I’ve written here before about the pop world’s astonishing lack of hit songs about pensions, but the same could be said of individual savings accounts (Isas).
The UK will soon be singing “happy birthday” to the Isa, which turns 20 in April — and there is much to celebrate about tax-free saving and investing. The cash Isa has been the most popular, but it’s notable that many people — especially women, I’m afraid — have never moved beyond this.
Colleagues of both genders sometimes sidle up to my desk at the FT and say: “I want to open a stocks and shares Isa, but how do I go about it?”
So, in the words of Vanilla Ice, it’s time to “stop, collaborate and listen”. Whack the US rapper’s 1990 chart-topper on your Spotify, and I’ll explain why you should be rocking your “Isa, Isa baby”.
I’ll start with the chief benefit of investing through a stocks and shares Isa: the tax savings.
Let’s say you owned some shares, they increased in value a great deal and then you decided to sell them. You would risk being hit by capital gains tax (CGT), currently charged at up to 20 per cent of your profits above a certain level. Happily, CGT does not apply to investment gains inside your Isa.
You will also dodge the dividend tax on the income from your investments. Depending on how much you earn, this could be up to 38 per cent of dividend payments above a certain level. But not inside your Isa.
Finally, when the time comes to cash in your gains and take money out of your stocks and shares Isa — perhaps to fund a post-retirement trip to Miami Beach — it won’t be subject to income tax. You don’t even have to fill it in on your tax return. Boom.
Before we get on to picking investments, let’s cover the reason I suspect people (women, especially) can be reluctant to open one. It’s the risk of losing your money.
Your investments can — and will — go up and down in value. But it’s a marathon, not a sprint. I don’t expect to crack into my stocks and shares Isa until I am well into my sixties. This “time in the market” gives me the best chance of boosting the returns on my investments, and thus maximises the tax savings available.
Over the long term, your investment growth will be turbo-charged if you reinvest those glorious tax-free dividends into your Isa. Better still, any money generated within the Isa does not count towards the £20,000 annual limit on what you can pay in. The same applies to the government bonus worth up to £1,000 available to under-40s who have opened a Lifetime Isa. So reinvest, reinvest, reinvest.
To open a stocks and shares Isa, you will need to choose an online investment platform — see our table below comparing some of the UK’s biggest. This takes about five minutes, although it could take you longer than that to find your national insurance number.
There are thousands of funds and shares to choose from — the biggest impediment for new investors, who can be paralysed by indecision. And the costs vary according to your investment style. Some platforms are more suited to trader-investors, who buy and sell lots of individual shares. I don’t have the time or the nerve to invest like this. But that is not all you can do with a stocks and shares Isa.
I use a large chunk of mine to invest in funds which give me exposure to a range of different asset classes (shares, bonds, commodities and property) and are diversified around the world, not solely focused on the UK. This spreads the risk — I will hopefully avoid crashing lows, but I accept that I won’t achieve soaring highs. You could call it a “Vanilla Isa” — but it’s a good way of getting started.
The simplest and cheapest way is to look for multi-asset funds that contain a bunch of everything, packaged according to the level of investment risk you’re happy taking. I like the Vanguard LifeStrategy range (I hold two of its funds in my Isa) but also check out BlackRock Consensus and the L&G Multi-Index range.
As your investment knowledge and confidence increase, you can sell down all or part of these vanilla holdings within your Isa and reinvest in something else.
About 40 per cent of my Isa portfolio has a slightly more exotic flavour. As I have a very long-term investment time horizon, I like funds that specialise in small companies and investment trusts — see Merryn Somerset Webb’s column this week for more ideas.
People describe this time of year as “Isa season”, as you have until the end of the tax year on April 5 to use up your £20,000 Isa allowance for 2018-19 — or lose it forever. When the new tax year dawns on April 6, a fresh £20,000 can be invested. This means over the course of the next month, a wealthy couple could stash away up to £80,000 between them — very handy if you’ve been “capped out” of saving into a pension.
I prioritise my pension first, as I get a generous company contribution plus 40 per cent tax relief, and Isa second. Bear this in mind when you’re working out how much to save where.
It’s natural to feel apprehensive about investing a lump sum into the stock market in one go. As Moira O’Neill at Interactive Investor says on our podcast this week: “Most platforms have a cash park facility where can use up your Isa allowance before the end of the tax year, and then invest at your leisure, drip-feeding money into the market.”
Be warned though, if you never invest the money, this is an expensive way of holding cash.
Psychologically, you may find it easier to invest if you set up a regular monthly savings plan. You can set up a direct debit from just £25 per month (see below). All the platforms offer reduced dealing costs for investing in this way, and some will let you do it for free.
Hopefully, you now feel “on song” about investment Isas. To misquote Mr Ice: “If there was a problem, Yo — I’ve solved it.”
*Platform only offers Vanguard funds; ** Provider offers Lifetime Isa. Source: Companies websites
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