As the end of the tax year looms act now to maximise ISA savings
THE end-of-year tax deadline is looming, which means you have less than a month to make the most of your annual ISA allowance.
Savers can put up to £20,000 in an ISA in the current tax year, but how do you choose between cash and equity versions?
Cash ISAS are simply tax-free savings accounts, so there is little or no risk to your money, although interest rates are poor. The best variable cash ISA pays interest of about 1.3 per cent, which is way below the three per cent rate of inflation.
Equity ISAS invest in stocks and shares and are therefore more risky. However, they tend to offer higher returns.
Tom Stevenson, investment director for personal investing at Fidelity International, said: “With interest rates unlikely to overtake inflation for the foreseeable future, cash continues to remain trash and it is the stock market that remains your best bet of generating a decent return in the current environment.”
If you had deposited £15,000 into the average UK savings account a decade ago, your savings would be worth just £15,478 today – a return of
3.2 per cent.
If, however, you had put the same amount into the FTSE All-share index, your investment would now be worth £29,713, a return of 92% and a difference of more than £14,000, according to Fidelity International.
If you pick the right fund to invest your cash in it could be possible to supercharge your savings. For most people it would make sense to spread an investment over a number of funds investing in different markets and sectors in order to diversify the risk.
As picking even one can be a daunting task, though, we have asked several experts for their recommendations.
Jason Hollands, managing director of Bestinvest, the online investment service, likes the Lindsell Train Global Equity fund, which selects stocks from across the world. It holds a concentrated portfolio of typically between 25 and 35 companies including wellknown global brands such as Unilever, Diageo, Heineken, Nintendo, Pepsico and Japanese cosmetics firm Shiseido. For investments closer to home, Mr Hollands favours Liontrust Special Situations.
“The fund has long been one of our top choices for UK equities and, frankly, it has delivered everything you could wish for from an actively managed fund: significant and consistent outperformance with relatively low volatility,” he said. “It is an approach that has worked well in both tough market conditions and in rising markets.”
Juliet Schooling Latter, research director of Chelsea Financial Services, is also a fan of Liontrust Special Situations, although she said she is wary of investing too heavily in the UK market at the moment.
“While we have had a correction recently, the UK market remains on the expensive side and we could see some further volatility over the coming months.”
Ms Schooling Latter also picked out Janus Henderson UK Absolute Return and Blackrock UK Absolute
Alpha, both of which aim to make money when markets fall as well as rise.
Japan is one of The Share Centre’s preferred regions and investment manager Sheridan Admans selected Legg Mason Japan Equity.
The fund has a portfolio of between 25 and 60 stocks, and investors should be prepared for some volatility.
Investors who do not feel able to make a decision before the tax deadline should not worry, though, according to Willis Owen research head
Liz Rees.
“If you’re still unsure about the best place to invest, you might want to consider putting the money into a cash reserve facility to ensure you still secure the benefits of the ISA allowance,” she said.
You do not need a lot of money to invest in an equity ISA – and small amounts can soon build up.
If you invested £5 a day, or £100 a month, into an ISA, you could expect to save £10,000 in seven years and three months, assuming an annual growth rate of 5%, according to Fidelity International.
Investing little and often into your ISA has another benefit, according to Mr Stevenson.
“By drip feeding money into your investment you’ll benefit from a process known as pound-cost averaging,” he said.
“Buying at a variety of prices over time helps to cushion your ISA portfolio from dips in the stock market.”