It’s not often that you can safe guard your money from the taxman and still seek to make a profit, but with an Investment ISA you can do just that. Here’s how to get started.
Investment ISAs offer a tax free home for your savings and the chance of more impressive returns than your average cash account. But with swathes of investment jargon and potential risk to your capital, many people are unnecessarily put off.
Here’s a beginners guide to Investment ISAs that’ll help you decide if you should take the plunge.
What exactly is an Investment ISA?
The big benefit of any ISA is that it protects your money from the taxman.
In any standard savings or investment account, you will have to pay tax on any interest you earn or profit you make. This is usually deducted automatically before you receive your gains.
An Investment ISA is essentially a tax free wrapper which can be placed around a variety of different investments to prevent you from having to pay tax.
Essentially money you invest is used, either directly or indirectly, to buy shares in the stock market. The performance of these shares will then determine if you make a profit and if so how much.
Ordinarily you would have to pay income tax on the income you earn from your investments and capital gains tax on the profit you make from selling shares. However, invest through an Investment ISA and you’ll receive any profit untaxed.
You must be at least 18 years of age to open an Investment ISA; however, the age threshold for most Cash ISAs is 16.
ISA Limits
There is a limit to the amount you can save through an ISA each year, the figures below are for the 2011/12 tax year (6th April 2011 – 5th April 2012):
You can save or invest a total of £10,680 in ISAs this tax year
Up to £5,340 of this can be saved in a Cash ISA
Whatever is left of your allowance can be put into an Investment ISA
So if you have put £3,000 into a Cash ISA, you can only invest up to £7,680 in an Investment ISA during the 2011/10 financial year.
What will you have to pay?
Investing in an Investment ISA does come at a price.
Unlike saving into a Cash ISA, if you opt to invest your savings into an Investment ISA you will have to sacrifice some of your capital in fees.
The reason for this is that the administration of Investment ISAs costs more to the providers than a relatively simple Cash ISA.
In most cases you will have to pay an initial deposit fee to cover the cost of buying the shares. This can vary significantly depending on the type of Investment ISA you choose but is usually around 2-5%.
After the deposit fee, you will also have to pay an annual maintenance fee; this is usually around 1-2% and is taken before your profits are paid.
As they can vary from account to account, remember to consider all the fees that you’ll have to pay when you compare Investment ISAs.
Should you invest?
Before looking at how to open an Investment ISA, you should strongly consider whether it would make better sense to put your cash elsewhere, or if you are moving other investments what fees you will have to pay.
Saving for the long term?
Investment ISAs should always be treated as a mid to long term investments and as a result shouldn’t be used in an attempt to make quick gains.
There are two main reasons for this: firstly although your returns through income from shares and profits are likely to be greater than the interest you’d get from cash over the long term, any capital in an investment can go up or down in value.
Secondly the amount you pay in fees for an Investment ISA will usually negate a significant part of your returns for at least a couple of years – although this will vary depending on how much you invest and where.
This is because the most significant expense you have to pay is likely to be the initial deposit fee of around 5% of your capital, followed by annual account fees on top of this.
Happy to take a risk?
All types of investment will leave your money exposed to a certain element of risk.
This means that you could get less money back than you initially invested if your account performs badly – although you can manage this to a certain extent through the type of ISA you choose or what areas of the market you decide to invest in.
Before investing, you should be happy to speculate with any money you put in an Investment ISA and accept that its value could go down as well as up.
Cash available
You shouldn’t invest money that you may need to access in the near future.
It’s usually reccomended that you have at least 3 months pay saved in cash before you consider investing – to prevent you from having to cancel an investment if you are faced with an unexpected bill.
Remember, because an Investment ISA is designed as a long term investment it’s unlikely that you’d be able to get your money out as quickly as from a cash account without losing out.
Ultimately you should only invest money you won’t need to draw on and are happy to speculate with.
Could it be put to better use?
If you have debts then it’s unlikely that choosing to invest will make the most of your money.
Even the best return on investments is unlikely to outweigh the amount of interest you would pay on unsecured borrowing such as a credit card or personal loan.
