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Be efficient - Put your money to better use

It's a new tax year, so why not take a more measured approach to tax-efficient saving and investing instead of waiting until the week before April 6, 2007 before maximising allowances? Why get involved in the giddy ISA rush at the eleventh hour, for instance, and run the risk of a stocks and shares panic buy? Don't be one of those people who in the first five days of April 2006, according to the Investment Management Association IMA, collectively invested £321 million in funds in a rush to use their tax-free allowances. The result was the strongest ISA selling season since 2002.

Maximise your allowances

On the other hand do ensure that you maximise your allowances. As an incentive, consider the fact calculated by accountants Grant Thornton that the tax thresholds announced in the recent Budget will net the Exchequer £144.7 billion in the coming tax year. This represents an increase of 109% on the £69 billion raised in 1996/7, the last full tax year before Gordon Brown moved in. But the Treasury says there are now twice as many people earning £50,000 pa as there were in 1997, so that's all right then.

Meanwhile, the IMA recently noted that almost 1 in 2 of private investors have missed out on the stock market rally of the past three years. Why? In the period March 03 to March 06, the FTSE 100 rose by 86%, the average corporate bond returned 14% whilst the average equity income fund returned 96%. Yet at the advice of banks, building societies and other tied agents, funds continued to be poured into corporate bonds. Mind you, research by the Financial Services Authority shows that approximately 40% of all equity ISA investors don't realise they are investing in the stock market anyway.

What do you want from your ISA?

Know what you're doing and what you want from an ISA account. In the tax year you can invest up to £3,000 in a cash ISA and £4,000 in a stocks and shares mini ISA shares, unit trusts, investment trusts and bonds.

Alternatively, you can put £7,000 into a stocks and shares maxi ISA. All interest accrued on ISA accounts is free of income tax and both basic rate and higher rate taxpayers don't pay any capital gains tax on investment ISAs.

The interest return on cash ISAs varies between providers, depending on such elements as instant access, withdrawal notice, whether it's a variable or fixed rate offer, and the existence of transfer penalties. Make comparisons based on the annual equivalent rate. Scrutinise bonus deals; they may be worthwhile opting for in the short term before switching to a better deal when the bonus rate drops.

Time to take advantage

It has been estimated that a higher rate taxpayer who has put £3,000 each tax year into a cash ISA since they were first introduced in 1999 would have saved £1,680 in tax. However many savers fail to take advantage of this tax efficiency because they mistakenly believe they have to put in the full £3,000 just to open as ISA cash account. You can open one with as little as a £1 and save on a monthly basis. Remember, though, that money withdrawn from a cash ISA cannot be replaced in the same year, i.e. saving £2,000, then withdrawing £500, still leaves you only an extra £1,000 to add.

Equally, stocks and shares ISAs are not restricted to investment lump sums; you could save as little as £20 a month this way. Furthermore, you can stop and restart whenever you like, vary the amount saved and withdraw all or part of your savings without penalty.

The value of your savings can go down

Of course, your savings might fall in value depending on market volatility in the short term, but over a longer period of five years or so you could see a better return than that from a cash ISA. Consider your investment term and thus your risk level acceptance. Also if the market does fall, you will be buying shares more cheaply. It has been reported that £50 saved a month in an ISA-wrapped FTSE 100 tracker fund since the beginning of 2003 would now be an investment worth upwards of £2,500, a decent profit. Regular savers, compared to lump sum investors, don't have to worry about getting the timing right for market upturns.

There is as much investment choice for savers as there is for lump sum investors. Also the more volatile the fund the more savers can benefit from pound cost averaging the average price you pay for your investment is reduced because of the ups and downs in the market.


Another route is the self-select ISA account, although this is obviously not for the faint-hearted. But the positive bull run has given more private investors more confidence; Barclays Stockbrokers report a 40% increase in self-select in the first two months of this year compared to the same period in 2005. If you set up a self-select ISA through a stockbroker then you must be prepared for annual charges and commission fees for buying and selling.

Do your own legwork

Discount deals are available online if you're prepared to do your own legwork and make decisions unaided. As always, study the form, check long term performance of funds and compare charges by total expense ratio. Note that past performance is not necessarily a guide to future performance.

Moneyextra.com recommends you take independent financial advice before acting on any article


2006-05-04 12:55:59 © Moneyextra.com