If you hold a Cash Individual Savings Account (ISA) you may
be dissatisfied with the low rates of interest you receive, which could make it
difficult to grow your money even at a rate that keeps pace with inflation.
Stocks & Shares ISAs offer the possibility of higher
returns than Cash ISAs, but only if you’re prepared to take some risks with your
savings. These investment accounts offer tax-efficient benefits, and while a
Cash ISA is simply a tax-efficient savings account which offers capital security,
a Stocks & Shares ISA lets you put money into a range of different
investments.
Make the most of your ISA allowance
All UK residents over the age of 18 receive an annual ISA
allowance of £20,000 (2020/21 tax year). This is the amount you can pay into
your ISA (or split between several ISAs of different types) to allow it to grow
through interest, capital gains or dividend income, and you won’t pay tax on
these proceeds.
Because you can’t carry over your ISA allowance into a new
tax year, it’s important to use it by 5 April each year. You need to bear in
mind, though, that tax rules can change in future and that their effects on you
will depend on your individual circumstances.
Don’t obsess over timing
When getting started, a common concern is that the market
will fall just after you’ve made a large investment. Some people make the
mistake of trying to ‘time the market’ – buying in just before prices spike –
which, while tempting, is very difficult given the unpredictable nature of
investments.
If appropriate, a safer strategy can be to drip-feed money
into your Stocks & Shares ISA throughout the year. Sometimes you might buy when
the market is high, and sometimes when it is low, but over time the aim is for
this to average out.
Time to make your decision
When you set up your Stocks & Shares ISA, you’ll make
some decisions about how your money is invested. How involved you are in your
investment decisions varies between different ISA providers; some allow you to
choose individual investments, while others provide ready-made portfolios.
Either way, your professional financial adviser can explain
how funds work. These funds may invest in shares in specific markets, regions or
industries, or in bonds, in property, in a combination of these, or in entirely
different assets.
Match your investment goals
Funds tend to advertise themselves based on their past
performance, so it’s naturally tempting to choose those that have achieved the
most growth in recent years. But past performance doesn’t guarantee future
performance and outstanding performance last year could be the result of a
trend that will self-correct this year. Don’t base your decisions on this
factor alone.
Instead, select funds with a stated objective that matches
your investment goals in terms of risk and return. Any investment involves an
element of risk. But multiple factors can raise or lower the risk level of a
fund, including the assets it invests in, the region, industries and companies
it invests in, and the way it is managed. Consider all these factors.
Review your investments regularly
Once you have made your investment selections, you should
review your Stocks & Shares ISA regularly to make sure it still meets your
needs, which may change over time. For example, if you hope to buy a house in
ten years, you might initially choose higher-risk investments, but after five
years you might want to reduce your risk level to protect your existing
capital.
While annual reviews of your investment strategy are wise,
more frequent adjustments are not usually recommended. There are many reasons
you might be tempted to adjust your investments. You might have heard of a
well-performing stock that’s offering unbelievable returns. Or you might have
suffered a sudden loss and decide your existing investments are
underperforming.
Investments, by nature, fluctuate in value
It’s more helpful to recognise that investments, by nature,
fluctuate in value. A sudden rise in one doesn’t mean you should buy and a
sudden fall in another isn’t a sign you should sell – in fact, you may recoup
that loss quicker by holding it.
Constantly moving funds can be stressful and ultimately
unproductive. In most cases, you’re better off sticking with your investments
through ups and downs. Diversification (which can be achieved by investing in several
unrelated funds) can also help to manage your risk level.
Invest in your future today with a stocks & shares ISA
Amid the mayhem caused by the coronavirus (COVID-19)
pandemic, it is easy to forget that the end of the current tax year is
approaching on 5 April and that means you don’t have much time left to make use
of the tax advantage of your £20,000 ISA allowance. For help selecting funds to
suit you, contact us for more information.
INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF
TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS
FROM, TAXATION ARE SUBJECT TO CHANGE.
THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO
DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.
PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE
PERFORMANCE.