16th April 2013
Peter Chadborn, financial planner at IFA Plan Money makes the case for using your Isa allowance early in the tax year rather than waiting until just before next April’s deadline.
So another ISA season is over. Did you get enticed in by the annual marketing hype from the investment industry? Why do we need an ISA season anyway and should we play that game?
For investment marketeers and advisers, March is the time to remind investors of an impending ‘use it or lose it’ deadline because if not used each year your individual annual ISA allowance will be lost. Does that matter? Well yes, it does. ISAs are a fundamental investment planning tool and even if you don’t appreciate their benefits now, in time you will acknowledge their tax efficiency value or even just as a disciplined savings method.
The easiest and most often taken option is to utilise the Cash ISA allowance. This is now £ 5,760 and arguably requires little thought beyond the prevailing interest rate, whether the rate is fixed or variable and what the access restrictions may be. One can be forgiven for assuming that the Cash ISA is the first port-of-call after which the Stocks and Shares ISA can be considered. But from a financial planning perspective this approach may not be ideal, not least because the Stocks and Shares ISA allowance is then half what it could be.
Let’s say that an average Cash ISA is yielding a return of 2% interest and an average equity fund Stocks and Shares ISA is producing an annualised growth of 6%. Tax efficiency on the greater return, particularly when compounded over many years, is significantly more beneficial so on that basis alone the full £11,520 Stocks and Shares ISA allowance should be used rather than half in the Stocks and Shares ISA and half in the Cash ISA.
Of course it is at this point that as a financial adviser I must warn against letting the ‘tax tail wag the investment dog’. A Stocks and Shares ISA should only be considered because you are making a medium to long-term Stocks and Shares investment anyway, not just because of the tax efficient benefits it offers.
Those investors who do not need a deadline to spur them into financial planning action may well benefit from making Stocks and Shares ISA investments on a monthly basis rather than as a single investment. The main advantage of this approach is that you avoid hoping that your single investment was not made at the peak of a market cycle. “Buy low, sell high” is an old investment adage but how do we know when “low” or “high” is? Even the experts don’t always get it right so what chance has the novice investor got? By setting up Investment ISA contributions via monthly direct debit you will periodically be buying units (shares) in your ISA fund when values are low as well as high and therefore buying more for your money and avoiding the risk of buying when the market is high. This is known as pound-cost-averaging.
In terms of choosing the right Investment ISA for you, well, the world and his dog will have an opinion. Newspaper columns will give you best buy tips, Investment company advertisements will boast of impressive past performance and financial advisers will claim to know the inside track.
Worst of all is the ‘mate down the pub’ scenario which is to be avoided at all costs. This is where you are swayed by making investment decisions based upon what has worked well for someone else. The reason this is to be avoided is because rarely are two people’s circumstances, risk appetite and long-term objectives identical. One of the most important considerations when making or reviewing an investment is your risk profile; your tolerance to volatility and your capacity for loss.
Only investments that match this criteria should then be considered.
So try and avoid the need for succumbing to the annual ISA season hype and avoid the risk of making rushed investment decisions which may in time be ones you regret.
Peter Chadborn’s website is at www.plan-money.co.uk