Six common ISA myths dispelled
1) ISAs are risky – FALSE
An ISA isn’t an investment, it is just a “wrapper” that money is kept in to protect it from the tax man. Other examples of wrappers are SIPPs and pensions. Think of an ISA as a box that prevents the tax man being able to touch your investment returns. Any risk comes from the investments that you have chosen to hold within the ISA, not from the ISA itself. Whatever you decide to invest in, cash, shares, bonds, an ISA should always be the first place that any non-pensions savings go.
2) The financial markets are volatile so I don’t know where to invest; I may as well not do an ISA this year – FALSE
If the attractive returns of stocks and shares ISAs appeal but investors are unsure as to where to invest the money then you could use an ISA Cash Park. Investors can simply ‘park’ the money and decide later where to invest later. That way, the ISA allowance is held without being forced into an immediate decision of where and when to actively invest the money.
3) Investing in an ISA means I need to fill out a tax return – FALSE
Any tax savings happen automatically within the ISA and ISAs do not have to be recorded on your tax return. You do not even need to tell your HMRC office (the taxman) that you have an ISA.
4) Investing in an ISA means that my money is locked up – FALSE
There is no minimum term for which the investment must be made and the tax advantages start on day one when investing in an ISA. It is always possible to gain easy access to whole or part of your savings, subject to any specific restrictions that may be imposed on a particular ISA product. If you withdraw money from your current tax year ISA you will lose that part of your allowance.
5) It is best to wait until the end of the tax year to do my ISA – FALSE
The tax advantages of an ISA start the day that the money is invested so by investing earlier in the tax year you gain more potential advantage. As soon as this year’s allowance is invested, it will start to receive its tax-boost but the longer you delay investing throughout the tax year, the smaller the boost it will get in this year. By delaying your ISA investment when you don’t need to you are simply agreeing to give the government some of your investment return over a number of months.
6) It is best to follow the crowd – FALSE
Once you see a bandwagon it is too late! Usually when there is a popular trend it means that a bubble is forming, it is best to remember your own needs and individual circumstances are different. Ask yourself when you will need the money? How much risk you are willing to tolerate? How involved you want to be in the investment? One way is to use online tools to help you make investment decisions, consult expert tips or if you don’t want to worry about monitoring your investments consider a multi-manager or multi-asset fund where the portfolio manager picks the asset classes and sectors with the correct weighting aiming to bring steady returns.
Tom Stevenson is investment director at Fidelity Worldwide Investment