Interest rates remain low, confidence in pensions has slumped and inflation is still well above the Bank of England’s target rate, so the Isa season takes on extra importance as an opportunity to get your money working.
While cash Isas offer you peace of mind, easy access and tax-free interest, it’s fair to say that stocks and shares Isas may still offer the best chance of long-term growth and there is no Capital Gains Tax to pay and no further tax on income.
Stocks and shares Isa 2012 – market conditions
A bumpy ride for stock markets in recent years has clearly dented investor confidence, illustrated by figures from the Investment Management Association (IMA). Net sales of investment funds (unit trusts and OEICs) within Isas fell from more than £4 billion in 2010 to under £3 billion in 2011.
Although any optimism should be less than wild given the ups and downs that share prices have experienced over the last decade, the FTSE 100 has risen with only minor blips so far in 2012, reminding us that growth is achievable.
It’s vital to remember that such a trend can swiftly be reversed though, so if you’re going to invest in a stocks and shares Isa you should make sure you diversify your investments, considering corporate bonds and government gilts, which can also be included.
Stocks and shares Isa 2012 – Isa deadline
The deadline to take up your 2012 Isa allocation of £10,680 is 5 April. You’re entitled to put £5,340 into a cash Isa with the rest in a stocks and shares Isa or you can put the whole lot into the latter.
Many banks offer you a route to invest in a stocks and shares Isa or you can use a discount broker, which offer a wide range of funds to choose from. There is also a deluge of ‘hot tips’ and ‘must-buy funds’ at this time of year but it’s important to look beyond the hype and focus on important factors such as fees and the level of risk involved.
Stocks and shares Isa 2012 – check the costs
The major hook for some funds may be their performance track record and while this is a good sign, it is no guarantee of future performance.
What you can guarantee is that you will incur costs for investing so it’s wise to keep them as low as you can. Unit trusts and OEICs charge an annual fee to manage your money and those that are run by an investment manager, making regular decisions on which stocks to hold, will cost more with no certainty of better returns.
Stocks and shares Isa 2012 – passive funds
Consider passive investments like tracker funds and exchange traded funds (ETFs), which cut down the cost of investing, while corporate bond funds can also be cheaper than equity funds, as well as adding a safety net if stock markets take another tumble.
Some discount brokers will list tracker funds separately from active funds, with managers such as BlackRock, HSBC, Legal & General and Vanguard offering a range of products that could enable you to build a diversified portfolio.
Discount brokers also reduce the expense of buying funds if you are making the investment directly, without financial advice.
Stocks and shares Isa 2012 – only invest what you can afford to lose
Unfortunately the exciting returns that we anticipate from investments often never arrive and we have to make do with smaller growth or even losses. You should only put at risk money that you can afford to lose or you may have a nasty shock if the value of your money drops.
If you have a long time frame, i.e. more than five years, to achieve your investment goals and you don’t need access to the money during that time then the tax-free returns offered by a stocks and shares Isa should be worthwhile.
Stocks and shares Isa 2012 – pick your own stocks?
You may wish to pick some of your own investments and buy direct shares in companies, which can be done through an online discount broker.
A self-selected Isa like this carries more risk and you should only invest if you fully understand the nature of the investment, what the underlying assets are and what kind of risks they carry.