Picking a fresh ISA

If you find yourself manically searching for the right individual savings account to suit your needs at the end of each tax year, perhaps this should be the year you change your habits.

Too many of us are prone to procrastinate, leaving the question of using up our ISA allowance until the last few weeks of the tax year.

Figures from Legal & General reveal that over the last three years an average of 27% of its ISA applications were registered in the five weeks before the tax year ended.

One reason for this may be the belief that providers come up with better deals towards the end of the tax year in order to entice savers to bank or invest with them.

Sort out your ISA early

But there are a number of advantages to sorting your ISA early, and the case for doing so is even stronger this year.

From 6 April, the ISA allowance increased to £10,200, of which £5,100 can be in cash (this limit has been in place for the over-50s since October 2009).

At a time of historically low-interest rates, you should be looking to maximise the returns on your capital. Francis Klonowski, independent financial adviser at Klonowski & Co, thinks it's always a good idea to sort your ISA out early.

"This gives you 12 months of tax-free interest or growth," he says. "If you delay for a year you’re going to have some taxable interest on your cash ISA, or taxable income on your stocks and shares ISA. So if you have a lump sum ready, there's no sense in delaying."
Even if you don't have the full ISA allowance ready to deposit in cash at the start of the tax year, setting up a regular payments system is a great way of getting into a saving habit and can soon build up to a sizeable amount.

Look at stocks and shares

Early birds can also be rewarded when it comes to stocks and shares ISAs.

Rob Fisher, head of personal investments at Fidelity International, says: "Investing earlier in the tax year gives your money more time to grow in the market over the long run – it means more of your money is sheltered from the taxman."
An analysis by Fidelity International for Moneywise shows early-bird investors could be more than £7,000 better off over 15 years than those who wait until the end of the tax year to invest.

The analysis assumed the full PEP (the ISA's predecessor) or ISA allowance was invested in the FTSE All-Share Index every year over 15 years.

At the end of the period, both early-bird and last-minute investors had squirrelled away £101,400, but the amount their capital grown differed vastly.

Those investing their allowance by the end of April each year had a fund amounting to £149,249.90 after 15 years, while those waiting until the end of March each year had only £142,243.35.

So the early birds had benefitted from an additional £7,006.35 of growth.

If investors had chosen a more aggressive, actively managed fund to invest their ISA allowance then the difference would be even greater. If you had invested £101,400 into the Fidelity Special Situations fund over 15 years, it would now be worth £257,222.65.

But if you had waited until the end of March each year to invest that sum, you would now have £226,514.53, losing out on £30,708.12.

According to Fidelity International, relatively few investors choose to buy in April, despite the potential gains. In fact, buying an ISA becomes more popular as the tax year deadline approaches, with March the most popular month, with 11.7% of sales. 

For those new to investing, using your stocks and shares ISA allowance can seem a daunting prospect. But equity ISAs are a great way for novice investors to gain access to the stockmarket within a tax-efficient wrapper.

Work out your risk profile

If you have never set up a portfolio before, Pete Herdmen, independent financial adviser at financial planners Skerritt Consultants, advises: "It's important to ascertain your risk profile and timescale for investment in order to choose suitable investment funds.

If you're not an experienced investor you may not want to get actively involved in watching your portfolio, so it might be a good idea to choose a quality managed fund rather than a separate fund for each asset class."
In choosing an actively managed fund you will be relying on the expertise of the fund manager, so look for consistency rather than short-term success.

As with stocks and shares investments of any kind, you should ideally be prepared to invest for at least five years and be able to handle the prospect of your returns going down as well as up.

Another way of setting up your ISA portfolio is through a fund supermarket. This will enable you to deal online as well as over the phone.

Mark Dampier, head of research at Hargreaves Lansdown, adds: "You'll be able to see your valuation at any time you wish, and be able to move funds when you need to.

The greater problem for most people comes when they need advice – most advisers won’t be keen to give advice on relatively small amounts of money."
One way to combat a lack of stockmarket know-how but avoid paying bloated management fees, is to invest in a tracker fund. Jennifer Storrow, managing director at Gee & Company Financial Planning, recommends this tactic.

"Index trackers are simple to follow and cheap to run," she says. "I would suggest L&G's UK Index fund or its International Index fund for equities, and M&G's Corporate Bond fund for fixed-interest exposure."

Storrow warns that you should be careful if you choose the fund supermarket route as they can also charge high fees.

She thinks an individual with a high amount of capital – for example, someone transferring previous years' ISAs into stocks and shares – should think about approaching an investment house directly, where they could potentially negotiate costs and avoid the complexity of dealing with wrap platforms.

Regular payments

If you feel wary of plunging into the stockmarket with a large lump sum, consider setting up regular payments into a stocks and shares ISA. By investing the same amount each month, you can even cut out some of the volatility associated with stocks and shares.

When the value is down you will buy more stocks and shares, and when the value is up you will buy less.

This way you don't have to worry about the timing of your investment, and the number of stocks and shares you own are effectively bought at an average price.

Before transferring cash ISAs into a stocks and shares ISA, it is important to remember a few points. Firstly, if you're likely to need access to the capital in the near future, you should keep it in cash.

Savers should always make sure they have an emergency stash of at least three months' salary that is easy to access.  

Secondly, stocks and shares ISAs cannot be transferred back into a cash ISA. So if you are going to invest the capital you should be prepared to keep it invested until you need to use it. Otherwise, when you transfer it back into cash, you'll lose the tax-efficient benefits.

Finally, what are your reasons for investing? Many people transfer their cash ISAs simply because rates are so poor, says Dampier.

It's important to think through such a decision and make sure you have adequate cash reserves available for unforseen circumstances.

Transferring ISAs

Transferring existing ISAs, whether it's into a better cash ISA or into a stocks and shares ISA, is often seen as complicated and time-consuming.

This reputation was confirmed a couple of years ago by horror stories of savers’ money stuck in limbo earning no interest.

However, since August 2008, guidelines have been drafted to help smooth out the transfer process.

Always check with your current provider whether there's a penalty for transferring your funds to another provider, and make sure the new provider accepts transfers.

Then fill out an ISA transfer form to allow the new provider to approach the old one on your behalf.

Bear in mind you can only transfer the whole amount of your current tax year ISAs, whereas you can transfer your previous years’ ISAs in part, should you wish to.

According to Brian Capon, spokesperson of the British Bankers' Association, once your existing ISA provider has received the form from your new provider it has a recommended timescale of 10 business days to start the transfer process.

If it's going to take longer your existing provider should contact both you and the new provider to explain why.

Capon adds that HM Revenue & Customs rules allow an existing ISA manager a maximum of 30 days to respond to the new manager's request and complete the transfer.

But the industry standard aims to undercut this: after 14 business days, if the new ISA provider hasn't heard from your existing provider it should start chasing it.

If you follow this process your ISA transfer should be a painless way to kickstart the financial year with tax-efficient savings.

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Your Comments

I have found ISAs getting more and more complicated and think that there must be a lot of people out there who do not understand half of it and are losing out with old ISAs sitting with nearly nil interest. Also normal bank and e-accounts sitting with zero interest. Come on people get out there and change to a higher interest account!