Some savers may be nervous about investing in stocks and shares, mindful that shares have partially bounced back from the sharp fall in March 2020, during the first lockdown, and that the short-term outlook for the economy is uncertain.
Those who have not yet used their allowance for tax efficient savings in an Individual Savings Account (ISA), may miss out on building up tax efficient savings.
The annual ISA allowance is: -
Unless the funds available for investment are likely to be required in the short term, in which case a cash ISA may be a more appropriate option, longer term investors should not focus too much on short term volatility in share prices as these tend to even out over time. Trying to time investment to achieve the best price is extraordinarily difficult. It is less likely to contribute to the overall returns achieved than steadily accruing dividends and growth over the long term within a tax-free environment.
Have Your Cake and Eat It
Nervous investors can have their cake and eat it, by investing this year’s allowance in the ISA wrapper before the tax year end but phasing in the purchase of investments over a longer time frame. Once money is in the ISA wrapper it qualifies as an ongoing tax- free efficient investment but does not all need to be invested in the market at one time.
In the event of a significant fall in share prices, investment of the balance of the money, held in cash within the ISA, can be made to take advantage of lower prices. The cash account won’t pay very much, if any, interest and may incur charges, but having the funds available within the ISA makes it possible to make a fund switch overnight. Money invested in a cash ISA may pay a little more interest and may have lower charges but can take up to 15 days to transfer to a stocks and shares ISA, so is a less agile option.
For the New Tax Year
By starting your ISA savings near the beginning of the tax year, a little and often drip feed of funds into the market can be achieved and over the medium to long term helps to smooth out the ups and downs of stock market returns. A regular direct debit payment can be arranged so that you do not risk missing out on the full potential of tax- free efficient savings by forgetting to add to the ISA each tax year.
The investor remains in control of the timing of buying investments and at any time may choose to redirect future savings into a different fund to satisfy the desire for risk. There is no limit on the number of fund switches which can be made but some ISA providers may levy a charge.
Should you wish to take less risk over the longer term, the transfer from a stocks and shares ISA to a cash ISA can also be made. To preserve the tax- efficient status, the transfer must be from ISA manager to ISA manager and not via the individual’s bank account. It is also possible to split the ISA allowance between the two types of ISA, in any proportion, with both a stocks and shares ISA and a cash ISA.
Equity investments do not afford the same capital security as deposit accounts.
For help with your ISA investments contact your usual LEBC adviser or firstname.lastname@example.org or call 0800 055 6585
Public Policy Director
Please remember, no news or research item is a recommendation or advice to buy. LEBC Group Ltd is not responsible for accuracy and may not share the author’s views. The contents of this blog are for information purposes only and do not constitute individual advice. All information is based on our current understanding of taxation legislation and regulations. The Financial Conduct Authority does not regulate estate planning, tax advice, wills or trustsBack to News & Views