Your Isa allowance - use it now or lose it
Human nature often leads us to leaving things until the very last minute and dealing with our finances - especially taking advantage of our annual Isa allowance – is no exception.
But with time swiftly running out before the end of the tax year on 5 April, now is the time to ‘use it or lose it', as procrastination may mean some of your gains will be lining the pockets of HM Revenue & Customs instead of your own. Given the tax advantage an Isa offers, with the interest and gains made free from the clutches of the taxman, they really are the best way for the majority of people to save.
Essentially an Isa, short for an individual savings account, is a tax-free shelter for your cash. For higher-rate taxpayers, this means avoiding income tax at 40% on any savings interest or gains, while for those in the basic-rate category it provides a 20% saving.
The drawback is there is a limit to what you can save. In the present (2013/2014) tax year the limit is £11,520, half of which, at £5,760, can be held in cash. This rises to £11,880 and £5,940 respectively in the 2014/15 tax year. However, following changes announced in this year's budget, from July that allowance will increase to £15,000 a year and you'll be able to split that across cash or equities whichever way you choose.
While many people will feel more comfortable sticking with the safety of a cash Isa, the upside is fairly limited, given the paltry savings rates on offer – a knock-on effect of having interest rates kept at 0.5% for the past five years. And even though inflation eased back to 1.9% in January, the outlook for savers remains bleak. In fact, despite the fall in the cost of living, not a single easy-access account on the market can presently match or beat inflation according to independent savings advice site Savingschampion.co.uk.
Susan Hannums, director at Savingschampion.co.uk, says: "As inflation continues its downward spiral, savers may be encouraged as more savings accounts now make a real return when taking into account tax and inflation. However, with inflation seemingly under control, the Bank of England is now under less pressure to increase interest rates."
Boost your returns with stocks and shares
But for savers willing to take on some risk, a stocks and shares Isa is far likelier to reward in the long term; after all, the FTSE 100 index, which is comprised of the UK's largest firms, returned more than 14% in 2013, far surpassing any gains derived from even the best savings accounts. On 24 February, it closed at 6865 – the highest level in 14 years.
Clearly, Britons have taken note as 2013 saw thousands flock to investments in a bid to get a better return on their cash. According to trade body, the Investment Management Association, UK savers ploughed an astonishing £20.4 billion into investment funds in 2013, some 43% more than 2012's total of £14.3 billion. As a result, there is now a record £770 billion of savers' cash in investment portfolios.
For those looking to take on a last-minute investment Isa, we highlight the top investment funds as recommended by the experts. Bear in mind that if you cannot make your mind up where to invest, fund platforms offer Isa cash reserves, where you can put your money temporarily into cash and decide where to invest later. But be warned, these reserves have very low interest rates, so you should aim to move it sooner rather than later.
Martin Bamford, managing director at independent financial adviser Informed Choice, recommends investors making a snap decision about their Isa consider a multi-asset portfolio.
These vehicles are typically designed as ready-made one-stop shops for small investors, as they aim to reduce risk by investing, usually via other funds, across a wide spread of different asset classes, including shares, bonds, commercial property and even alternative investments such as gold.
Bamford tips the Investec Cautious Managed fund, which he describes as "a diversified portfolio of equities, bonds and other high-quality fixed interest securities". While the fund has a large portion invested in the UK, it also has exposure to the US, Japan and Europe and over the past three years its investors have enjoyed an 18.2% return.
Bamford also backs the Jupiter Merlin Income Portfolio, up 22.4% over three years. He adds: "This is invested in a variety of different investment funds across different asset classes, designed to spread risk."
Darius McDermott, managing director of fund broker Chelsea Financial Services, says more cautious investors could opt for the Artemis Strategic Assets fund, 13% up over the past three years.
He says: "Although it is a multi-asset fund, equities are its mainstay and it only invests in other assets if the manager thinks necessary, so it is slightly less risky than a full equity fund."
Sticking to the UK
Designed to deliver income as well as capital growth, UK Equity Income funds are hugely popular among UK investors, with the average fund achieving a return of 37% over the past three years. Not only do they invest across a wide range of companies but they also target those which pay dividends.
McDermott rates the Threadneedle UK Equity Alpha Income and Rathbone Income funds, both of which invest in big dividend payers such as pharmaceutical giant AstraZeneca. Over the past three years, the funds have delivered respective returns of 62.5% and 48.3%.
Those wanting to keep things simple could go for a low-cost tracker fund. Unlike an actively managed fund, where the manager invests in a selection of stocks they favour, a tracker (or index fund) simply mirrors the fortunes of a particular index, such as the FTSE 100. Justin Modray, founder of Candid Financial Advice, rates the Vanguard FTSE UK Equity Index, which echoes the performance of the UK's wider FTSE All-Share Index, which is 31.9% stronger over three years.
He says: "This is a very low-cost tracker, costing just 0.15% a year before any additional fees." For intrepid investors looking for something higher-risk, with the potential of greater returns, Modray cites Marlborough Special Situations, which has delivered a 67% return over the same timeframe.
After falling out of favour during the credit crunch, Commercial Property funds are back in the spotlight. Investors can spread their cash over a wide variety of properties, such as offices and retail parks. As well as having the potential for capital growth, the rents paid by tenants can provide a stable income above inflation, which should help placate the yield-hungry.
McDermott rates the Henderson UK Property Trust, which is up 17.5% over the past three years and delivers an income of 4.2%. He says: "Property as an asset class adds diversification to an overall portfolio and this fund has one of the best yields, while having low volatility."
For investors looking for property fund with a wider remit, Modray highlights Schroder Global Property Income Maximiser, up 14% in the past three years; it has investments across, among others, Japan, Hong Kong and the US.
•Source for fund performance data – FE Trustnet, as at 12 March 2014
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).