Isa checklist: 12 Isa dos and don'ts
Consider bond funds as they are more tax-efficient within an Isa
This is because by holding them in the tax-efficient wrapper you avoid paying income tax on any gains. Whereas equity funds incur capital gains tax, for which you already have an annual tax-free allowance. If you don't have room to put your whole portfolio in your Isa, prioritise the bond funds over the equity funds.
Keep your eye on retail bonds
Many companies such as John Lewis, Tesco and National Grid have launched retail bonds over recent years. Provided they have at least five years to maturity, most retail bonds can be invested in an Isa, and any tax deducted can be reclaimed. However, the government announced in December's Autumn Statement that bonds with maturities of less than five years could soon be allowed in Isas, so watch out for further announcements.
Use your spouse's Isa allowance too
That's £23,760 to play with if you use both allowances in the 2014/15 tax year.
Increase your monthly savings each year as the maximum allowance increases
Automatically putting money into your Isa each month is a hassle-free way to build up a tidy nest egg, but don't forget to readjust the amount each tax year so you're always putting in the full allowance.
Understand the value a fund manager can add to your portfolio
This is especially with smaller companies or emerging markets companies where it's more difficult to pick the winners yourself.
Review, review, review!
A stocks and shares Isa requires more attention than a cash Isa so make sure you put the time aside to check the performance of your holdings and that you're on track to meet your objectives. Also have a quick look to see if your Isa provider meets your needs, in terms of cost, service and investment range.
Cash in a poorly paying cash Isa
If you do that, you'll lose that tax-free allowance forever. Instead, switch it to another cash Isa with a better interest rate, or a stocks and shares Isa.
Forget about Aim shares
Investors can invest in companies such as Majestic Wine and Asos in their Isas, following a rule change last August. If you're happy to take a bit more risk than say, investing in FTSE 100 shares, the Alternative Investment Market (Aim) might be the place for you.
Around 15 to 20 funds should be ample for most investor.
Use individual shares if you're not going to monitor them
If you're short of time, invest in funds or investment trusts as it's far easier to keep on top of developments.
Invest in it if you don't understand it
If you don't understand how an individual company, such as a bank, makes its profits, or how a fund manager makes big returns using derivatives, steer clear. Be careful of retail bonds too. They may seem simple but do your research. The yields on Co-op bonds looked enticing but many investors (including professionals) misunderstood the risks and were caught out.
Overlook investment trusts
These are slightly different to funds as they are traded on a stockmarket and can be bought either at a premium or discount. Sometimes they are cheaper and have better performance than similar funds. However, they're not offered by every Isa provider so look closely at the investment range when choosing a provider.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
Alternative Investment Market
AIM is the London Stock Exchange’s international market for smaller companies. Since its launch in 1995, 2,200 companies have raised almost £24 billion listing on AIM. The market has a more flexible regulatory system than the main market and can offer tax advantages to investors but its constituents are a riskier investment than bigger companies listed on the main market.