Individual Savings Accounts

Consider your options before the fast approaching deadline

If you are thinking about taking out an Individual Savings Account (ISA) or using up any unused allowance, time is running out if you want to meet the 5 April 2008 deadline. With the equity markets going through a period if turbulence if are concerned about allocating your full ISA allowance to equities, there are other strategies you may wish to consider. One is to split your ISA allowance between cash and equities, investing up to £3,000 in a cash ISA account and up to £4,000 in a stocks and shares plan. From this April, the overall ISA allowance increases to £7,200, with a maximum £3,600 allowed in cash. ISA rules will also be simplified from April, removing the distinction between mini ISAs and maxi ISAs and bringing personal equity plans (PEPs) under the ISA umbrella. The biggest change is that cash ISA savers will for the first time be allowed to switch accumulated cash ISA savings into stocks and shares, although you cannot switch equity investments to cash. If you are a first−time equity ISA investor you may wish to consider choosing a defensive equity income fund. If your risk reward profile is higher and you don’t know which assets to invest in a multi−asset fund could provide you with a diverse range of investments that includes property and commodities, shares and gold. Capital−protected products offer another route to peace of mind when stock markets are turbulent, although there is less to gain if shares start to move ahead.

Managed funds, particularly emerging markets, commodities and cash funds are also another consideration. Alternatively, regular savings, rather than investing a single lump sum, is another method to investing a consistent amount at regular intervals. You can gradually drip−feed into the market regardless of the price on any given day. This is known as pound cost averaging and can help smooth out the effect of market turbulence. Nobody can tell for sure whether an annual lump sum will perform better than regular investments, but you can be sure regular investments will give you a lower risk profile. Another option is to open a cash ISA plan initially and then buy shares or funds when market confidence returns, or drip−feed purchases over time. A self−select ISA, where you can pick any share or fund you want, consistent with the rules of ISA investing, is one way of achieving this. Although the cash will receive interest while you wait, it will be subject to tax at 20 per cent, as if it were held in a non−ISA savings account.

Levels and bases of, and reliefs from, taxation are subject to change.