Where to invest your ISA?

Transcription

1 Where to invest your ISA? On 19 February 2014, ft.com held a live discussion where participants could ask a panel of experts about building an ISA portfolio. Chaired by Elaine Moore, Deputy Editor of FT Money, the panel included Patrick Connolly, Certified Financial Planner at Chase de Vere, and Anna Sofat, Wealth Adviser and Director at Addidi Wealth. The transcript for the event can be found below. Please remember that investments can go down as well as up and investors may get back less than they originally invested. Alliance Trust does not endorse or recommend any products, investments or services mentioned in articles provided by external parties. The views and opinions are those of the individual as at the date of publication and do not state or reflect those of Alliance Trust. Laws and tax rules may change in the future without notice. The information here is our understanding as at February This information takes no account of your personal circumstances which may have an impact upon your tax treatment. This is not a recommendation to buy or sell investments and is for information only. Morning, welcome to the FT's live Q&A on Isas. I'm Elaine Moore, the FT's deputy personal finance editor and I'll be hosting today's event. Before we ask our experts to start answering your questions here's a bit of background reading that explains why Isas are now the UK's favourite savings product: In praise of ISAs. Here's a chart showing the number of Isa subscriptions in recent years - see how much more popular cash accounts are than stocks and shares.

2 I'm keeping an eye on Twitter to see what questions are coming in for our experts and spotted this comment "Looking forward to #FTisa I'm in one of those moods..." Question is, what is an #FTisa mood? Ok, there are so many questions coming in already that we'd better get started. First one is nice and broad. Comment from Patrick, London I have not reached the limit on my cash Isa, but want to open a stocks and shares Isa to get a higher return. Is this a good idea? Anna Sofat, wealth adviser and director at Addidi Wealth, why don't you take this one. This will depend on the purpose for your saving, the time you can leave it invested and your attitude to risk. Stock & Share Isas are a good vehicle for medium to long term savings and so you should not invest any funds in stock and share for less than a 5 year time period. Patrick Connolly, certified financial planner at Chase de Vere, anything to add to that? It's often a good idea to invest in both cash and stocks and shares Isas. Part will be secure and part will give you the opportunity for better returns - but with more risk. There are a lot of questions from investors confused about the rules on stocks and shares Isas, but let's get some basics out of the way. Patrick, can you explain the investment limits on both cash and stocks and shares. The Isa contribution limits change each year in line with the tax year. For the 2013/14 tax year the full Isa allowance is 11,520, of which half, so 5,760 can be invested in cash. From 6 April the limits rise to 11,880 and 5,940 respectively. Ok, another question Comment From Anon Given the charges involved, how much do you have to be saving a month for a Stocks & Shares Isa to be worthwhile?

3 this will depend of what charges are being levied for: 1. transactions many platforms these days do not levy any charge for buying and selling although some, especially DIY platforms do and these are often subject to certain minimums. 2. by the funds you invest there used to be an initial charge of upto 5% but most funds now have clean share classes with no initial charge so you should shop round if you are levied a charge. 3. your financial adviser many advisers charge a fee on every contribution you make but others will set up a regular Isa for you without an on-going initial charge. So in theory it should be possible not pay any cost for investing on a regular basis, in practice you may have to pay between 1-3% Most Isa charges are percentage based so this can be cost effective even if you don't have much to invest. Some investment providers will accept as little as 10 each month. This brings up the sensitive issue of charges.. something that a lot of people are asking questions about on Twitter. I guess a lot of people are paying a lot more than 10 a month. Comment From Anon Should I have to pay an admin charge on my Isa? Does every Isa provider add on this fee? To be clear we're talking about stocks and shares here - you don't ever have to pay for a cash Isa. Anna, any thoughts? For stock & share Isa not every provider levies an admin charge but its better to look at your overall costs and see if these are reasonable rather than look at admin costs in isolation. There should be no explicit charges for cash Isas. Patrick what admin are investors actually getting for their money? Admin is a bit of a vague term. For stock & share Isa not every provider levies an admin charge but its better to look at your overall costs and see if these are reasonable rather than look at admin costs in isolation. There should be no explicit charges for cash Isas. Patrick what admin are investors actually getting for their money? Admin is a bit of a vague term. Admin is a vague term and not usually used. You typically pay three ongoing charges - the charge for the investment company to run your money this will include dealing charges, the charge for any platform on which you hold the money and then any costs you pay to your adviser or execution-only broker. Ok, so if you take the 3 charges together can you give our readers an idea of what per cent they can expect to pay each year? For the platform, you can expect to pay % pa; the fund will be c0.2%-0.75% and adviser 0.5-1% pa so total of c1.5%-1.8% max Question here about the benefits of cash v stocks and shares - something readers thinking about charges will be concerned about. Comment From OJMK What are the pros and cons of putting additional cash into a stock and share Isa instead of a 5% current account.

