Make the most of your New Isa
Savers will soon be able to take advantage of the government's bumper tax break promised in the Chancellor's March budget, allowing everyone to shelter £15,000 a year from the taxman.
Until this summer, people have been restricted as to how they split their tax-free savings between cash Isas and stocks and shares Isas. The limit for the amount saved in stocks and shares is set at £11,880 and the maximum for cash Isas is £5,940.
But the introduction of Nisas on 1 July 2014, will see a new and improved total of £15,000 for the 2014/15 tax year allowing all – or none – to be in cash.
Some savers will, of course, prefer to have their money where they can see it – in a savings account. This will make the decision over how to invest the new £15,000 allowance fairly straightforward. But while it is important to have some money in cash for the proverbial rainy day, the argument for placing your hard-earned nest egg into stocks and shares is compelling.
A recent study revealed that the average stocks and shares Isa fund posted growth of 9.42% during the 2013/14 tax year. This follows on from double-digit growth of 13.7% during the previous 2012/13 tax year.
By contrast, the average interest rate on cash Isas (both fixed and variable rate) during the course of the 2013/14 tax year was just 1.69%.
Richard Eagling, spokesperson for Moneyfacts, says: "The performance of stocks and shares Isas during the 2013/14 tax year has been pleasing. The vast majority of investors who opted for a stocks and shares Isa rather than a cash Isa will have been rewarded for their decision. With no significant improvement in cash Isa rates, we would expect to see the popularity of stocks and shares Isas increase further this tax year."
Isa savings are incredibly popular thanks to the tax breaks. In fact, the latest figures from the Investment Management Association show £2.3 billion was invested in stocks and shares Isas in the most recent tax year, which is over £1 billion more than the previous year.
How should I split my new allowance?
While savers can choose between a straightforward deposit account and one invested in stocks and shares, those who have stuck with cash have seen the damaging effects of interest rates that have been rooted at 0.5% since March 2009.
Indeed, the buying power of their nest eggs has been slashed by 10.4% over these five years, according to analysis from fund group M&G. It says £10,000 put away in savings five years ago is now worth just £8,960 in real terms. Yet those who plumped for stockmarket investments would have seen far more impressive returns. Over the past five years, UK equities would have provided investors with an impressive return of 99.4% when factoring in inflation, turning £10,000 into £19,940.
Most cash Isas pay less than today's slightly reduced inflation rate of 1.6%, so the majority of savers are losing money in real terms. Experts are urging people to consider other asset classes for income to make sure their money is growing.
Patrick Connolly, IFA at Chase de Vere, says: "A beginner investor should start with 100% in cash and as they start to invest in stocks and shares this percentage will decrease."An intermediate investor might have 25% in cash and 75% in stocks and shares. A sophisticated investor might have a larger amount in cash in absolute terms, especially as they get older. However, in percentage terms it's likely that the bulk of their investments will be in stocks and shares. They might hold 10% in cash and 90% in stocks and shares, for example."
Are you ready to invest?
While people need money in cash, to generate real returns above inflation they also need to have money invested in assets such as shares and property. Whether you're new to the game of investing or not, it's important to make sure you invested according to your own personal needs and circumstances.
Savers need a balanced portfolio that uses a mix of investments across different sectors, regions and investment styles.
How to invest depends on who is doing the investing. First, experts recommend working out your personal goals and how long you want to invest for.
Ben Yearsley, head of investment research at Charles Stanley, says: "You need to identify why you are investing money. What's your timeframe? What is your income requirement (if that's what you need)? A series of relatively simple, obvious questions can help you narrow down your potential universe from many thousands of options to a much tighter list. You also need to think about inflation proofing."
When you have mapped out your objectives, which may include needing income or growth – or both - you should assess what level of risk you are comfortable with, decide on asset allocation, and then you can pick the funds you want to buy.
A strategy for beginners
Darius McDermott, managing director at Chelsea Financial Services, says: "A beginner to Isa investing would probably benefit from regular monthly savings to both get them into the investing habit as well as shelter them a little from the inevitable market ups and downs that could otherwise scare them off or cause panic.
"They may start off with a global equity income fund, for example, which gives them some diversification, should perform better in falling or flat markets and which will allow them to benefit from compounding of dividends. As time progresses, they should make sure they increase their monthly savings in line with salary increases if they are unable to invest the full allowance."
McDermott likes Artemis Global Income and the M&G Global Dividend fund. Danny Cox, head of financial planning at Hargreaves Lansdown, also likes income funds, such as Artemis Income. He says: "Equity income funds remain among the most popular fund choices in large part due to low interest rates on cash.
"Equity income investing has long been popular with investors and UK income funds should form a core foundation of most types of portfolio. Funds in this sector tend to focus on generating an attractive income for investors along with some capital growth over the long term. The level of income will vary from fund to fund."
While some investors will choose to have the income from their investments paid to their bank account, equity income funds can also be considered by those looking to grow their wealth. This can be achieved by reinvesting the income. Over the long term, both these options can make a significant difference to the value of your investment.
