Although another TLA, an ISA is your friend

Sunday, 17th August 2008 12:02 - by Resident IFA

TLA’s…don’t you just love them?! If you don’t know what a TLA is, I am referring to the infamous ‘three-letter abbreviation’. Please keep a look out for these in everyday living - we had JFK and the GLC (random!), and now I can immediately think of them in everything from food (MSG) to personal ads (SWF) to education (SAT) to text language (LOL) to a great website…LSE if you weren’t already there! An ISA, or Individual Savings Account, sits nicely in this not-so-exclusive club, being the tax-free savings/investment allowance the Government provides each UK tax-paying resident with. Currently, the limit is £7,200 in each tax year. This can be split into putting a maximum of £3,600 into a Cash ISA, and the residual allowed into an Equity (Stocks & Shares) ISA, or the full £7,200 invested into an Equity ISA, thus negating a Cash ISA. Essentially, an ISA is just a wrapper protecting a savings account or collective investment, i.e. an OEIC (4-letter TLA!) a.k.a an Open-Ended Investment Company fund, from income or capital gains tax (CGT…that’s better!). This is the reason I say an ISA is your friend. Surely, any allowance for tax-free saving or investing is positive…as we all perceive we pay far too much tax anyway? So, it is a good shout to make sure you use this valuable allowance where feasible. Some of us aren’t lucky enough to have lump-sums to contribute to ISA’s in every tax-year, but you can get the same tax breaks by saving regularly. For example, if you saved £100 per month for 10 years into an ISA account with 0% interest (unlikely!), you would have amassed £12,000…not bad for a consistent approach. Many people who utilise their ISA allowance by contributing a lump-sum leave it until the last minute to do so – perhaps between late March and April 5th. This always makes me question why, if you have the resources to use an ISA, leave it so late in the tax year? Why not invest a third of the way into the tax-year instead i.e. now? None of us know where the ‘bottom’ of the stock-market is, but we do know that the Banks and Builders have taken a fearful hammering lately, the FTSE being approximately 18.94% down (5,454.8 from 6,730.7) on Friday’s close from its 52-week high. So, investing via an ISA is not only tax-efficient, but some value in what you invest in (excluding Cash) could be had at the moment when you consider the queasy state of the markets. As a final thought, by my calculations, if a Couple had managed to save/invest their full PEP (Personal Equity Plan – the ISA predecessor) and ISA allowances since 1997, they would have £356,400 in an environment free from Income tax and CGT…and that is without any interest or capital growth those monies may have seen since. Not bad, eh?! Until next time…