Tom McPhail, of independent financial advisers Hargreaves Lansdown said: “Investors are right to be nervous. The combined pressures of the Western sovereign debt crisis, ongoing political instability in North Africa and the Middle East, and now the tragic natural disasters in Japan all mean that it is impossible to view investment prospects with any certainty or indeed confidence.
“Nevertheless, investors should not let this situation deter them from taking advantage of their tax breaks. The £10,200 ISA allowance cannot be carried forward and failure to take up these allowances now will mean paying more tax later.”
According to research from Fair Investment Company, a couple who have both invested their full ISA allowance since the tax-efficient savings vehicles were launched in 1999 could have a nest egg of more than a quarter of a million pounds.
"If an individual had invested their full allowance into a stocks and shares ISA each year since 1999 - £7,000 until 2007, £7,200 from 2007 until 2009 and £10,200 in 2010 - they would have invested a total of £87,600," explains Julie Smith, savings analyst at Fair Investment Company.
"Assuming growth of 7.00% a year, net of charges and not taking account of inflation during this period, the gain on this investment would be £50,282, creating a total pot of £137,882. If their partner had done the same, the result is more than a quarter or a million pounds sheltered from the tax man."
Know the basics
Until 5 April 2010, everyone over 18 years of age can save up to £10,200 in ISAs, of which £5,100 can be in cash, and the same amount in stocks and shares, or you can invest the whole lot in stock and shares. At the start of the new tax year on 6 April, you will be able to invest £10,680, of which half can be in cash, or again you can invest your full allowance in stocks and shares.
If you are considering using your stocks and shares ISA allowance before the end of the tax year on April 5, remember that it is vital to take a long term view, usually at least five to ten years.
Philippa Gee, investments spokesperson at moneysupermarket.com, said: "The thought of taking out a stocks and shares ISA might seem daunting to a lot of people, but in fact they are a great option for anyone who has some money to put aside - not just experienced investors or those who have a large amount of money to invest. There are significant advantages to keeping savings away from the taxman and there are plenty of funds to choose from, so whether they're seasoned investors or just dipping their toe in the water, most savers can find a product to suit them.
"Investing in equities can be extremely flexible and anyone looking to put money aside, whether they're planning for retirement, saving to fund their children's university costs or looking to build the deposit on a property, can find a product that suits their circumstances.”
Start with investment areas you are familiar with, such as the UK. One option might be to go for a tracker fund, which as the name suggests, follows a particular stockmarket index, such as the FTSE 100 Index of Britain’s biggest companies.
Once your confidence grows, you can consider other areas later on, such as Europe and or riskier emerging markets.
Build a balanced portfolio
When building your portfolio, don’t pile all your money into one asset class. If you do, you are at much greater risk of losing everything if something goes wrong with that particular sector.
The technology bubble, and the fact that it subsequently burst, demonstrates why it is much better to spread your investments over several different investment and geographical areas to help limit your losses if markets suddenly drop.
You should diversify your investments between the four main asset classes – cash, fixed interest securities, property and equities – to help reduce the overall level of risk. You can either choose funds within these different asset classes, or you can make use of a managed portfolio.
Managed funds come with different risk profiles to cater for everyone from the very cautious to the very adventurous. Fund managers publish information about the underlying asset allocation of a fund, so request to see this.
moneysupermarket.com has launched a stocks and shares ISA channel which allows first time and inexperienced investors to select their own funds. There are select lists of funds for all preferences; whether low cost, income, ethical, lower risk, medium risk as well as higher risk with the aim of helping customers who are put off by a choice of thousands of funds.
All initial funds charges in the lists have been discounted to 0% and the ongoing total expense ratio (TER) has been capped so initial funds are not swallowed up in charges. Investors also have access to over 1,500 funds if they have something specific in mind.
If you are uncertain about which are the best investments to suit your individual circumstances, then you should seek professional independent financial advice.
Whatever your attitude to risk, you should always make sure you keep some of your savings in an easy access account, so that you can get access to it in the event of an emergency. Experts recommend keeping a savings buffer of three to six months’ salary in place.
One of the things many potential stocks and shares ISA investors most fear is putting their money into the stockmarket only to watch it plummet soon afterwards. It’s never possible to know exactly the right time to invest, but you can help smooth out stockmarket volatility by saving regularly rather than investing a large lump sum.
For example, if you drip feed money into the stockmarket at £50 a month, it will buy more units or shares when prices are low and fewer when they are high. This process is known as ‘pound cost averaging.’
If you are worried about investing your full allowance in the stockmarket now, many ISA providers enable you to put your money into a cash fund and then drip feed it in later on.
For example, Fidelity offers a ‘Cash Park’ where investors can put their ISA allowance for this year while they decide which funds to invest in. The standard rate of interest on Fidelity’s Cash Park is fixed 0.4 per cent below the Bank of England bank rate before tax, so don’t leave your money languishing there for too long.