2nd January 2019

Tax advantaged investing with your ISA

The annual ISA savings allowance has risen steadily, and now, up to £20,000 per person can be invested each tax year.    It is also possible to reinvest previous ISA savings without eating into this allowance.

As well as putting lump sums into an ISA you can also make monthly savings.  Even smaller savings can grow into a useful sum.

There are two main ISA categories; cash and investment.

Cash ISAs are usually found in the high street, available through banks and building societies.   Your money is held on deposit and you are paid interest.  The interest rate is usually quite low, 0.75-1.5% is typical.

Compare that to, say, an investment ISA, which invests in stocks and shares. This can earn dividend income and also capital appreciation if the underlying investments increase in value.

Investment ISAs, are available through financial advisers like ourselves.  They invest into stocks and shares and other financial assets, typically using a range of investment funds.

Investment funds are collective saving schemes which pool money so that it can be actively managed by a team of professionals.

There are hundreds like this, all with their own characteristics and objectives.   Providing recommendations on and investing into these kinds of funds is one of our core activities.

RNS Financial Advisers is fully independent which means it can invest into the top funds without any bias.

The case studies we have included show some of the ways ISAs and financial advice can benefit you.

To discuss making any investments please contact the office who will be able to arrange an initial meeting free of charge with one of our financial advisers.   They will be happy to provide advice on investments, pensions, and life insurances, for you, your family and your business.

Case study – John has £10,000 in his current account, £40,000 in a savings account, and £30,000 in an ISA account, with his high street bank.  He does not have an account manager at the bank anymore and there has been nothing done with the accounts for some time.  A review by RNS highlights that he has unused tax free ISA allowances and that the ISA has been neglected and fallen into a ‘zombie account’ earning just 0.1% interest.

We transfer the £30,000 from the existing ISA into a new account, and add an extra £20,000 for the current tax year, meaning he has £50,000 in tax free accounts instead of £30,000.  And to get a better potential return the money is invested in a fund that matches the clients attitude to investment risk with the aim of providing better investment returns than a deposit based product.

Case study – Karen’s business has done well recently and she has spare money each month she would like to save.   She also now has £10,000 in her current account and £20,000 in her savings account and is unhappy that she gets less than 1% interest.

A review by RNS highlights she needs to keep her existing savings instantly accessible for emergencies or slow months in her business.  We advise that an investment ISA would not be suitable for these savings and unfortunately a low interest rate is inevitable for short term balances.

However, with the spare £250 per month we recommend and set up an ISA investment account paid into each month by standing order.

Because she is investing every month she is not concerned with short term fluctuations.  She expects her investments will average out over time and wants to focus on long term growth.

We invest her premiums into a portfolio of five investment sub-funds, group together in a ‘wrapped’ account, meaning she is invested in growth stocks and shares in the UK, Europe, America and China.

Case study – David has saved into ISAs with his high street bank in the lead up to his retirement.   Now he has retired he has time to review his finances and finds he has a total of £100,000 spread across several ISA accounts at the bank and £30,000 in his current account.

With a total of £130,000 at the bank he is aware he has deposited more than the £85,000 compensation scheme limit would protect.  In addition, he has £53,000 in an old stocks and shares ISA, originally a PEP from years ago.

A review by RNS confirms he is over the limit for protection with the Financial Services Compensation scheme, but that would only be an issue if the bank was to become insolvent.

David feels, regardless of this, he has too much deposited with just one bank and also the interest rates on all of his old accounts have fallen and there is no income being generated to help complement his pensions.

The review also highlights that his stocks and shares ISA, which has done well in the past, is invested in high risk growth funds.  Now he is retired he is not comfortable with how much the value can fluctuate.

We recommend transferring the £53,000 stocks and shares ISA and £50,000 from his cash ISAs. It pays out to him at the rate of £250 each month as a tax free income to complement his pensions.

The other £50,000 in his ISAs is moved into a new cash ISA.  David is planning to change his car in the next 12 months so it is inadvisable to invest it, because his new investments, even if they are low risk, could still fluctuate from time to time.

Case study – Vince and Laura have started a family and expect they will need to provide a helping hand in the future for their new daughter.    They ask us for advice and have heard about Junior ISAs.

We discuss Junior ISAs but Laura and Steve did not know control of a Junior ISA automatically passes to the child when they turn 18.

They felt this was too young so we recommend an ISA account called a designated account, which is savings earmarked for their daughter separately from their own, but that stays under their control until they are ready to give her the money.

Case study – Ben is the director of his own company and draws dividends each year.   When one of his uncles passes away he receives an inheritance of £75,000.

He wants to invest this money wisely and hopes it will be a long term investment that can grow now and give an income later.

We recommend a portfolio of ten investment sub-funds, grouped together in a ‘wrapped’ account, invested in growth stocks and shares.   The objective of growth stocks is to make money through share price appreciation over time.  These shares do not generate any dividend income so there is no income tax.

£20,000 can be invested into an ISA but the other £60,000 cannot.  It would exceed the annual limit.  But, by using a ‘wrap’ account, we can mirror the investment portfolio in ISA and non-ISA parts of the account.

Then, each tax year, we can switch £20,000 from the non-ISA part into the ISA part, without disrupting the overall investment strategy.

After 4 years, all of the money is now in an ISA.   Then Ben wants an income.  So we can switch into income paying funds and all of the income is tax free because it is now derived from the ISA.

Also, switching the investments does not incur any capital gains tax, even though they have made gains, because ISAs are exempt.

The value of investments are not guaranteed and they can go down in value as well as up and if they go down your investment could be worth less than what was invested.