Connolly says: "For those who want to adopt a more cautious approach and don't want all of their money going into shares, then the Schroder Multi Manager Diversity fund is a good option. This fund spreads risks by investing one-third into shares, one-third into fixed interest and one-third into other investments such as property or commodities."
As a novice you might simply want to invest into a very small number of funds or even a multi-manager or multi-asset fund, which will offer access to a number of other funds through a single vehicle.
Hannah Edwards, commercial director at BRI Wealth Management, says: "The Standard Life Investments Myfolio fund range is a superb multi-asset fund. It is ideal for investors who do not want the responsibility of selecting their own individual funds."
Tips for intermediate investors
As time goes by and experience increases, investors are likely to want to broaden their portfolio, particularly if they have accumulated a good-sized pot of money.
Connolly says: "These people should already have core investments in place and be looking to diversify to spread risk and hopefully improve performance. Intermediate investors might have broad-based UK equity or global funds and want to increase their exposure to international markets such as the US, Europe and emerging markets."
They can also look at investment funds where the manager is given a greater degree of flexibility, so they could take bigger positions in certain stocks, sectors or countries.
Connolly suggests looking at Axa Framlington American Growth, Neptune US Opportunities, JPM Europe Dynamic, Henderson European Growth and JPM Emerging Markets funds.
As the size of the investment portfolio begins to grow or as it gets nearer to when the money might be required, intermediate investors should make sure they hold different asset classes, such as fixed interest and property, alongside shares. This approach will provide a degree of capital protection if stockmarkets fall.
For fixed interest, many advisers recommend considering strategic bond funds where managers are given a high degree of flexibility where they invest such as Henderson Strategic Bond, Jupiter Strategic Bond and Kames Strategic Bond.
An intermediate investor could also look at property, particularly funds that invest in real 'bricks and mortar' property as these should provide more consistent returns than investing in property shares; plus their performance correlates less with the stockmarket. Funds to consider include Henderson UK Property, L&G UK Property Trust and M&G Property Portfolio.
Edwards says: "As we start to see a general improvement in commercial property, we now like the Henderson Commercial Property trust."
Brian Dennehy, managing director at Fundexpert.co.uk, says: "As a rule of thumb, we suggest up to around 10 funds for pots of £30,000 to £100,000 and 15 to 20 funds for pots over £100,000." Advice for sophisticated investors
McDermott says more experienced investors should be more comfortable with risk and "know their own limits better." They may be more comfortable diversifying their portfolio with higher-risk, specialist funds, such as those that invest in smaller companies in the UK or overseas.
Dennehy adds: "Indian equities tumbled in the second half of 2013 but have since bounced back to hit all-time highs. And there are reasons for continued optimism – the likelihood of new reforms and the election of a pro-business government will help support economic growth in the short term.
Over the long term, India's huge youthful population remains a key positive and important driver of their economy. Jupiter India remains a fund for long-term monthly investing."
Dennehy says he is "cautiously optimistic" on China. He says: "The Chinese stockmarket has been a relatively poor performer in the past two years but not disastrous. History says that based on current valuations investors should expect to make money in three years or more. Invesco Perpetual Hong Kong & China is one of the top performing funds within its sector for 2013."
Connolly likes Old Mutual UK Smaller Companies. "While on its own this is a high-risk fund, if included as part of a balanced portfolio those risks are reduced substantially."
McDermott adds: "More sophisticated Isa investors are more likely to hold individual stocks, with perhaps a small amount in Aim stocks [smaller companies not able to list on the main stock exchange] now that they are Isa-able and stamp duty has been abolished."
A helping hand
Platforms offer tools that will help you identify funds you might be looking for. Many fund supermarkets offer fund lists of recommended funds. For example, Hargreaves Lansdown offers its Wealth 150 list, Fidelity publishes a Select List and Bestinvest has a Premier Selection.
A recent study by fund supermarket rplan showed that 41% of people had placed their money in a ready-made portfolio. More formally known as 'model portfolios', they are a package of funds with each one targeted at a range of investors. They have proved popular, which is understandable since there are more than 2,500 funds to choose from.
Alternatively, investors can buy multi-manager or multi-asset funds that bundle together a group of funds run by a manager, as recommended by Edwards.
There has been a price war between fund supermarkets recently, which means there are cheap ways to access investments. You can compare costs at moneywise.co.uk/investing/funds/whats-the-cheapest-way-to-buy-funds
Investing should be for the long term, so it's important not to panic if you see negative reports about a fund or stock or if you have a bad few months or year – whether you are a beginner, intermediate or sophisticated investor.
Your fund managers are managing the money day to day. However, reviewing every six months is important because the performance of funds and asset classes will vary, meaning that the original asset allocation will drift, potentially resulting in the risk profile of your portfolio changing and no longer meeting your original objectives.
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.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
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).
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.
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.
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).