversified approach, not just in terms of geography and sector but also in the type of security, such as bonds which are loans made to companies and public bodies at a fixed interest rate for a term of three months to half a century.
A collective – whether an investment trust or open-ended like a unit trust – reduces risk and volatility. The cheapest option is a tracker which seeks to replicate a published index. Ensure that is large enough to hold even the smallest company and for safety holds the stock, rather than a synthetic approach, and does not lend its securities.
Top examples include the Legal & General’s UK Index and International Index, which mirror the FTSE All-Share and FTSE World ex-UK indices. For open-ended funds, check Bestinvest’s ‘Spot the Dog’ list of those which have consistently underperformed (tel: 0207 189 2400).
It reveals a three-year return on £100 was just £80 with SF Webb’s Capital Smaller Companies Growth but £178 with Liontrust’s UK Smaller Companies.
Over 10 years, the best performing investment trust sectors, showing their growth excluding expenses, were Asia Pacific excluding Japan 175.1 per cent, Europe 134.5 per cent, European smaller companies 225.3 per cent, global 180.2 per cent, Japan 225.4 per cent, UK equity and bond income 149.6 per cent and UK smaller companies 252.6 per cent.
The top sectors over the same time were biotech and healthcare 512 per cent, debt and technology media and telecoms.