Dec
Savers should make the most of tax-free savings
Most savvy savers will have used up their cash ISA allowance to get the best returns on their ISA accounts, but many don’t consider using the full allowance by making use of Equity ISAs by investing in stocks and shares and earning tax free returns.
Equity ISAs can up the stakes in terms of earnings when compared to their cash counterparts. A key advantage is that you are allowed to invest all of your ISA limit, as opposed to the maximum of £3,600 which can be put into a cash ISA. This means that you can invest up to £7,200 every year.
Changes have been made to the ISA system which mean that as of April 2010, the allowance will be increased from £7,200 to £10,200 – £5,100 of which can be invested into a cash ISA and up to the full £10,200 into an equity ISA.
Now comes the question of returns. Cash ISAs offer predictable returns, with different rates offered depending on the access provided on the account, with better rates offered on accounts that lock your money away for a fixed length of time. These ISAs hold no risk, as long as you stick to FSA regulated providers and invest only the current Financial Services Compensation scheme limit.
However, with equity ISAs there is no upper limit to how much you can earn, but these ISAs do come with different levels of risk, depending on the scheme you choose, so in many cases you will also get a regular income.
For example, one of the top performing equity funds for 2009 has been Neptune Japan Opportunities, which produced a return of around 70% for investors.
It is much more challenging to find the best ISA rate for equity funds than cash ISAs, as the rates of return offered are only a guide to the potential returns offered, so these are never guaranteed. But there are a number of rules that can help you along the way.
Be aware of the risks
Before deciding on which ISA to invest in, it is a worth thinking about the type of asset that would best suit you. If you have already decided to invest into an equity-based ISA, this shows that you are already willing to add the risk element in order to seek higher returns. But the levels of risk differ between investments, allowing you to choose the amount of risk you wish to take.
Something that’s always worth remembering is that you won’t gain or lose anything until you sell your shares, and in many cases if your shares lose value, they will recover over time.
Gavin Haynes, of Whitechurch Securities said: “Although the volatility of the stock market can be unsettling, the potential to generate long-term returns is indisputable. Over the past 20 years the FTSE All-Share index has provided a total return (including dividends) of 332pc, equivalent to an annual compound return of 7.6pc.”
Keep an eye on exchange rates when investing abroad, as there is always the chance that they will change, sometimes against you. For example, if you buy into an American shares and those shares appreciate by an average of 5%, but the dollar falls by 10% against sterling, the value of your fund will go down.
If you purchase funds that invest in emerging markets, such as China, you could benefit from the successful economic progress, but this can carry greater risks of political instability or unexpected events. It may be safer to invest in global emerging markets funds, as your investment is spread across a group of countries, therefore spreading the risk, although the exchange rate issue still remains.
It can be wise to diversify your investments in order to protect yourself from the vast fluctuations in the stock market to essentially reduce your overall risk.
Although there is the option to buy funds directly from the companies that run them, this can actually end up costing you more, as fund supermarkets tend to waive the initial charge that fund managers impose which is usually around 5%.
