Grab a last-minute ISA
Whether it's booking a holiday, buying your Christmas presents or revising for an exam, if you like to do everything last minute, chances are you'll still have some of this tax year's individual savings account allowance to invest.
Every adult has an annual allowance of £7,200 to invest into ISAs. This rises to £10,200 next tax year, unless you're 50 or over before 6 April 2010, in which case you'll already have the extra £3,000 to put away.
Of this, you can put up to £3,600 (or £5,100 if you're 50 plus) into a cash ISA, with the remainder going into a stocks and shares ISA.
But, if you haven't used up your full ISA allowance, don't despair, there's still time to take advantage of it. The 2009/10 tax year ends on Monday 5 April (Easter Monday) and, with some ISAs, you'll be able to make a contribution right up to midnight.
"You can go right up to the wire if you're doing it online," says Patrick Connolly, spokesperson for AWD Chase de Vere.
It's certainly worth using your allowance if you can. ISAs are tax-efficient, giving you shelter from income tax on the cash element and capital gains on the stocks and shares element. There are also some income tax advantages on stocks and shares ISAs.
Although you can't claim back the 10% tax credit on dividends, so won't be any better off if you're a basic rate or non-taxpayer, there's no further tax to pay for higher-rate taxpayers.
Additionally, where interest is paid rather than a dividend, for instance on corporate bonds and gilts, this is paid tax-free.
The first decision you need to make is whether to go for a cash or a stocks and shares ISA. Connolly explains: "You should build up a cash buffer before considering investing.
This will protect you if you have unexpected expenses or lose your job. A cash ISA is great for this. Although interest rates are low, they will go up and interest is tax-free."
There are, however, a number of things to watch for when comparing cash ISAs. First up, check whether the rate is fixed or variable.
Andrew Hagger, spokesperson for comparison website moneynet.co.uk, says: "Rates can be fixed for up to five years so make sure you know where your rate might go as well as thinking about how you expect interest rates to move generally."
However, just remember that if you fix you will be stuck with this rate for the length of the term regardless of whether or not interest rates on savings are going up.
Another thing to look out for are bonuses. These are relatively common and usually last for 12 months, after which the rate will drop.
"There's nothing wrong with a bonus as long as you remember to switch to another, more competitive, cash ISA once the bonus period is up," says Hagger.
If you are looking to transfer your cash ISA to take advantage of a better rate, then make sure you follow the rules to ensure you retain the tax advantages. First, contact the new provider and, providing it accepts transfers, it will give you an ISA transfer form.
Complete this and your new provider will do all the legwork on your behalf. The transfer takes about a week, although legally, it could take as long as 30 days.
You also need to be aware that, although you can split previous years' cash ISAs, you have to move all of the current year's in one go. But, whatever you do, don't withdraw the money as that will mean you lose your tax-free status.
Last-minute cash ISAs
|Best for instant access...|
|Santander*||3.5%||£1||No||3% bonus for 12 months|
|Barclays||3.1%||£1||No||1% bonus for 12 months|
|Best for transfers...|
|Newcaslte BS||3%||£500||Yes||1% bonus on first anniversary|
|Nationwide||2.75%||£1||Yes||1% bonus until June 2011|
Best for fixed interest
|Saga||3.9%||£1||Yes||Three-year fixed rate|
|Cheltenham & Gloucester||3.5%||£100||Yes||Two-year fixed rate|
|Post Office||3%||£500||Yes||One-year fixed rate|
|Coventry BS**||3.25%||£5,100||No||One-year fixed rate|
Read Moneywise's round-up for more great cash ISA rates
Stocks and shares ISAs
If you've already got plenty of cash stashed away in ISAs then you could consider a stocks and shares one.
But you will need time on your side, as James Davies, investment research manager at Chartwell, explains: "Over time, stockmarket investments perform better than cash but, as they rise and fall, you need to be able to leave your money untouched for at least five years."
This volatility, which could mean the value of your stocks and shares ISA falls, also means that you need to be comfortable with this.
If you're going for a stocks and shares ISA, there's plenty of choice. As well as some 2,000 or so funds to pick from you could also go for an investment trust or design your own portfolio.
"Be warned, however, that many brokers will charge you if you are holding shares or exchange traded funds so look out for additional ISA charges.
"We firmly believe in no ISA fees and no hidden charges," says Rebecca O'Keeffe, head of investments at Interactive Investor. Added charges could erode any benefits so you need to consider this before you make your decision.
To help narrow down your choice, you need to weigh up your investment objectives and risk profile. Your attitude to risk is determined by factors such as how comfortable you are with losing your money as well as your timeframes.
For example, if you are saving for retirement in 30 years' time you can afford to take more risk as even with a market crash your money has a good chance of recovering.
There are general rules about where you should invest depending on your risk profile, as Davies explains: "If you're cautious then fixed interest is a good option.
This covers everything from gilts and investment grade corporate bonds through to more risky high income corporate bonds."
For a higher level of risk, equities are a good option. Connolly recommends starting with something relatively low risk for your first equity investment, for instance a UK fund or a diversified global fund then building on this.
"These funds are a good starting point but if you're a medium-risk investor then you could afford to look at more adventurous funds investing in North America or Europe for example," he adds.
At the top end of the scale sit the funds which offer the greatest risk but the most potential for return. Among these are the smaller companies, commodities, specialist sectors such as technology and emerging markets.
You could also consider holding shares directly as Hannah Edwards, head of new clients at BRI Asset Management, explains: "With direct equities you're not paying a fund manager to select investments but you are likely to experience far greater volatility."
If you're not sure where you sit on this scale, don't worry. You can pop your stocks and shares ISA allowance into a fund supermarket and leave it sitting as cash until you're ready to invest.
