Last year the ISA rules changed, but many investors are not sure of how these changes affect them. Everyone can invest up to £7,200 in an ISA this tax year and any income and capital growth are tax free, which makes them a very attractive form of investment planning for consultants.
From October 2009, any individual over 50 sees their allowance rise to £10,200. This increased allowance applies to everyone else with effect from next year for the 2010/2011 tax year.
If a consultant invested the maximum allowance of £7,200 into ISAs each year, over 10 years, they could be worth in the region of £106,048 at the end of the decade, assuming average charges and an annual growth rate of 7%. This can then be taken as a lump sum free of any tax. Consultants often use ISAs as a useful tax-planning tool to boost retirement benefits.
Mini and Maxi ISAs now no longer exist, having been replaced by cash and stocks and shares ISAs. The entire annual ISA allowance can now be invested in stocks and shares. Any combination of cash and stocks and shares can be used, providing the investment into the cash ISA does not exceed £3,600. This rises to £5,100 next tax year when the overall maximum into ISAs increases to £10,200.
Transfers from cash ISAs to stocks and shares ISAs will now be permitted. The correct procedure must be followed when switching ISAs, as you cannot draw the money out and then reinvest it for the same tax year, but you can transfer the ISA to another provider. Any old PEP investments are now stocks and shares ISAs.
Consultants should consider various factors when deciding which ISAs are right for them and if the stock market is the right place to invest. Investment risk, the period of investment and whether income or growth is required are fundamental questions that need addressing.
If investing in the stock market there are thousands of funds to choose from and deciding which funds to invest into can be a minefield. Investors should be aware that investing in the top performing fund one year is not necessarily the right thing to do, as many high performing and headline grabbing funds are extremely volatile and suffer periods of significant loss.
Investing in funds that have clever advertising to draw in the investor should also be avoided. Another pitfall is following trends, as they are often not such a good investment as first thought, as was proved with the technology boom.
Before deciding on specific funds investors should consider what level of risk suits their circumstances. In essence if the market goes down how much of the investment are you prepared to lose and how long are you prepared to stay in the stock market to ride out the volatility. There is a correlation of risk verses reward; the greater the investment risk the greater the potential return.
Consultants should also consider diversifying their risk and not invest everything in the same investment company, fund or possibly even the same type of asset. It is not necessary to invest in equities to invest in an ISA.
The stock market can be a volatile place to invest as has been evident over the last year, where we have seen the FTSE 100 index fall by 24%; however within that period we have also seen periods of sustained growth in excess of 30%. This is where time also becomes a factor, if an investment can be left to ride out these downturns and given time for the value to rise again, then the volatility may not have any significant effect on the investment. It is important to remember that no money has been lost and no growth has been gained until an investment is surrendered.
Trying to second guess the market can be a high risk strategy, investing when the market is low is of course a good idea however we only know with the benefit of hindsight whether the market falls further. Investing on a monthly basis buys units at a different price every month, thereby averaging out the cost of the investment over its term. As the markets are still relatively low, investing in a stocks and shares is still considered a good opportunity for most who are prepared in invest for the medium to long term.
Once all the facts have been established it narrows the investment choice and will be easier to find an appropriate investment. For example, a low risk investor who does not want to risk losing their capital should not consider investing in the Japanese smaller companies sector, but may well consider a cautious managed fund. Once the risk profile is established appropriate funds can then be sourced, ensuring that these funds have a consistent track record in performance, with solid independent industry ratings and an experienced fund manager who matches the particular investments objective. Seeking qualified advice is always prudent.
Justine Roberts can be contacted at justine@medicalandfinancial.com or visit www.medicalandfinancial.com