Isa checklist: 12 Isa dos and don'ts

Last updated: Mar 13th, 2014
Feature by Ruth Emery

DO:

Consider bond funds as they are more tax-efficient within an Isa

This is because by holding them in the tax-efficient wrapper you avoid paying income tax on any gains. Whereas equity funds incur capital gains tax, for which you already have an annual tax-free allowance. If you don't have room to put your whole portfolio in your Isa, prioritise the bond funds over the equity funds.

Keep your eye on retail bonds

Many companies such as John Lewis, Tesco and National Grid have launched retail bonds over recent years. Provided they have at least five years to maturity, most retail bonds can be invested in an Isa, and any tax deducted can be reclaimed. However, the government announced in December's Autumn Statement that bonds with maturities of less than five years could soon be allowed in Isas, so watch out for further announcements.

Use your spouse's Isa allowance too

That's £23,760 to play with if you use both allowances in the 2014/15 tax year.

Increase your monthly savings each year as the maximum allowance increases

Automatically putting money into your Isa each month is a hassle-free way to build up a tidy nest egg, but don't forget to readjust the amount each tax year so you're always putting in the full allowance.

Understand the value a fund manager can add to your portfolio

This is especially with smaller companies or emerging markets companies where it's more difficult to pick the winners yourself.

Review, review, review!

A stocks and shares Isa requires more attention than a cash Isa so make sure you put the time aside to check the performance of your holdings and that you're on track to meet your objectives. Also have a quick look to see if your Isa provider meets your needs, in terms of cost, service and investment range.

DON'T:

Cash in a poorly paying cash Isa

If you do that, you'll lose that tax-free allowance forever.  Instead, switch it to another cash Isa with a better interest rate, or a stocks and shares Isa.

Forget about Aim shares

Investors can invest in companies such as Majestic Wine and Asos in their Isas, following a rule change last August. If you're happy to take a bit more risk than say, investing in FTSE 100 shares, the Alternative Investment Market (Aim) might be the place for you.

Over-diversify

Around 15 to 20 funds should be ample for most investor.

Use individual shares if you're not going to monitor them

If you're short of time, invest in funds or investment trusts as it's far easier to keep on top of developments.

Invest in it if you don't understand it

If you don't understand how an individual company, such as a bank, makes its profits, or how a fund manager makes big returns using derivatives, steer clear. Be careful of retail bonds too. They may seem simple but do your research. The yields on Co-op bonds looked enticing but many investors (including professionals) misunderstood the risks and were caught out.

Overlook investment trusts

These are slightly different to funds as they are traded on a stockmarket and can be bought either at a premium or discount. Sometimes they are cheaper and have better performance than similar funds. However, they're not offered by every Isa provider so look closely at the investment range when choosing a provider.

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