AFTER pensions, Individual Savings Accounts (ISAs) are the most tax-efficient way to save and invest for the future, and are the bedrock of many an investment portfolio.
ISAs offer a taxefficient and convenient gateway to the equity markets and also a useful short or medium term account for cash.
The important thing to remember about the tax reliefs that come with ISAs is that if you do not use them, you lose them. There is no catch – they were introduced to encourage saving and provide an effective way to save tax efficiently.
Advantage
The beauty of them is that they are free of any further liability to personal income tax and completely free from capital gains tax, giving an advantage over time that is similar to pension funds.
The main difference is that ISAs are far more accessible. Encashments may be made at any time and may be taken regularly to provide an income.
This is where ISAs really come into their own because withdrawals are paid with no tax liability and can provide a tax-efficient income for investors. However, it should be noted that the favourable tax treatment of ISAs may not be maintained in the future and is subject to changes in legislation.
So, having established that the ISA is the cornerstone of every investment portfolio, the next question is how to invest it. The rules allow direct investment in equities or investment into “collective” funds such as unit trusts or an Open Ended Investment Company (OEIC). Alternatively, smaller amounts can be invested into cash. Collective funds provide the investor with access to a wide range of diverse sectors and markets.
Diversity means that the investor is not exposed to the particular fortunes of an economic sector, less still of a particular company within that sector. It would be unusual for a unit trust to hold more than 3% in a particular company and the risk is spread over all investors.
No immunity
However, nobody can be immune from the vagaries of the markets and the more general economic influences. As the recent volatility in the financial markets has shown, equity-based funds can go down in value as well as up.
Collective investment funds are managed by professional investment managers for which there will be a charge. However, investment professionals are able to use sophisticated research and analysis tools that are out of reach for the average investor.
The rules for investing in ISAs are fairly straightforward. They are available to almost anyone who is 18 years of age (16 for a cash ISA) and is a UK tax resident. Currently, investments can be as much as £7,200 per person in a tax year, but minimum amounts may apply. However, following the changes announced in the April Budget, ISA limits will be raised to £10,200 (£5,100 for cash deposits) from 6th October 2009 for anyone aged 50 or more, with the higher limits applying to all investors from 6th April 2010.
This means that, resources permitting, a husband and wife may invest £14,400 in taxefficient investments rising to £20,400 for all couples by next year.
■ For further information or to discuss any aspect of financial planning, contact the author, a founder member of The Ellis McComb Partnership, 3 Mortimer Street, Birkenhead, Wirral, CH41 5EU; telephone 0151 650 6520, e-mail ellis.mccomb@sjpp.co.uk.