This means that you are likely to be better off using the money to pay off your debts instead of investing and looking again at investing once you’re debt free.
For more information read our guide: Should I Use my Savings to Pay Off my Debts?.
Self select or investment fund
Once you’ve decided that you want to invest, the next step is to decide how much involvement you want to have.
Investment ISAs tend to fall into two main categories: self select ISAs and investment fund ISAs.
Fund ISAs
Fund ISAs leave the buying and selling of shares to a fund manager, and work by pooling money into one large fund and investing this large amount of money across a number of companies.
This means that you don’t actively buy and sell shares but instead buy units or a share in an investment fund. Your money, along with the hundreds or thousands of other people’s money is then pooled together and used to buy shares in a wide range of companies.
Therefore, in theory at least, you have the clout of a much bigger investor and can reduce your risk by spreading your money across a wide number of markets, sectors and companies.
However, the annual fees for a fund based ISA are usually greater initially than a self select ISA as you are essentially paying the fund manager to manage your investment on your behalf.
That said, if you are a first time investor, or don’t feel confident buying and selling shares then choosing an Investment ISA that operates through a fund may be the most sensible choice.
Self select
The big advantage of a self select ISA is that it allows you to control exactly where you money is invested and the amount of risk you are exposed to.
However, because you essentially take the reins, they do tend to be better suited to people who have some experience in managing investments, perhaps having already having bought and sold shares in the past, and a clear idea which companies they want to invest in, rather than total novices.
If you are considering a self select ISA then you will also have to be willing to monitor your returns and the markets to check how your investments are performing and make any trades if necessary.
This is even more important because as you will only be investing in fewer companies than an investment fund, you will be exposed to a greater level of risk as your money isn’t spread so widely.
Compare ISAs
After deciding the level of involvement you want to have with your investment, you will have to decide exactly which type of ISA you want to opt for.
Choose a fund
If you want to invest through a fund you should compare those on the market to make sure you get the account best suited to your needs.
For help choosing a fund, read our guide: 9 Steps to Finding an Investment Fund That Will Maximise Your Profit
Select a self select
In the same way as comparing the various fund ISAs on offer, if you’ve decided to opt for a self select ISA then you can start to compare the different ISAs on the market.
Check exactly what areas each self select ISA will allow you to invest in; some are restricted to certain market sectors, while others may only allow you to buy shares from UK based or European companies.
You should also check the different fees applied by the various accounts, including deposit fees, trading fees and whether the account also applies a dormancy fee if you are inactive for a certain period of time.
The level of advice and guidance you receive will also vary between self select ISAs, some may recommend investments which you have to approve or reject, while execution only account will literally leave the decision entirely to you.
You can compare of the different self select ISAs using our self select comparison table.
Swapping or transferring ISAs
If you decide that you want to move your Investment ISA at a later date then you can do this. However, you can’t simply close your existing Investment ISA and deposit the money into a new Investment ISA.
In order you ensure that your tax free allowance is transferred with the money, you need to get your investment manager or company to transfer it directly to your new account.
This usually involves completing an ISA transfer form which is then send to the new account provider who makes sure that the money you are transferring doesn’t affect that year’s ISA allowance.
As such, if you are unhappy with your Investment ISA you can look to change your investments or switch to a different provider.
As with Cash ISAs, you can hold more than one Investment ISA but you are only allowed to pay into one each financial year.
You can, if you wish, move money from a Cash ISA to an Investment ISA without losing your tax free benefits, however you can’t transfer money the other way, from and Investment ISA to cash.
Additionally you can in some situations move existing investments within an ISA wrapper, so you get the tax benefits on the existing account, however, whether you are able to do this will depend on the type of investment account you hold.
For more help transferring your Cash ISA read the guide: How to transfer your Cash ISA
At a time when Banks are sitting hard on their cash reserves, Investors are having to find more innovative ways of Finding Finance. Finding the money is only the first hurdle you will have to jump if you or your business are going to ultimately secure the funds for expansion, redevelopment, commercial premisses or whatever else it is that the business needs to grow.
So.. What makes one person’s pitch for finance rock and another’s roll?
