For a lot of people there is a lot of confusion around ISAs, what they are, and where to invest your money. So, Danny Cox, from the independent financial advisor Hargreaves Lansdown, is with me to explain and hopefully help you make the right decision.
Q1: Danny, if we start off with the simple questions, could you just briefly explain what an ISA is and why it’s so valuable?
Danny Cox: Well an ISA is so valuable Clare, because simply what is does is protects your savings from tax, and if you pay less tax your savings are going to make much more money, compared to other taxable investments.
So, they call it a 'tax wrapper', so it’s protecting your savings and investments - you pay less tax so therefore get a better return.
Q2: And how much can you invest?
DC: You can invest a maximum of £7,200. If you are 50 this year, you can invest £10,200, and within that, part goes to cash and part goes to stocks and shares.
If you are paying in £7,200, you can pay in £3,600 to cash; if you are able to pay £10,200, you can pay £5,100 in to cash. And from next April, everybody can pay £10,200.
Q3: And so the cash element is 50% of the total allowance, so if you want to take advantage of your full ISA allowance, it’s going for stocks and shares ISA, isn’t it? And I think this is where some people get a little bit nervous because obviously, cash is deemed to be safer, because the value your underlying investment is safe, but with stocks and shares, obviously that value could fall as well as go up.
So how do people decide what’s the best option for them?
DC: I think for most people it’s a very important question. I think for most people they need to build some cash and have some cash behind them, and for that cash ISA is perfect, it’s a tax free bank account or a tax free building society account, you can draw your money, normally, at anytime that you wish.
For longer term savings, if we look at the impact that inflation and rising prices has on your savings, then stock markets, traditionally, have performed better, and your savings have actually gone up better in value then in cash.
So if you can afford to take some risks and you are happy for a long term investment, perhaps 5 years plus, then a stock market ISA will probably give you a better return, there will be some ups and down in between though.
Q4: So if you have never invested in shares before, where do you start?
DC: Well, I think the best place to start Clare, is to start with the UK. Investing money in a UK fund, you can start your stocks and shares from as little as £50 per month as a regular savings or perhaps a £1000 as a fund.
Start small, look at the UK, and as you build your confidence and build your savings, then perhaps look to more overseas markets, perhaps Europe, perhaps emerging markets, but remember that stocks and shares investing, you need to give it time, you need to give it at least 5 years, and in fact if you start to invest overseas you probably need to give it nearer 10 years.
Q5: But, if you are at all unsure and aren’t confident that you are making the right decision, rather then regretting it later, its well worth taking some advice isn’t it?
DC: Yes, I think you are right Clare, first of all people should be doing their homework, so look at some research, look at some websites, try and understand a little bit more about what you are investing in, but if you are unsure, take some advice from an independent financial advisor.
Q6: But, the key thing is, whether its cash or stocks and shares, use your ISA allowance, because if you have used it every year since ISAs where introduced in 1999, you could have sheltered, I think it’s just under £80,000, couldn’t you?
DC: Yes, it is about £80,000, but if you go back further, if you go back to 1987, if you had used all of your old PEPs – which where the old name for ISAs – your old TESSA allowances and your ISAs allowances, its £174,000 that you could have set aside and sheltered from tax. That is a huge amount of money, but importantly it’s making sure you are not paying tax on your investments.
The tax you pay on your investment reduces the return that you get. If you think about your cash ISA, for every pounds worth of interest you are getting a pounds worth of interest, where as, if it was in a standard bank account, you are only getting 80p, and if you are a high rate tax payer, you are only getting 60p, so its so important.
Clare Francis: Brilliant, thank you Danny.
Danny Cox: Thank you.