Money
Managing your money
Time to think about ISAs
Taking full advantage of the tax benefits of an ISA (individual savings account) wrapper should be top of your list if you have any money to put aside, says Holly Thomas
Every April the Government allows us to squirrel away tax-free cash where income earned on it is exempt from capital gains tax. You do not need to declare any money saved in an ISA to HM Revenue & Customs either.
The rules are changing this April to allow more flexibility on how much money is invested and where it is invested.
Every adult will now have an annual ISA investment allowance of £7,200. Up to £3,600 of that allowance can be saved in cash with one provider. The remainder of the £7,200 can be invested in stocks and shares with either the same or another provider.
A separate new rule means that amount of cash in an ISA from previous years can be transferred into tax-free stocks and shares holdings without affecting your annual tax-free allowance - but only after April.
Cash ISAs are popular with those who want easy access to their money - perhaps to use as a rainy day fund.
Stocks and shares ISAs should be viewed as a medium to long-term commitment and the value of investments and any income from them could fall as well as rise.
They offer a wide choice of investments, and an independent financial adviser can guide you to cautiously or aggressively-managed funds, according to your attitude to risk.
While the new rules mean investors will be able to switch money in cash ISAs into equities, they will not keep the tax advantages if they want to do the reverse. So do not use a stocks and shares ISA as a home for your rainy day/emergency fund because if the market falls and you need to get your hands on some money, you could make some serious losses by selling low.
Over-cautious investors spooked by the current volatile market conditions can build up cash ISAs in the knowledge they can move some of that money into the stock market when they feel more confident.
Recently, panicked investors have been busy pulling their money out of the stock market after the UK markets fell significantly. Aside from crystallising losses by selling at a low point, you lose the tax-free wrapper and the cash cannot be reinvested until the following tax year.
Experts urge that even the most cautious investors should use the rest of the tax allowance in stocks and shares by putting money in a cash fund or conservative fixed-interest fund which is very low risk and will offer returns of around four per cent. But, of course, this is not guaranteed.
Alternatively, paying a regular amount into a stocks and shares ISA rather than a lump sum means you take advantage of "pound cost averaging". This means monthly payments buy more units when the market drops, which will be worth more when the market rises.
* Holly Thomas is the deputy personal finance editor of the Daily Express and Sunday Express. Holly's opinions are her own and for general information only. Always seek independent financial advice.
