Isa season looms . . . but experts advise caution
FINANCIAL experts believe that a combination of low savings rates and tax changes will prompt a sharp rise in demand for investment-based Individual Savings Accounts – stocks and shares Isas – in coming months.
But they urge investors keen to put fresh money into their Isas before the end of this tax year, on April 5, and at the start of the next tax year, to tread carefully. Some believe that stock markets, especially in the US, could be heading for a sharp correction, having reached close to record levels.
They are encouraging investors to drip feed new money into their Isas rather than investing it all in one go. Alternatively, they recommend putting money into an Isa, then waiting to see what happens, before using it to buy stocks and shares.
The annual maximum allowance for investing in – or saving into – an Isa receives a massive boost in just over two weeks, when it jumps from £15,240 per adult to £20,000.
Alongside increases in contribution limits for Isas set up on behalf of children, this means a family of four – with two children under the age of 16 – will be able to invest up to £48,256 a year between them – a sum so large that few families will be able to take full advantage of it.
Brian Dennehy is managing director of FundExpert in Chislehurst, Kent. He makes a living from recommending investment funds and Isas to clients. But he believes that now is ‘one of the most difficult periods in many years for investing in an Isa’.
Dennehy says: ‘For the past two years, I have said equity markets have been like an avalanche-prone snowy slope. We know there is a high risk of an avalanche, but we just do not know what will trigger it and when.
‘It could be something we know about – the possibility of a victory for Marine Le Pen in the forthcoming French presidential elections turning into a reality. Or it could be something unexpected that catches everyone by surprise and spooks markets. But, mark my words, stock markets look vulnerable to a major correction.’
It is a view shared by Ben Willis, head of research at investment adviser Whitechurch Securities in Bristol. He says: ‘With equity markets reaching record highs and bond yields still at historically low levels, I would be reticent about putting a lump sum into the stock market at present levels.
‘I think a better strategy is to make regular investments into an Isa or inject cash into it, then invest if there is a market shake-out.’
Neil Rossiter, of financial planning firm Blackdown Financial in Taunton, Somerset, says investors should fund their Isa on a regular basis and treat it as ‘yet another bill which has to be paid’.
Despite concerns over the frothiness of stock markets, investmentbased Isas are likely to become more popular.
The Chancellor’s decision in this month’s Budget to cut the annual tax-free dividend allowance from £5,000 to £2,000 will prompt many taxpayers to ring fence as much of their portfolios from the taxman as possible. This can be done by using this and future years’ Isa allowances to build tax-free wealth.
It can also be achieved for existing shareholdings by a process called ‘bed and Isa’ – where the shares are sold and then bought back inside an Isa. Though such trades may attract capital gains tax if they take an individual over this and next year’s tax-free £11,100 limits, they protect future dividends inside the Isa from further tax.
From April 2018, annual dividend payments above £2,000 will be subject to tax of 7.5 per cent for basic rate taxpayers, 32.5 per cent for higher rate taxpayers and 38.1 per cent for additional rate taxpayers.
The popularity of cash Isas is likely to be dented by the introduction of the personal savings allowance in April last year, which means that £1,000 of interest from savings accounts is now tax-free for basic rate taxpayers in any one tax year.
Higher rate taxpayers have an allowance of just £500 a year. It is not available to additional rate taxpayers.