News
ISA Article
17/03/2009
Every UK adult has an annual ISA allowance; this can be invested into cash (up to £3,600) stocks and shares (maximum £7,200) or a mixture of both subject to maximum £7,200 in total for the 2008/2009 tax year. How you split the two elements between cash and stocks and shares is entirely up to you.
With the recent cuts in the bank base rate and the average building society account now only paying 0.51% (Bank of England figures, 23 Feb 09) interest per annum, there are many arguments against keeping more money than necessary on deposit. Generally, as a starting point to any portfolio construction, investors should keep a certain element of cash on deposit to cover short term spending plans or emergencies. However, over the longer term equities tend to outperform deposits and bonds and therefore you can get a higher return - although you lose the instant access element.
Here are a few questions and answers put together by our in-house experts to explain the benefits of ISAs and external factors that may affect them:
How valuable are the tax benefits?
You may think that £7,200 is a relatively small amount however, research has shown that if an investor utilised each of their ISA allowances since they were introduced originally as PEP’s in 1987, they could have amassed over £300,000* in a tax efficient environment - and could have saved approximately £25,000 in capital gains tax. This is in addition to the income tax savings on interest and dividends.
Why should I consider alternatives to cash for my ISA?
With the poor returns currently on offer from deposit based accounts, for monies that can be left longer term - predominantly five years plus - there are alternatives which offer better prospects for income or growth in the form of stocks and shares ISAs. Recent studies from Barclays Capital have shown that if you held equities for just two years, the returns would beat cash in 72 out of 108 years - meaning the chance of out performance being 67%. Extend the holding period to 10 years and you have a 92% chance of beating the returns on Cash ISAs with a Stocks and Shares ISA.
What about current market conditions?
All the negative press coverage on the current recession and subsequent market conditions will have no doubt only added to your concerns about investing in alternative products, particularly those linked to the stock market. With the FTSE 100 down 26% over the last year - and 20% less since the turn of the century - who could blame you for asking yourself ‘is there any benefit in considering alternatives’?
However, based on the current low share prices and the high dividends many experts are optimistic about the opportunities out there and are confident equities will provide solid returns over the longer term.
This argument is further strengthened by analysis undertaken by fund manager Fidelity International. They studied every complete 10 year period between 1899 and 2007, using data from the Barclays Capital Equity Gilt study, and out of the 99 10 year periods, the real value of shares has only fallen by more than the most recent decline on 19 separate occasions. A spokesman for Fidelity International said: "buying shares at the end of a lost decade as bad or worse than the past 10 years has failed on only one occasion since 1899 to at least double the purchasing power of the money invested over the following 10 years. Only a very confident investor would bet against an 18-1 record."
Do alternatives offer the same protection as deposits?
Although many of the alternatives do not offer the capital guarantees of deposit accounts, they do offer greater potential for higher returns. We appreciate that each individual is different and risk is personal to you, however with the many alternatives on offer we are confident you can achieve an appropriate level of balance between risk and reward.
This year sees us in a recession, a credit crunch and with historically low interest rates. The ISA allowance is unlikely to rank high on your list of priorities but failure to act means you are simply agreeing to give some of your future returns to the taxman.
* This assumes ISA allowance is fully utilised each tax year and a 6% net annual growth rate.
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