Take our quiz and find your perfect ISA
The ISA season is upon us once again, but how can you decide which type of ISA is best for you? It all depends on how much savings you've got, your attitude to risk and how long you can stash your money away for. Our ISA quiz will help you make the right choice.
1. Can you afford to stash your money away without easy access to it?
A: I may need to dip into my ISA at short notice
B: I don't need it for another five years
C: I'm saving for my retirement and still have plenty of time until I will need to access the money
2. How comfortable are you with the prospect of losing a chunk of your money?
A: About as comfortable as I am with the idea of swimming with sharks
B: Not great, but I accept that it's necessary to take a risk to get a greater reward
C: It's just an inevitable short-term aspect of investing and nothing to panic about over the long term
3. What does your portfolio look like?
A: I'd have to have one to be able to answer that
B: Mostly cash and low-risk investments such as bonds
C: I won't bother with cash; it's all about stocks and shares
4. How often do you review your portfolio?
A: Never, I just find it stressful
B: I use an IFA and make sure we look at the asset allocation once a year
C: I constantly check how my investments are doing
5. Do you already have a savings pot to fall back on?
A: I've got nothing
B: I've started saving and now have the equivalent of about three months' salary
C: I have a considerable amount of savings
6. How big a part does your ISA play in your overall saving and investing strategy?
A: If I'm lucky I'll manage to use up the yearly cash allowance
B: I've got extra money to save over the £10,200 2010/11 allowance, which I can put in easy-access savings accounts
C: It's just one very small part of a larger pot
How did you score?
Give yourself 0 points for every A, 5 points for every B, and 10 points for every C.
IF YOU SCORED 0-10...
GO FOR A CASH ISA
Either you're not willing or unable to take on the risk that a stocks and shares ISA would entail, or you need to build cash savings first, so for you cash really is king.
Interest rates are still low, but there's one big advantage to saving in a cash ISA: it's tax-efficient. Saving tax-free means your interest goes further because no tax is deducted.
This means basic-rate taxpayers automatically get 20% more interest in their account than a normal savings account, and higher-rate taxpayers get 40%. So you should use up your £5,100 cash allowance (this will increase to £5,340 in April, in line with inflation), before using other savings accounts.
As well as going for the best possible interest rates when picking an ISA, check if there are any penalties for transferring in existing ISA deposits. ISAs that accept transfers often offer slightly lower rates.
If you have time on your hands, you might consider putting your money into a fixed-rate ISA as it will pay more interest than an instant-access one. As the next move on interest rates is likely to be upwards, fixed rates might not be such a good idea.
Check our latest round-up of the best cash ISA rates for all the best fixed- and variable rate offers
IF YOU SCORED 10-30...
GO FOR A MIX OF CASH, EQUITIES AND BONDS
Even the most competitive cash ISA pales into insignificance compared with the potential gains equities offer. You will inevitably have to take on more risk though, and be prepared to have your money tied up for a number of years – a minimum of five years is usually recommended.
While it's possible to save up to £10,200 in a stocks and shares ISA, you can use up to half of this allowance in a cash ISA, and given your slightly cautious attitude, it makes sense to keep some money in cash. How much you save in cash will depend upon your existing savings and what you're saving for, but you can still play the stockmarket without going all out on equities.
Bonds and gilt (government bond) funds are a more low-risk option, popular with cautious investors; however, inflation is eroding their real returns and their popularity has reached saturation levels.
Overall, you should spread the risk by diversifying your portfolio as much as possible.
IF YOU SCORED 30-50...
GO FOR A MAINLY EQUITY-BASED PORTFOLIO
As you most likely have either a long way to go until retirement or a healthy savings buffer in place, you can afford to take on a bit more risk and invest the bulk of your money in a stocks and shares ISA. It may be tempting to plump for the current success stories, such as China and emerging markets in general, but it's still important to have a diverse portfolio.
"Potential returns can certainly be more appealing in a stocks and shares ISA. But the one factor that's certain with the stockmarket is that over certain time periods you will see a fall in value in your investments,” says Gavin Haynes, managing director of Whitechurch Securities.
Given your score, you can stomach these fluctuations, but it's still just as important to adhere to the investor's mantra of ‘diversify, diversify, diversify' and to review your portfolio regularly.
IF YOU SCORED 50-60...
CONSIDER A SELF-SELECT ISA
As you can afford to take some risks and have a sound investment knowledge, you could opt for a self-select ISA and pick your own stocks and shares. A word of warning, though: although it will be cheap to use a discount broker to buy shares, you may struggle to manage your portfolio as it expands or to keep tabs on all the dealing charges. According to McDermott, it's not necessary to use a self-select ISA if you're only picking funds.
You can also broaden out into other assets like commodities. You can gain exposure through a commodity-based fund or exchange traded funds (ETFs).
In terms of areas to invest in, as a risk-tolerant investor, you should be willing to invest in emerging markets or in less obvious choices such as Japan.
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.
Sometimes known as a trading ISA, a self-select ISA gives investors full control over which assets to include in their ISA, allowing them to choose individual shares and bonds rather than investment funds. Aimed mainly at experienced investors and subject to the same investment limits of a regular ISA, a self-select ISA will usually be managed by a stockbroker on an investor’s behalf.
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 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).
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).
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.