4 OJMK - where are you earning that 5% from?? That's pretty impressive from a cash account. Cash will protect your money in absolute terms but not necessarily in real terms after the effects of inflation (though inflation does seem to be falling). Stocks and shares can provide better returns but with more risk. 5% is a very good rate for a cash Isa. You'll need to check the terms and see how much more you can invest. You then need to weigh that up with the risk/return of investing in stocks and shares. Ok, enough about charges - let's go to saving for your kids. There's been a rule change that means parents with a child trust fund can put the money into a Junior Isa next year - something a lot of people are pleased about. Comment From Anon I want to save money for my children but concerned that they will spend it all when they turn 18. Can I have any control at all over when/how they get the money in a junior Isa? Good question. What to do if you're worried your child will spend all that hard saved money on motorbikes and nights out... No. When the child turns 18 the Junior Isa will become an adult Isa and the child will be able to access their money. This means they could, in theory, take all of the money out and spend it however they want. If it s a junior ISA then the child cannot access it until 18; however 16 year olds are allowed to open a normal Isa and this is available to them from age 16. If you're worried about a child accessing their money at age 18 the simple answer is to not invest too much in Junior Isas. You can look at other areas which give you more control - but you might have to pay tax on any income or gains. Like a pension for your child? No. Like a unit trust or investment trust savings plan in the name of the adult or the adult using their own ISA allowance. This approach gives you total control of the money - but if selecting a savings plan you might have tax to pay, if using your own ISA allowance then you'll be using that up. Comment From Jon What are the rules on grandparents setting up Isas for their grandchildren? Junior ISAs must be opened by a parent or guardian with parental responsibility for the child, or by the child themselves if they re aged 16 or over. This person is known as the registered contact. This is the only person who can give investment instructions for the Junior ISA. All communications related to the account will be sent to the registered contact. However, once it is open, parents, friends and family, including grandparents, are able to add to the Junior ISA subject to the overall annual contribution limit. Comment From O Can a junior isa be transferred to a sibling before they reach 18?

5 Grandparents do set up ISA but the parents control these so many of my clients will set up a normal unit trust but designated for the grandchild which is quite tax efficient. No. An Isa or a Junior Isa cannot be transferred to another person. Given the interest in child isas, it would be good to a group / family ISA product being introduced into the market! Speaking of families, a question just through on about passing on your Isa. Comment From Mick M Can an Isa be transferred upon death? Pensions, of course, cannot be transferred. So what about Isas? Your Isa will end on the date of your death. There is no tax to pay up until that point. The Isa manager will either sell the investments and pay the proceeds to your personal representatives (or a beneficiary of your estate) or transfer the investments directly into their hands. Isa investments will form part of your estate for inheritance tax purposes. Last question on families. Comment From James M Can a partner/wife pay into my stocks and shares Isa? James M obviously has a very generous partner/wife. Yes she can but obviously she loses any rights to funds! What do they need to know? Just the account number? Enough about the rules, let's move on to WHERE to invest your Isa. Here's a question I bet a lot of people have. Ruth, take it away. Comment From Ruth I have always subscribed the maximum to a cash Isa each year, however, with rates being so low and some extra money available, I am toying with opening a stocks & shares Isa. I have looked into this before, but find the area really quite confusing. My appetite for risk is fairly low but I would welcome some easy ideas of where to put some money. Stocks and shares Isas can be daunting if you've never invested before. You're right about cash rates - it's difficult to find accounts paying any more than 2% per annum. Unless you lock your money away for a long time, right? You can get a rate of 3% per annum over 5 years through the likes of Skipton and Virgin Money.

6 For cautious investors, there are two choices if you want a stock & share Isa - you seek advice and get a low risk portfolio put together yourself. Or you opt for a multi-asset type fund such as Standard Life Absolute return fund which has a keen focus on the downside whilst aiming for 3-5% returns pa. Comment Where do you see as the best sectors to buy funds in over the coming year? I wish I knew. Over the long term equities should outperform. However, they've gone up quite a bit over the past 2 years so could be due a more difficult year. Last year, the most popular theme was UK equity income. You can read about it here: Big themes for your ISA I quite like Europe equities still and technology for more higher risk investors. It is often best to look at the areas which have under-performed, so maybe emerging markets or Asia. However, these are high risk and might go down more before they go up. Comment From Katharine McKiernan: Can I invest in different asset classes with an Isa? Yes you can - you can invest ina ll asset classes via an ISA. much will depend on your needs and attitude to risk. Diversification really works over the longer term so I would stick to the basic rules round diversification. And a related (sort of) question. Comment From Randomdude can you have more than one investment Isa at the same time? (love that user name) You can only invest in one investment ISA in each tax year, but you can pick a different one each year and can also transfer previous year's money in different parts. A lot of questions about income. Real returns have been hard to come by for cautious investors If you're using a fund supermarket or platform you can invest with many different investment companies in the same Isa. Comment From James M Are there low risk trackers that allow me to just leave my money alone for a year, without having to check the markets all the time? Income is hard to come by - equity income funds and high yield bonds do provide decent levels of income but come with a healthy risk warning now. Property funds are now worth a look. Trackers allow you to leave your money alone and not need to check on it too regularly. However, trackers usually track stock markets and so they're risky - so it makes sense to keep an eye on how it is performing. Comment From Justin

