ISAs: a simple way to save
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Saving with an ISA needn't be complicated, says Peter Sharkey – in fact, it's as easy as ABC.
As this column highlighted last week, we've reached a time of the year when some companies make a big fuss about investing.
Why? Because it's 'ISA Season', the financial sector's equivalent of Black Friday, Super Saturday and Magnificent Monday combined. Prepare for more than a month of reminders telling us that we must have an ISA; that we must not lose our 2018-19 allowance; that we should at least open a cash ISA for the time being – oh, and that we can invest up to £20,000 in an ISA.
Millions of people are put off by that final prompt, not least because few folks happen to have a spare £20,000 knocking around which they would like to invest.
Accordingly, too many people give ISAs a body swerve, believing them to be too complicated, or perhaps concluding that they don't have enough money with which to open one. Some people think that if they open an ISA, they must complete a tax return; others have taken questionable advice from that bearded guy in the pub who suggested they're not worthwhile unless you have millions in the bank.
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All of this is nonsense. Let me explain.
Yes, your annual tax-free ISA limit is £20,000, but you may not have £20,000 to hand right now. It doesn't matter; you can actually open an ISA with £25. But why would you?
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The simple answer is: you receive an attractive tax break as soon as you open an ISA. Every penny you put into your ISA and all of the growth you enjoy with your money invested in one is tax-free. There's another reason: investing over the long term, perhaps starting with just £100 a month, can have enormous benefits.
For example, let's say you invested £100 a month into a stocks and shares ISA (of which more later) for the next 15 years and enjoyed annual returns of 5pc. At the end of the period, you would have an ISA fund worth £26,728.89. Not a bad return on £23 a week and proof that you don't need to be a millionaire to start an ISA. It's also worth noting that if you saved £250 a month over the same period and enjoyed the same returns, your fund would be worth £66,822.24.
You may be thinking, 'Sounds attractive, but aren't ISAs complicated?'
Well, only if you call filling in a form, usually online, complicated.
You do not have to fill in a tax return after you've opened an ISA, though you will need to decide which type of ISA you require.
For the time being, let's ignore Lifetime ISAs, Innovative Finance ISAs and Help to Buy ISAs, only because there are conditions associated with opening each, and concentrate instead on Cash ISAs and Stocks and Shares ISAs.
You can actually invest in both a Cash ISA and a Stocks and Shares ISA. Many people do, mindful that Cash ISAs are lower risk, whereas Stocks and Shares ISAs tend to carry a higher risk, primarily because their returns are dependent on how individual shares or funds perform.
Stock markets can be volatile, although once you've opened a Stocks and Shares ISA, you may then choose to invest in a 'cautious' portfolio of lower risk funds. Such funds usually comprise a mix of stable, well-established companies that have enjoyed steady growth over a number of years. Their profits and dividends reflect this, but as they have been around for a long time, they're less likely to enjoy prolonged spurts of spectacular growth as might be the case with a small, tech company which happens to have developed a must-have app.
In other words, while you may use your ISA to provide exposure to a series of cautious investments, it's also possible to opt for an 'adventurous' portfolio of funds focusing on new technology or renewable energy (yes, your Stocks and Shares ISA can invest in specific 'green' and 'ethical' funds too).
Before the end of the current tax year (April 5), readers can expect to hear plenty about ISAs, but this doesn't mean that a) they're all good and b) they're complicated investments to be avoided at all costs.
Opening an ISA with twenty-five quid gets the ball rolling. Then all you do is decide upon the level of risk you wish to take – if it's a Stocks and Shares ISA, you may select from cautious to aggressive and everything in between – set up your direct debit, then sit back and relax.
TAM Asset Management Ltd offer investors the opportunity to invest in a variety of ISA portfolios before the end of the 2018-19 tax year. For further details, please visit the MoneyMapp website.
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For more financial advice, check out Peter Sharkey's regular column, The Week in Numbers.