The Great ISA Myths
As the Isa season cranks up another gear, Fidelity FundsNetwork sets about debunking eight ideas some of your clients may still wrongly harbour about the tax wrapper.
Isas are risky – FALSE: An Isa is not an investment, it is just a ‘wrapper’ in which money is kept to protect it from the taxman – other examples being Sipps and pensions. Investors should think of an Isa as a box that prevents the taxman being able to touch their investment returns. Any risk comes from the investments they have chosen to hold within the Isa, not from the Isa itself. Whatever assets your clients decide to invest in, an Isa should always be the first place any non-pensions savings go.
The tax advantages of an Isa are not worth it – FALSE: Obviously a pound in one’s pocket is much better than in the taxman’s. For every £100 net saved, an Isa can add between £22 and £25 for a basic rate taxpayer and much more for those who pay higher rates of tax.
Markets are volatile so there is no point doing an Isa this year – FALSE: If stocks and shares Isas appeal but investors are unsure where to put their money then they should ‘park’ their cash and decide later where to invest it later. That way, the Isa allowance is banked without anyone being forced into an immediate decision of where and when to actively invest the money.
Investing in an Isa brings the 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 a tax return. Investors do not even need to tell HM Revenue & Customs they have an Isa.
Investing in an Isa means the 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 instant access to whole or part of the savings, subject to any specific restrictions that may be imposed on a particular Isa product.
It is best to wait until the end of the tax year to do an Isa – FALSE: The tax advantages of an Isa start the day the money is invested so by investing earlier in the tax year, your clients potentially gain more advantage. As soon as this year’s allowance is invested, it will start to receive its tax boost but the longer a delay investing throughout the tax year, the smaller the boost it will receive. By unnecessarily delaying an Isa investment, people are simply agreeing to give the Government some of their investment return over a number of months.
To reach financial goals, people must invest a large lump sum – FALSE: The following table shows how much an investment would be worth for someone who invested in a fund that grew by 6% and had a management charge of 1.5% a year and no initial charge:
|Monthly payment||10 years||20 years||30 years|
Source: Fidelity FundsNetwork, March 2012
It is best to follow the crowd – FALSE: Investors need to understand that, once they spot a bandwagon it is too late. Usually when there is a popular trend it means a bubble is forming and they should remember their own needs and individual circumstances are different. When will they need the money? How much risk are they willing to tolerate? How involved do they want to be in the investment?
Important Note: Material within this article has been complied with the help of the Marketing Hub which is part of Marketing In Practice Ltd on behalf of your professional financial adviser. The contents of this document do not constitute advice and should not be taken as a recommendation to purchase or invest in any financial product. The value of a market investment can go down as well as up and you may not get back the full amount, particularly in the short term. Before taking any decisions, we suggest you seek advice from a chartered financial planner.This article is distributed for educational purposes and should not be considered investment advice or an offer of any product for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. Past performance is not indicative of future results and no representation is made that the stated results will be replicated.