7 I usually invest in new Isas at the start of each tax year. I am already fully invested for 2013/2014 with half in a cash Isa and half in stocks & shares Isa. How often would you recommend I review my holdings? Both for the interest rate on the cash Isa and the returns on holdings in stocks & share Isa. FT Money editor Jonathan Eley was told you should spend 10 hours a year. Hmm. Wonder how many readers are doing that. I'd guess... none. Some people review their investments too much and some not enough. A broad rule of thumb of every six months is sensible. What should you look for? Is it performing as you expected? If not why not? How is it performing compared with other investments and why? Will performance change and so do you need to make any changes? There's a bit of a battle going on over Isas v pensions. One of the key for me is whether the fund is performing in line with its aims and objectives ie is it doing what it says on the box! Comment From Womble Should I be maximising my Isa allowance or putting more into my pension? I don't have much disposable income - but equally not many foreseeable large outgoings, and a healthy Isa pot for a rainy day fund. For most people the best approach for long term savings is a combination of pensions and Isas. Pensions provide initial tax relief but are inflexible. Isas can also be tax efficient but with far more flexibility. The best mix for you will depend on the flexibility you need. I would strike a balance between the ISA and pension - its important that you are making provision for your retirement (c5-10% of earnings in your 30s would be ideal). Ok, last 10 minutes - let's get uber niche... Comment What about alternative lending such as FundingCircle? Funding Circle is a peer to peer platform, where you lend money to individuals or businesses. One of my personal favourite topics. Get your poll votes in. We'll be closing them shortly. I think they are worth a consideration for investors who have large savings and they can take a view. For smaller investors I would stick to well tried platforms ZOPA where you can earn higher interest by lending. Buyer be aware in this space. You can read more about p2p and Isas here: Osborne set to announce tax free treatment for peer-to-peer lending Comment From Dennis

8 Should I consider & make plans to move my Isa away from a Scotland based platform in the event of a yes vote. The FT has been looking at all of the issues connected to Scottish independence recently and it's clear there are a lot of uncertainties for individuals, especially when it comes to their savings. Not yet. We have many Scottish clients who are concerned about the independence vote. However, even if there is a 'yes' vote there won't be changes overnight and so there should be plenty of time to make any changes that become necessary. Comment From hatcheri An Isa cap of 100K has been talked about. How likely is this? I would not be surprised given the pressures on publc purse and the fact it will mostly impact on bigger savers. However, I think it would deeply unpopular and likely to deter people saving. That's all the questions we have time for - time to let our experts rest their typing fingers. Let's take a look at the snap poll results. Have you invested in AIM-listed companies through a stocks and shares Isa - Yes 11%, No 89% That's not surprising. Aim shares are not recommended for ordinary investors. That's sensible. Direct exposure to AIM shares for anything but a very small part of a portfolio isn't a good idea for most people. Do you invest in a cash or shares Isa? Cash 27% Stocks & shares 47% Both 27% In the general population cash Isas are fair more popular - this result says something about the sophistication of FT readers. This is good as most people should be saving via an Isa whether its a cash Isa which can be used for day to day savings or a stock and share Isa for longer term saving. 100% yes would be fantastic! As if we needed reminding how sophisticated FT readers are. Do you currently have an Isa for the 2013/14 tax year? Yes 79% No 21% I guess those No votes will be planning to invest over the next few weeks. Hopefully so. If people can afford to invest then Isa are a really good way to do it. You can invest for this tax year right up to the last day (5th April 2014) How much do you invest in your Isa each month? Under 100 (14%), Between (29%), Between (7%), Over 500 (50%)

9 This is very positive and shows many people are using their full allowance. Regular premiums are a great way for many people to invest - especially if they're looking at riskier areas. Well done FT readers! Do you plan to invest the maximum 11,520 in the 2013/14 tax year? Yes (71%) No (29%) Oh! I'm surprised by this. More good news. Keep on investing/saving... Do you currently invest in a Junior Isa? Yes 11% No 89 % Last one. Either a lot of readers are footloose and fancy free - or they're unimpressed by Jisas. I'm investing into a Junior Isa for my son. Many of my clients are using JISAs for their children and grandchildren - it would be great if we can use these to educate the children themselves before they reach 18! That's it - like all the best live shows we've run over our allotted time. Many thanks to everyone who submitted questions in today s Q&A, and to Patrick, Anna and Elaine for answering them Alliance Trust does not endorse or recommend any products, investments or services mentioned in articles provided by external parties. The views and opinions are those of the individual as at the date of publication and do not state or reflect those of Alliance Trust. Laws and tax rules may change in the future without notice. The information here is our understanding as at February This information takes no account of your personal circumstances which may have an impact upon your tax treatment. This is not a recommendation to buy or sell investments and is for information only.