It’s The Fizz.. It’s ‘The Soda in The Campari’
Lenders look for certain information when they consider a Finance Proposition. They remember what to ask for by referring to CAMPARI.
C is for Character and that’s your Character. Just like any partnership; and essentially anyone lending you money is becoming your partner in business. You wouldn’t think about taking on a partner unless you knew and trusted the person you were going into business with, so why should the lender. That’s why it’s always best to start with a lender who knows you and your business. Failing this, you have to convince the lender that you are trustworthy.
A is for Ability; can you do what you say you can do, can you prove it. It may be that you have Educational Qualifications in your field of expertise or that you have years of experience running a similar business.
M is for means; God forbid your business plan will fail, but if it does can the lender recover its loan from your assets. Lenders hate risk and conversely love security, be prepared to provide a personal guarantee or use your home as security if there is no security in the business itself.
P is for Purpose; so what’s the money for? If your business needs money to support a sinking ship, then think again. Tighten the sails and stop the leaks first. Lenders like forward thinking businesses, those that are full steam ahead..heading for distant shores..not sinking.
A is for Amount; is the amount you are asking for the right amount to achieve the objectives of your plan. Prove it.
R is for Repayment; The lenders want to see that you can afford the monthly repayments for the debt. They want to be convinced that your cash flow forecast is not a work of fiction, rather based on reliable data, such as a full order book or OAP’s banging on the door of your nursing home.
I is for Insurance; The worst case scenario - something might go wrong; your key person might become ill or die, the factory might burn down..not likely but possible. Any self respecting lender would want to know you had considered all eventualities and having the right insurance will cover these bases.
Meeting the Campari criteria requires some tough work ahead and thats before you make the pitch for finance.
The pitch requires the Soda..the Fizz which will sell your plan to the lender.
Can you have a Campari without the Soda.. yes of course but will it hit the spot, I doubt it.
The Cupcake is a phenomenal example of how marketing can lure us into buying or investing in something that we would normally never touch.
The simple sponge cake was one of the first things I learnt to bake as a child; 4:4:4: and 2 eggs results in a bland and inoffensive cake. Of course the fun was not in the eating but in the mixing, spoon licking and decoration.
Given the choice as adults we wouldn’t touch them with a barge pole, they are pretty tasteless and very fattening. Strangely though in recent times they they have been adapted by marketing companies as the new wannabe gift, a symbol of love, the accompaniment for champagne and a delight to the eye. ‘The perfect little treat’! But Why?
The secret of course is in the presentation, its not the sponge cake we are attracted to but the decoration and sparkles on top, frosty icing, glittering balls, hand-piped messages and decorative cases. Pop 4 in a hand folded box and the deal is nailed. Serve with ice cool champagne for a fiver and we are hooked. Does cupcake and champagne even go together?
Like it or not the cupcake is selling, it’s everywhere.
The relevance to our investment choices is startling, only yesterday I was contacted by a land management company, they were selling plots of green belt land which were without planning permission. It’s a risky propossition with the potential for high return if planning permission is granted at a later stage.
Being a curious sort of person I asked for the brochure. The proposition the sponge, the brochure and presentation a decorative cupcake. An alluring piece of marketing that made it look like they were selling a to die for product when if fact it was just sponge.
Of course, there is a chance that you could buy a cupcake that actually tastes nice; that after all is the expectation. However, consider the reality. The right ingredients have to be measured, mixed and baked. The cake has to be fresh, soft, light and the flavour superb.
Let’s face it when you have recovered from the appeal of its appearance most cupcakes taste pretty dull and ordinary. Come on its just a sponge.
The fact that pretty ordinary deals are wrapped expertly in glittering packages is a phenomena investors have to think about carefully.
What you should be doing is stripping off the icing and then decide if you would still buy the cake.
You could argue that the icing adds an intrinsic value to the product which could facilitate an emotional response but, well worth a couple of £’s, this argument wouldn’t hold much water though if you were shelling out 10′s of £000′s on a piece of land.
The message, beware the marketeer he is a clever and often devious character and is the reason that the following saying was coined. ‘If it looks too good to be true it probably is’.