Melvin warns: "The taxman isn't a massive fan of this. If you held your investment as cash indefinitely you could have them on your back."
You can also transfer your stocks and shares ISAs into another stocks and shares ISA. The process is exactly the same as for cash, with your new manager asking you to complete a transfer form so it can request the money from your existing manager.
Additionally, because you're switching to a different fund, your old ISA will be sold and transferred so you'll be out of the market for a short time.
As well as moving your existing stocks and shares ISAs around, you can also transfer your cash ISAs into stocks and shares. Again, you'll need to complete a transfer form with your new provider to start the process.
Just bear in mind that whether you're moving a cash or a stocks and shares ISA, if you're moving this tax year's ISA you must transfer everything you've saved into it.
So how do you actually bag a last-minute ISA? With 5 April falling on the Easter bank holiday, bagging that last-minute ISA might not be so simple this year.
Take Santander, which had the top cash ISA rate at the beginning of March, as an example. Its branches will be open on Saturday 3 April, with a limited number open on Monday 5 April, but it is stressing that customers should sort their ISAs earlier if possible.
"The last working day before the tax year end is Thursday 1 April so we recommend customers open and deposit into their ISAs for this tax year well before this date to ensure they don't miss out," says Reza Attar-Zadeh, director of savings and investments for Santander.
Going online will give you more time and flexibility.
To complete an online application you'll need your national insurance number and cleared funds in your bank account. It's also worth making sure everything's in order before you start filling in your application.
Also check the terms and conditions first if you're leaving it late. For example you can apply for First Direct's cash e-ISA right up to midnight on 5 April, but it's only available to existing customers.
Discovering you need to open a new bank account at 11.30pm on 5 April could seriously reduce your chances of taking advantage of this year's ISA allowance.
FUND RECOMMENDATIONS FOR LOW-RISK INVESTORS
* M&G Optimal Income
Fund manager: Richard Woolnough
Recommended by James Davies, investment research manager at Chartwell. He likes this because it is very flexible and can invest across fixed-interest securities as well as holding a small amount of equities.
* Invesco Perpetual Corporate Bond fund
Fund managers: Paul Causer and Paul Read
A solid fixed interest fund with two experienced fund managers and is recommended by Carl Melvin, managing director of Affluent Financial Planning.
* JO Hambro UK Opportunities fund
Fund manager: John Wood
Hannah Edwards, head of new clients at BRI Asset Management, plumps for this fund. Although an equity fund she says it has a strong track record and its manager, John Wood, a former accountant, is regarded as a safe pair of hands.
RECOMMENDATIONS FOR HIGH-RISK INVESTORS
* First State Asia Pacific Leaders
Fund manager: Angus Tulloch
This fund invests across the Asia Pacific region including the likes of Australia as well as emerging markets such as China and the Indian subcontinent. James Davies, investment research manager at Chartwell, likes this fund for its mix of markets but also for the credentials of the fund managers.
* JPMorgan Emerging Markets fund
Fund manager: Austin Forey
A favourite of AWD Chase de Vere's Patrick Connolly, this fund invests in emerging markets with a strong focus on Brazil, China and India.
* Old Mutual UK Select Smaller Companies
Fund manager: Daniel Nickols
For something closer to home, Hannah Edwards, head of new clients at BRI Asset Management, recommends this fund as a good way to get exposure to UK smaller companies.
FUND RECOMMENDATIONS FOR MEDIUM-RISK INVESTORS
* Neptune UK Equity
Fund Manager: Jeremy Smith
This fund's combination of big picture asset allocation and rigorous stock picking captures James Davies, investment research manager at Chartwell, eye. He adds that although it lags in good times it doesn't tend to lose as much as other funds when markets are falling.
* Cazenove European
Fund manager: Chris Rice
Patrick Connolly, spokesperson for AWD Chase de Vere, likes this fund, saying: "This would give a medium-risk investor some good diversification out of the UK."
* Lazard Global Equity Income fund
Fund manager: Patrick Ryan and team
Recommended by Hannah Edwards, head of new clients at BRI Asset Management, this fund gives broader exposure to international equities.
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.
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.
The ISA rules allow investors to transfer money from an uncompetitive savings account with one provider into one from another provider that pays a better rate of interest. The bank to which you are transferring the money must do the transfer process, as withdrawing the money from the ISA wrapper means you lose the tax-free status. You can transfer a cash ISA into a stocks and shares ISA, but not the other way around and the current tax year’s cash ISAs must be moved whole to a single provider, but previous years’ ISAs can be split between new providers.
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.
The familiar name given to securities issued by the British government and issued to raise money to bridge the gap between what the government spends and what it earns in tax revenue. Back in 1997, the entire stock of outstanding gilts was £275bn; by October 2010 it had surpassed £1,000bn. Gilts are issued throughout the year by the Debt Management Office and are essentially investment bonds backed by HM Treasury & Customs and considered a very safe investment because the British government has never defaulted on its debts and this security is reflected in the UK’s AAA-rating for its debt. Gilts work in a similar way to bonds and are another variant on fixed-income securities.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
Corporate bonds are one of the main ways companies can raise money (the other is by issuing shares) by borrowing from the markets at a fixed rate of interest (the reason why they are also known as “fixed-interest securities”), which is called the “coupon”, paid twice yearly. But the nominal value of the bond – usually £100 – can fluctuate depending on the fortunes of the company and also the economy. However it will repay the original amount on maturity.
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.
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.
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.
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).
Where APR is the rate charged for money borrowed, Annual equivalent rate is how interest is calculated on money saved. The AER takes into account the frequency the product pays interest and how that interest compounds. So, if two savings products pay the same rate of interest but one pays interest more frequently, that account compounds the interest more frequently and will have a higher AER.