2012 - the year of the ISA
Last year’s resolution was to rid myself of all my credit cards, something I have now happily achieved, with some difficulty – they’re too easy to obtain, too easy to spend on and mega expensive to fund if they remain uncleared.
Two years ago, I promised myself I would put sufficient financial protection in place to ensure my family (Tara included) would be fine if anything horrible happened to me.
This New Year’s Day, I’m going to vow to make 2012 my year of the ISA.
Funding two of my three boys through university is proving to be a big challenge, so 2012 will be the year (I hope) when I finally start to take full advantage of tax-friendly ISAs. I can think of no better way to save or invest than via this wrapper, especially given the government’s irritating propensity to meddle in the pensions arena and, in the process, make pension planning almost impossible.
What I love about ISAs is that you always remain firmly in control of your investment. You can contribute on a monthly basis or in one go. You can withdraw funds when needs must without bothering the taxman and you can choose to use your allowance to save part in cash and part in stocks and shares, or if you are feeling brave, all in equities.
The ISA allowance for the year 6 April 2011 to 5 April 2012 is a generous £10,680. From 6 April, it will be £11,280.
My New Year ISA strategy will be as follows. I will use half my 2011/2012 allowance (£5,340) to save in a cash ISA. This will then become my emergency savings pot, to be used when I have tax bills to pay, unexpected household expenditure to meet or children at university to dig out of yet another financial hole.
I will then invest the other in an equity-based ISA through an online fund supermarket, where investment fund charges are discounted. I will drip-feed my money in on a monthly basis, thereby ensuring that I don’t commit all my money to the market just ahead of yet another market correction.
Initially, I will invest exclusively in investment trusts on the basis that they are cheaper than unit trusts or openended investment companies. They are also more investorfriendly in that they have independent boards to look after investors’ interests.
One attribute of investment trusts I particularly like is their ability to spread income payments to shareholders by tucking away some income in good years to pay out in difficult years when corporate dividends are under pressure. I will then invest in equity income, as a galaxy of companies is growing dividends despite the diffi cult economic backdrop.
I will also invest in emerging markets, because it will be the likes of Brazil, China and India - rather than the UK, the US or continental Europe - that will drive any global economic growth we see.
That’s it. All that’s left for me to do is wish you a wonderful 2012. May your personal finances prosper
Jeff Prestridge is personal finance editor of Financial Mail on Sunday. Email him at firstname.lastname@example.org
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.
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).
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
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.