It’s that time of the year when you will be bombarded by articles and adverts imploring you to take out an ISA before the new tax year starts.
We agree it is important to use up as many tax efficient allowances as possible, let’s face it, there are not that many left, but just how do you avoid being taken in by the slick adverts promising ever greater returns, and how do you find the right ISA for you?
The first thing to remember is that there are two sorts of ISAs; Cash and Equity, both are quite different.
A Cash ISA is basically a deposit account with a protective tax free wrapper around it meaning you will pay not tax on the interest you receive. As with any other savings account a range of options are available to you from instant access to long term fixed rates.
An Equity ISA, despite the name, can invest in a wide variety of asset classes, everything from stocks and shares, to gilts, corporate bonds and property are available.
How do I decide whether I want a Cash or Equity ISA?
Take a step back and look at what you want to achieve. If you need access to your capital, do not want to take risk or simply just want to shelter some of your savings from tax on the interest then a Cash ISA is probably for you.
With a Cash ISA you know that your capital is secure and depending on the type of account you choose it is accessible. However interest rates are at all time lows and unless you tie your savings up for at least three years the interest rate you get will be lower than inflation; meaning the buying power of your savings will be reduced.
An Equity ISA offers the possibility of better returns than a Cash ISA, but with this comes increased risk. If you opt for an Equity ISA be prepared to have times when your investment falls in value. Typically you should only consider an Equity ISA if you are prepared to invest for at least five years and can accept that you will see the value of your investment fall as well as rise.
You can have both
Remember that the maximum you can pay into an ISA in the current tax year is £10,200, however this can be split. You can pay up to £5,100 into a Cash ISA and £5,100 into an Equity ISA.
This flexibility can be useful if you want capital security and access to some of your savings but are prepared to take some risk and a longer term view with a proportion of your capital.
Ok, so I definitely want to put some money in a Cash ISA, what next?
1. Decide whether you want instant access or you are prepared to tie up your money for a longer period of time. As a general rule of thumb you will get a higher interest rate if you tie up your savings. The following links are useful:
Fixed Rate Cash ISAs
2. Be careful not to fall into the bonus rate trap. Banks and building Societies have a nasty habit of luring you in with bonus rates only to drop the rate of interest quietly afterwards. If you are prepared to manage your savings closely then bonus rates can work well for you, our best buy tables always make it very clear when an account has a bonus rate
3. If you have existing Cash ISAs now is a good time to review the interest rates you are getting. Many Cash ISAs allow you to transfer in ISAs you have taken out in previous tax years and you may benefit from a better interest rate. The following links show the best rates for ISAs that will accept a transfer in:
That’s my Cash ISA sorted, but I’d like to invest for the longer term too
If you have saved into a Cash ISA the maximum you can then pay into an Equity ISA in the same tax year is £5,100; this limit rises to £10,200 if you do not want to use a Cash ISA.
So, how do you go about selecting an Equity ISA?
1. There are two ways you can invest into an Equity ISA, firstly you could do it yourself and go straight to a fund manager or fund supermarket, you will make the decisions which funds you want to buy. Alternatively you could take advice from an IFA who will help you with the decision making process
2. Whichever route you follow start by thinking what you are trying to achieve, how long do you want to invest for and how much risk you want to take
3. Then think about how you want to split your investment between the various asset classes, stocks and shares, gilts, corporate bonds, commercial property etc. Diversification between asset classes is key, many experts believe that most of the return you get is derived from asset allocation and not fund selection so it’s worth spending some considerable time thinking about how you will split your investment
4. Then think about funds, if you are investing directly you will have to make this decision yourself, however if you are using an IFA they will help
5. Now think about whether you will invest directly with a fund manager or you will use a platform of fund supermarket. If you are planning to invest in more than one fund then you will need to use a platform or supermarket, such an approach has many benefits, not least simplicity
6. Finally, don’t just sit back and forget about your investment, review it on a regular basis. Are you happy with the performance of the funds selected? Are the funds still investing in the same way as when you took them out? Has the fund manager changed?
Don’t be rushed
The end of the tax year is about six weeks away, whether you want a Cash or Equity ISA you still have time to do your research and make the right decisions for you. But if you think an ISA is right for you do make sure you use your allowance; once the tax year has ended its too late.
How we can help
We want to help you make better decisions and make your money work harder for you, how do we do that?
If you are thinking of taking out a Cash ISA then take a look at our best buy tables. Our best buy tables are 100% unbiased and 100% independent.
Our advisers will spend time with you discussing your requirements and will then make a recommendation appropriate to your circumstances.