Make the most of your ISA allowance before the deadline
Tuesday, 08 February 2011 11:34
By Kate Saines
Tax is not a very nice word at the best of times. But now more than ever, with the recent hefty tax rises announced, it feels as if the "T-word" is creating more angst than ever before.
Which makes it even more important, say financial experts, to ensure you are making the most of your tax-free ISA allowance.
ISA provider Fidelity International has calculated that with the increase in VAT and the proposed hike in National Insurance, a basis rate tax payer could soon be paying more than 43 per cent in taxes on each new pound they earn and spend.
Higher rate tax payers, meanwhile, will be shelling out just over 51 per cent.
Rob Fisher, head of UK personal investments at Fidelity, said: "ISAs are still one of the few tax breaks that you get as an investor, with no capital gains or income tax to pay on your returns, so it makes sense to de-tax your investments and make the most of your £10,200 ISA allowance.
"Any unused ISA allowance can't be carried over into the new tax year – so, quite literally, use it or lose it."
This year we all have the ability to invest £10,200 in ISAs. Up to £5,100 can be invested into a cash ISA.
You can invest the remaining £5,100 in a shares ISA. Alternatively you can invest the entire £10,200 in a shares ISA.
So far, it's pretty straightforward. But how do we make sure that we are getting the best out of our investment and therefore make the most of our allowance?
Deadline
First, and most obviously, it's important to know the deadline. You must invest all your cash for the ISA year before April 5th.
As mentioned, you cannot carry your allowance over so if you forget you will miss out.
Experts warn you should not leave it too long before investing. Danny Cox, an independent financial adviser at Hargreaves Lansdown, said: "Leaving your ISA subscription to the last minute of the tax year, means you miss out on up to 12 months tax efficient growth and income per contribution.
"A couple could miss out on as much as £204 of income tax savings this year, rising to £213.60 next year and risk missing their allowance completely (assumes basic rate tax payers investing in fixed interest funds with a 5% yield)."
Choosing the best ISA – Cash ISAs
Ensuring you choose the very best fund that's not only right for you but also has a healthy interest rate is essential to make the most of your allowance.
If you are opting for a cash ISA you need to decide if you want a product which allows you easy access to your money, or an account which locks your money in for a set period of time.
Typically, you are looking at rates of around two to three per cent on the best instant access ISAs.
For better returns of around four per cent you will need to invest in a fixed-term ISA, and this means locking your cash away for three to four years.
Clearly, bolting up your cash for several years will reap the better returns. However, if this does not suit your lifestyle there's no point in opting for a fixed-term ISA.
No matter which option you choose, you will definitely want to find the best rate. Our price comparison tool has a selection of cash ISAs currently on the market.
The good news is that this year ISA providers are being particularly competitive, which means there are some attractive rates out there.
Kevin Mountford, head of banking at price comparison website Moneysupermarket, said: "The traditional ISA season has started earlier than previous years and in general, savings providers are being more aggressive than normal."
Read our feature on eight of the best cash ISAs
Take a risk on Stocks and Shares
Cash ISAs might provide a safe haven for your cash, but if the rates simply don't do it for you, opting for a stocks and shares ISA will undoubtedly offer you higher returns.
You can invest your ISA allowance in a variety of products from single company equities, bonds, investment funds such as unit trusts or investment trusts and more complex products like exchange traded funds.
All of these come with varying elements of risk. As with all investments, the longer you hold them the more likely you are to see gains. Markets tend to be volatile over the short term but over a period of ten years or more you will see steadier increases.
If you are fearful, you are not alone. Analysis by Virgin Money has revealed that Shares ISAs returned four times as much as Cash ISAs in 2010.
Yet, despite this investors were reluctant to open them, taking out cash ISAs at nearly four times the rate.
According to HMRC figures, 11.9 million cash ISAs were opened in 2010 compared to three million shares ISAs.
Grant Bather, a spokesman at Virgin Money, said: "With cash ISAs outnumbering share ISA investment by four to one, it is clear savers have been put off the stock market as a result of the volatility seen over the past few years.
"Unfortunately investors don't have a crystal ball but it is important to consider the mix of cash and shares in your portfolio to ensure you are comfortable with the risk you are taking."
Getting help from an independent financial adviser might be a good idea if you are keen to invest in the markets.
They will assess your attitude to risk and find you a product to suit you.
The general message, however, when investing in stocks and shares is that putting all your eggs into one basket, or choosing just one fund or share to invest in, is risky.
However, spread the risk over a wide variety of stocks, shares or funds and you will increase your chances of earning some decent returns.
Investing via a fund supermarket is a great way of doing this.
Fidelity is one of a number of ISA providers who offer this service to investors. Their 'supermarket' is called FundsNetwork and it allows customers to literally pick and choose which funds they would like to invest their ISA allowance into.
You can choose from a selection of 1,100 funds from 65 providers. Rob Fisher of Fidelity said: "It's cheaper to buy through us than direct with a fund provider as we offer great online discounts."
You can top up your ISA over the year as more money becomes available and if you decide one of your funds isn't performing well, you can switch to another fund at a cost of 0.025 per cent.
The service is run online and includes a tool which allows customers to filter, sort and compare funds based on independent ratings, charges and risk versus performance.
Fidelity also offers the Select List, a selection of 86 funds hand-picked by investment experts. The benefit is instant diversification.
Mr Fisher said: "Our managed solutions offer you ready-made portfolios of funds in a single investment.
"Each is actively managed on your behalf and diversified to reduce your exposure to risk."
Temporary Solutions
If you are unsure where to put your money but don't want to lose your ISA allowance, Fidelity also offers an ISA Cash Park service.
It's a temporary shelter which gives you time to decide where to invest either new money or existing investments for your stocks and shares ISA
It offers interest at 0.4 per cent below the Bank of England rate.
Switching
Making the most of your ISA allowance means making sure you're on a good rate. If you already have an ISA investment, and think you can get a better deal elsewhere, why not switch to another ISA?
New rules mean the process of transferring your investment to a new product should take no more than 15 days, meaning your old provider cannot delay the process and prevent you from earning higher interest sooner.
There are even some providers out there who pay interest from the date the account is opened, as opposed to the day the funds are transferred.
Kevin Mountford of Moneysupermarket, said: "Many savers may not be aware of their current ISA rate so, as a first step, they should check the rate they are on, and switch to a better deal if necessary.
If you have had an ISA for more than twelve months, the chances are you will be on a much lower rate of interest so it would be beneficial to switch."
Use the Myfinances.co.uk comparison tools to find the best deal on an ISA
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