DIY InvestorMagazine
/
March2014
DIY InvestorMagazine
/
March2014
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ISA INVESTING
JOIN ‘THECLUB’
As ‘ISA season’ is upon us once again, SteveHaysom
explains the basics and benefits of the tax efficient
wrapper.
Themercury is rising and our parks and gardens have burst
into life so theDIY investor knows preciselywhat season
it is; its ISA season again and this year seems to have
generated evenmore frenzied activity than before.
However tempting itmay be to dismiss this late flurry
in the run up to the end of the tax year as amarketing
exercise by platforms and product issuers, the ISA has a
vital role to play in any long-term investment strategy and
once the calendar shows 6thApril, that 2013-14 allowance
will be gone forever.
Once the preserve of an elite group of stock pickers, the
‘ISAMillionaires Club’ has been expanding of late – due in
part to above-inflation increases in subscription levels – in
his recent budget the Chancellor announced that from July
1st 2014 savers will be able to shelter £15,000 p.a. in an
ISAwith greater flexibility around the combination of cash
and stocks and shares. But it is not only subscription levels
that account; having existed for 15 years, ISA asset growth
points to the benefits of long-term investing.
A little number crunching points to the opportunity –
wealthmanagers BrewinDolphin calculates that an investor
making themaximum subscription each year and achieving
a 5% return after fees could achieve a pot of £1million
within 29 years.
The benefits of compounding and tax efficient saving
can deliver life-changingwealth to thosewho seize the
opportunity; the first step is to use this year’s allowance
now, because otherwise you’ll lose it.
WHAT ISAN ISA?
An Individual Savings Account (ISA) is an investment
wrapper whose key attraction is that returns generated
within it are free of tax.
DIY investors can choose either a cash or a stocks and
shares ISA and benefit from higher rates of return and tax
benefits than savings accounts.
With interest rates set to remain at record low levels there
is precious little to be earned on savings accounts and any
return less than the prevailing rate of inflationmeans that
your capital is being eroded.
In the current tax year investors can subscribe up to £11,520
in an ISA, up to half (£5760) of which can be in cash.
CASH ISA
A cash ISA is simply a savings product that pays returns
with no deduction of tax – a saving of 20% to standard rate
taxpayers and 40% to those that pay at the higher level.
£226 billion is currently invested in cash ISAs and despite
the fact that rates have been declining, with the best
instant access account currently available paying just
1.75%, this represents a year on year growth of 6%.
The budget delivered amassive boost for savers, raising the
annual maximumCash ISA subscription to £15.000 from
July 1st and allowing investors to convert from stocks and
shares to cash products for the first time.
WEALTHMANAGERS BREWINDOLPHINCALCULATES THATAN INVESTORMAKING THE
MAXIMUM SUBSCRIPTION EACHYEARANDACHIEVINGA 5% RETURNAFTER FEES COULD
ACHIEVE A POTOF £1MILLIONWITHIN 29 YEARS.
STOCKSAND SHARES ISA
Stocks and shares ISAs currently allow investors to
subscribe up to the full £11,520 annual allowance and
invest in a wide range of stocks, bonds, funds, investment
trusts and ETFs. Profits are not liable for capital gains
tax and no additional income tax is due on dividends or
distributions.
The 2014 budget allows peer-to-peer loans to be held
in an ISA as well as bonds with less than five years to
maturity.
ISAN ISA FORYOU?
Notwithstanding the pressure from all sides to participate
in what always seems to be described as a ‘bumper’
ISA season, many DIY investors will recognise the
value of a tax efficient investment vehicle. Understand
your attitude to risk, set your financial objectives and
construct your long term investment strategy. Whilst
somemay need a nudge, ISA season should not really
sneak up on you; the end of the tax year should just be
another milestone on the way to the achievement of your
investment goals.
Somemay consider that easy access to their investments
makes an ISA amore portable and attractive alternative
to a pension in their retirement planning; others may
decide that the creation of sub-pots within a tax-efficient
account may be the best way to give their children a
financial head start in life. It is worth shopping around to
ensure that the ISA provider you choose delivers the right
technical capability and range of investment options that
allow you to implement your strategy and at a cost that
you find acceptable.
ISA INVESTING – SOMETHINGS TO
CONSIDER
Bonds with less than 5 years tomaturity can
now be heldwithin an ISA. Bond funds aremore
efficient within an ISA as they are sheltered from
income tax whereas equity funds incur capital
gains tax for which you already have an annual
allowance of £10,900. However, collectives do
not replicate the performance of bonds, so be
sure that theymeet your requirements.
Take it to themax – combining your allowance
with that of your spouse will allow you to jointly
shelter £23.040 in the current tax year and
£30,000 p.a. from July 1st.
If you don’t have time tomonitor the
performance of individual stocks, consider
tapping into the expertise of the professionals
by buying funds or investment trusts.
Allowedwithin ISAwrappers since August 2013
AIM stocks can add a little zest to your portfolio
but it may not be the place for the faint hearted
– consider an AIM tracker or small-cap fundwith
exposure to AIM stocks.
TAX SAVINGS
1.
No capital gains tax is paid on profits from
share price increases, saving you between
18% and 28% according to your tax liability
2. Tax on interest earned from bonds can be
reclaimed fromHM Revenue & Customs
each year
3. Income earned, or dividends received from
shares or funds are taxed at 10%, saving a
basic rate taxpayer 12%
However, if you domake the wrong choice, ISAs are
reasonably simple to transfer with no loss of tax benefit
– you have instant access to your funds should you
require it.
If you are not confident about picking individual
investments youmay to choose to effectively cede
asset allocation decisions to the experts by purchasing
amanaged or multi-manager fund, by adopting a
model portfolio, purchasing a low-cost index tracker
or by selecting one of the pre-selected portfolios of
funds that are on offer. What you should try to avoid
is missing this year’s deadline and then thinking ‘I
wish……
