Your Isa allowance - use it now or lose it

Published by Philip Scott on 28 March 2014.
Last updated on 28 March 2014

Egg timer

Human nature often leads us to leaving things until the very last minute and dealing with our finances - especially taking advantage of our annual Isa allowance – is no exception.

But with time swiftly running out before the end of the tax year on 5 April, now is the time to ‘use it or lose it', as procrastination may mean some of your gains will be lining the pockets of HM Revenue & Customs instead of your own. Given the tax advantage an Isa offers, with the interest and gains made free from the clutches of the taxman, they really are the best way for the majority of people to save.

Essentially an Isa, short for an individual savings account, is a tax-free shelter for your cash. For higher-rate taxpayers, this means avoiding income tax at 40% on any savings interest or gains, while for those in the basic-rate category it provides a 20% saving.

The drawback is there is a limit to what you can save. In the present (2013/2014) tax year the limit is £11,520, half of which, at £5,760, can be held in cash. This rises to £11,880 and £5,940 respectively in the 2014/15 tax year. However, following changes announced in this year's budget, from July that allowance will increase to £15,000 a year and you'll be able to split that across cash or equities whichever way you choose.

Find the best Investment Isa

Beware inflation

While many people will feel more comfortable sticking with the safety of a cash Isa, the upside is fairly limited, given the paltry savings rates on offer – a knock-on effect of having interest rates kept at 0.5% for the past five years. And even though inflation eased back to 1.9% in January, the outlook for savers remains bleak. In fact, despite the fall in the cost of living, not a single easy-access account on the market can presently match or beat inflation according to independent savings advice site

Susan Hannums, director at, says: "As inflation continues its downward spiral, savers may be encouraged as more savings accounts now make a real return when taking into account tax and inflation. However, with inflation seemingly under control, the Bank of England is now under less pressure to increase interest rates."

Boost your returns with stocks and shares

But for savers willing to take on some risk, a stocks and shares Isa is far likelier to reward in the long term; after all, the FTSE 100 index, which is comprised of the UK's largest firms, returned more than 14% in 2013, far surpassing any gains derived from even the best savings accounts. On 24 February, it closed at 6865 – the highest level in 14 years.

Clearly, Britons have taken note as 2013 saw thousands flock to investments in a bid to get a better return on their cash. According to trade body, the Investment Management Association, UK savers ploughed an astonishing £20.4 billion into investment funds in 2013, some 43% more than 2012's total of £14.3 billion. As a result, there is now a record £770 billion of savers' cash in investment portfolios.

For those looking to take on a last-minute investment Isa, we highlight the top investment funds as recommended by the experts. Bear in mind that if you cannot make your mind up where to invest, fund platforms offer Isa cash reserves, where you can put your money temporarily into cash and decide where to invest later. But be warned, these reserves have very low interest rates, so you should aim to move it sooner rather than later.

Go multi-asset

Martin Bamford, managing director at independent financial adviser Informed Choice, recommends investors making a snap decision about their Isa consider a multi-asset portfolio.

These vehicles are typically designed as ready-made one-stop shops for small investors, as they aim to reduce risk by investing, usually via other funds, across a wide spread of different asset classes, including shares, bonds, commercial property and even alternative investments such as gold.

Bamford tips the Investec Cautious Managed fund, which he describes as "a diversified portfolio of equities, bonds and other high-quality fixed interest securities". While the fund has a large portion invested in the UK, it also has exposure to the US, Japan and Europe and over the past three years its investors have enjoyed an 18.2% return.

Bamford also backs the Jupiter Merlin Income Portfolio, up 22.4% over three years. He adds: "This is invested in a variety of different investment funds across different asset classes, designed to spread risk."

Darius McDermott, managing director of fund broker Chelsea Financial Services, says more cautious investors could opt for the Artemis Strategic Assets fund, 13% up over the past three years.

He says: "Although it is a multi-asset fund, equities are its mainstay and it only invests in other assets if the manager thinks necessary, so it is slightly less risky than a full equity fund."

Sticking to the UK

Designed to deliver income as well as capital growth, UK Equity Income funds are hugely popular among UK investors, with the average fund achieving a return of 37% over the past three years. Not only do they invest across a wide range of companies but they also target those which pay dividends.

McDermott rates the Threadneedle UK Equity Alpha Income and Rathbone Income funds, both of which invest in big dividend payers such as pharmaceutical giant AstraZeneca. Over the past three years, the funds have delivered respective returns of 62.5% and 48.3%.

Those wanting to keep things simple could go for a low-cost tracker fund. Unlike an actively managed fund, where the manager invests in a selection of stocks they favour, a tracker (or index fund) simply mirrors the fortunes of a particular index, such as the FTSE 100. Justin Modray, founder of Candid Financial Advice, rates the Vanguard FTSE UK Equity Index, which echoes the performance of the UK's wider FTSE All-Share Index, which is 31.9% stronger over three years.

He says: "This is a very low-cost tracker, costing just 0.15% a year before any additional fees." For intrepid investors looking for something higher-risk, with the potential of greater returns, Modray cites Marlborough Special Situations, which has delivered a 67% return over the same timeframe.

Commercial property

After falling out of favour during the credit crunch, Commercial Property funds are back in the spotlight. Investors can spread their cash over a wide variety of properties, such as offices and retail parks. As well as having the potential for capital growth, the rents paid by tenants can provide a stable income above inflation, which should help placate the yield-hungry.

McDermott rates the Henderson UK Property Trust, which is up 17.5% over the past three years and delivers an income of 4.2%. He says: "Property as an asset class adds diversification to an overall portfolio and this fund has one of the best yields, while having low volatility."

For investors looking for property fund with a wider remit, Modray highlights Schroder Global Property Income Maximiser, up 14% in the past three years; it has investments across, among others, Japan, Hong Kong and the US.  

•Source for fund performance data – FE Trustnet, as at 12 March 2014

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