Tomorrow is the start of a new tax year and for many people this could be a good opportunity for a fresh approach to saving. Treasury changes mean cash Isas will be less attractive from next year, creating a compelling argument for using your Isa allowance for equities, if you’ve never done that before.
At the moment only one in every five Isas opened is a stocks and shares Isa. However, following chancellor George Osborne’s Budget announcement that, from next April, no tax will be deducted on the first £1,000 of interest from a standard savings account (essentially making them tax-free savings accounts for most people) cash Isas now look a lot less appealing.
Chris Cole, of advisers Towry, says: “Cash Isas can be very useful for those looking to invest for a short period of time or those who are overtly cautious; however for anyone investing for at least five years, holding cash in an Isa wrapper now looks increasingly inefficient.”
For those investing over a long-term period, and who are prepared to accept a level of risk, there is one good reason to choose stocks and shares over cash Isas: potential returns. According to research by Moneyfacts, the average stocks and shares Isa has posted growth of 7.4% during the 2014/15 tax year so far, compared to an average cash Isa rate of 1.53% in the same tax year.
In the 16 years since the introduction of Isas, the average stocks and shares fund has now grown by 174%. The best performing Isa fund over that period, Marlborough Special Situations, has posted growth of 1,609%. But if you are considering using your Isa allowance to invest in stocks and shares, don’t jump in without doing plenty of research first.
You can either invest in an individual fund directly with a fund manager, or you can use a fund supermarket to mix a wide range of funds within a single Isa.
Fund platforms charge for their services, as do the underlying fund managers, so it’s really important to understand how much each will charge you. Most funds cost less via a platform than buying direct from the fund manager, so it’s usually the most sensible way to invest in a stocks and shares Isa.
According to comparison site comparefundplatforms.com, for investments up to around £50,000 Cavendish Online, a discount broker using the Fidelity platform, is very cost-effective.
“There is a flat 0.25% annual charge with no fund dealing fees,” says Justin Modray of comparefundplatforms.com. “This is a little cheaper than using the Fidelity platform directly, where the annual charge is 0.35%. Hargreaves Lansdown is another popular platform, but with a 0.45% annual fee it is at the more expensive end of the market.”
The savings from using a low-cost platform can make a big difference over the long term. “For example, if you invested £25,000 over 10 years with 6% annual growth before charges and four fund deals a year, the impact of charges would be around £820 lower via Cavendish Online versus Hargreaves Lansdown,” says Modray. “Discount broker Chelsea Financial would end up costing around £1,400 more than Cavendish.”
You can hold collective funds, such as unit trusts and open-ended investment companies (OEICs), as well as investment trusts, gilts and exchange-traded funds (ETFs), individual shares and corporate bonds in a stocks and shares Isa.
The fund or funds you choose to invest in will depend on your approach to risk, how long you plan to invest for, and whether you already have any exposure to equities.
Brian Dennehy, managing director at fund research company fundexpert.co.uk, says that cautious investors might want to consider the Jupiter Distribution fund, which has returned 7.84% over a year and 46.37% over five years. The fund aims to provide a sustainable level of income and the prospect of capital growth over the long term by investing in an actively managed portfolio of fixed interest securities and mainly UK equities.
Martin Bamford, of financial advice firm Informed Choice, suggests Axa Framlington’s Managed Balanced fund as a good option for first-time stocks and shares investors.
“This fund invests in a range of stocks and shares in any part of the world,” he says. “It also has small exposure to bonds, which offers a good balance for the novice investor who might be uncomfortable with full exposure to equities. The fund has ongoing charges of 0.70% and has delivered returns of 11.31% over the past year and 56.25% over the past five years.”
Scott Gallacher, of advisers Rowley Turton, recommends the Invesco Perpetual Global Targeted Returns Fund, which has a 0.82% annual management charge and aims to achieve a positive total return over a rolling three-year period. The fund launched in 2013 and has returned 8.81% over the past year.
For more ambitious investors, Dennehy suggests Jupiter’s High Income fund, which has returned 7.19% over the past year and 65.23% over the past five years. The fund aims to achieve a high and rising income with capital growth.
New rules for flexibility
Not sure whether you want to tie your money up in an Isa? Well, the good news is that changes that were announced in the Budget last month and that come into effect in the autumn give Isa investors much more flexibility in managing their tax-free savings.
From tomorrow, when the investment limit increases, you can put up to £15,240 into your Isa.
However, once you have paid in that amount, you can’t put any more in during the same tax year, even if you make a withdrawal.
Under the rules that come in later this year, you will be able to withdraw some of that pot and then still top up your Isa later in the tax year. “With the fully flexible Isa, people will have complete freedom to take money out and put it back in later in the year, without losing any of their tax-free entitlement,” said chancellor George Osborne.
Lisa Bachelor
