All your investment ISA advice in one place
In this article you'll learn:
- What an investment ISA can do
- Guidelines on how to get the best out of an investment ISA
It's a bad time to be a saver. With interest rates at rock bottom and little sign of a rate rise coming any time soon, many people need alternatives ways to provide a return on their capital.
The result? We've seen the continued evolution of the individual savings accounts - the ISA. ISAs began life in the late 90s, replacing a number of previous investment products designed to encourage the public to save more.
Today, ISAs have a reputation for being a sensible investment choice. They are easy to set up (most high street banks and building societies offer a number of ISA products), available in different options, and most importantly they are tax-free. So you don't pay tax on any income or capital gains you've made on your investments.
ISA investment limits
The amount you can save without paying tax has recently gone up - and it will continue to rise into 2018. The tax-free allowance works on a per-person, per tax year basis. For the tax year 2016/2017, the tax-free allowance is £15,240, increasing to £20,000 for 2017/2018.
There are currently* two main types of ISA available:
Cash ISAs Very simply, you pay money into the account and then receive interest at an agreed rate, either monthly or annually. The average rate at the time of writing for an easy access cash ISA is just 1.05%**. That means if you saved the maximum £15,240 a year, you'd get just £160.02 in profit.There is no investment risk with cash ISAs, hence the current lowly rates. Although you should consider how inflation will erode any value created.
Stocks and shares ISAs (also known as 'investment ISAs') Your ISA savings are invested into shares or other investments or in investment funds. By exposing your capital to more risk than a cash ISA you are offered the potential for much greater rewards in return.
What can I invest in a stocks and shares ISA?
As you'd expect, you can invest company shares, but you can also invest in unit trusts, investment funds, corporate bonds, and government bonds. So more than just the 'stocks and shares' that the name suggests.
What control do I have over my investments?
This entirely depends on how you invest your ISA allowance. You can choose to be a DIY investor and select your own stocks and funds. This means you take the responsibility and the time to research the market, assess the level of risk you're comfortable taking on, build and then monitor your portfolio.
Alternatively, you can invest in ready-made, diversified portfolios which aim to minimise the amount of risk taken on in pursuit of returns. We believe that this is a more professional approach and can give you more peace of mind about your investments.
Be careful what you pay
As well as being aware of the risks you should also do your homework when it comes to the charges associated with ISA investing. They may appear small percentages but they're one of the main factors dragging your potential returns back. We believe that minimising these costs is crucial to optimising your investment returns, which ultimately is your objective.
For more investment ISA advice, or for guidance on how best to invest for the future, contact the expert financial advisors at Flying Colours on 0333 241 9900.
*The Government are introducing the 'lifetime ISA' from 6 April 2017. You can read more about that here.
**Source: Moneyfacts, July 2016.