Good News
Many Buy to Let investors who have traditionally geared their investments heavily, sometimes at the 80% + LTV level, have been left have been out in the cold by lenders until now. Today 10th may 2010 has seen the return to market of Mortgages for Investors in The Buy to Let arena, at the 80% LTV level.
Many Buy to Let Landlords enter the market on fixed deals as this is a way of securing repayments from 2-10 years. After this period investors revert to the Lender’s Standard Variable Rate (SVR). The disadvantage of a SVR is that it need bare no relation to the Bank’s Base Rate (BBR); effectively you are at the mercy of Lender’s internal decision making.
While interest rates are low SVR‘s have remained relatively stable however adhoc interest rate rises are not uncommon. The latest lender to increase its SVR was Marsden Building Society, which increased its SVR by 0.46% to 5.95% on January 1st this year. According to Moneyfacts, 8 Lenders have increased their SVR while the Bank Base Rate remained at 0.5%.
A prudent Investor would try to fix their rates again as it buys security going forward. The downside of re-mortgaging is that it costs a plenty, costs which should happily and logically be viewed as the risk premium for security.
Post election warning bells are sounding, a hung parliament could be the literal hanging of many investors if they don’t build the security factor into their investment model.
For many Buy to Let Investors the 80% LTV level may not go far enough however, it’s arguably the best news some may get this year.
Castles in The Sky
It was never easy to get a foot on the property ladder, well that’s unless you happen to inherit at the right time, or Mummy and Daddy are pre-disposed to offering the ultimate handout; a generous 10% or (£20,000) of the average house price in Scotland. The present financial climate dictates that repayments will start at about £1000 a month on the remaining £180,000 supported by a joint income if two of you are sharing, of about £50,000. This assumes you have a squeaky clean credit history of course and,you haven’t already been down the raggedy path of bankruptcy.
So that’s the few in the gilded cage sorted out what of the others, the other first time wannabes who are seeing it as it is. Damned near impossible!
There were a frugal few who wisely stashed away money every month saving for the elusive deposit. While their friends partied, holiday’d and adorned in the latest fashions, while they were meanly huddled in the cold watching last years DVDs. I know a few of those who proudly saved their 10%’s are now meanly huddled in the cold watching last years DVDs sitting on negative equity. Is there no justice?
One answer would be to buy with friends, we’ve all seen TV ‘friends’ and wished ‘if only life was like that’; friends, lovers and companions all under one roof, sharing the cooking, cleaning and languishing on charming conversation. Oh how quickly friendship and love can turn to hate when money and property is involved. As brilliant as it looks, if you are going to do it cross the legal t’s and dot the bad tempered i’s or you might be looking a future nightmare in the eye.
Ok so what about shared equity;another great idea where you can share with a Housing Association.. form a queue and sadly if you earn over £60,000 a year between you, you will have to take a demotion. Housing Association schemes in and around Edinburgh are few and far between and they are in designated blocks which might not be every bodies bed of roses. Other schemes are emerging where private landlords can take the other equity share and I’m sure this will present other options for First Time Buyer.
‘Paying rent instead of paying a mortgage‘ my dad always used to say’ is a waste of hard earn’ t money’; ‘you are lining the pockets of the landlords’. I’m guessing I’m not the only one that’s heard that one. He had a point of course, because it’s the landlords we see 10 years down the line behind the wheel of a flash BMW getting ready to shell out for their son or daughter’ s £20,000 golden handshake.
The key is time.
It’s never been easy to save for a deposit. It’s never easy to go without now, in the hope of some unknown reward somewhere down the line. The younger you are the harder it is to even think beyond next year, never mind in 10 years time.
Analysing the facts today, property investment in any capacity may seem mad, never mind for the First Time Buyer. History has taught us however, that we have to speculate to accumulate; and this philosophy is substantiated by statistics and our wealthy landlord. There is no reason to believe that tomorrow’s history will be any different to any other.
Waiting for tomorrow’s history is in essence the First Time Buyer‘s Demise.
Helen Clover- Edinburgh, UK
