Tomorrow’s easing of lockdown restrictions will be at the forefront of many people’s minds as they plan a mini-spending spree at their local shops.
But canny investors among them will not have forgotten that a new opportunity to invest tax-efficiently in the months ahead has just begun.
One that should be used – despite the lure of the high street – especially if they are keen to continue to build long-term wealth free from the clutches of the taxman.
I’m referring to the Individual Savings Account. Last Tuesday – April 6 – heralded the beginning of the new tax year and with it came a brand new Isa allowance for investors to use (or not).
Star pick: Vietnam is popular with investors as many countries are relocating their manufacturing there away from China and it has a young workforce
In a nutshell, it means that between now and April 5 next year, adult investors (18 and over) will be allowed to invest – or save – up to £20,000 in a plan that is free from both capital gains tax and income tax.
There is also an annual allowance – a ‘junior’ one – that permits savings or investments to be made on behalf of children, albeit lower at £9,000. It is all rather exciting.
It means money can be saved in cash or even better invested anywhere in the world, not just in the UK, but in the US and emerging markets such as Vietnam (an equity market liked by one of our experts below).
It’s a use-it-or-lose-it allowance, which means that any unused amount cannot be carried over into a new tax year. It explains why last month there was a frenzy among investors – helped by calls from Isa providers – to use as much of their allowance before the tax year drew to a close.
Indeed, data from the investment platform Interactive Investor indicates that more people are maximising their contributions than ever before.
Some 1.37 per cent of its customers maxed out on Isas in the last tax year, compared with 1.1 per cent in the year before. With many households cash-rich after squirrelling money away during lockdown, this trend is likely to continue.
Lord Lee of Trafford is one of the country’s most successful Isa investors and an ‘Isa millionaire’ many times over. He believes every serious investor should be striving to build an Isa financial fortress.
He says: ‘For investors, Father Christmas not only comes late on December 24, but also on April 6, when he delivers a sackful of tax-free investment opportunities and new allowances for the year ahead.
‘For those yet to set up an Isa, it’s never too late to start, particularly at a time when you are getting a near-zero return from leaving money in your bank. For those who are regular Isa investors I would urge them to keep investing and use their allowance throughout the year rather than wait until next March when the deadline looms.’
Although most people still use their allowance to take out a cash Isa with a bank or building society, investment Isas (commonly known as stocks and shares Isas) are increasingly popular. This is because of low interest rates making cash Isas unappealing – a point made by Lord Lee.
It is also a reflection of the chance to make stellar long-term returns from an investment portfolio sitting inside a tax-free wrapper.
Investment Isas are provided by a host of companies. There are online Isas run by wealth platforms – the likes of AJ Bell, Hargreaves Lansdown and Interactive Investor. These allow investors to construct their own portfolios from investment funds and shares. Investments can be made on a regular or ad hoc basis.
Other Isa providers include the likes of Nutmeg and Wealthify, which offer ready-made investment portfolios that are risk graded.
For those readers who like to construct their own Isa portfolio, we have asked three leading experts to show how investors could invest their £20,000 allowance in this new tax year
For those readers who like to construct their own Isa portfolio, we have asked three leading experts to show how investors could invest their £20,000 allowance in this new tax year.
The portfolios, built around equal amounts (£4,000) invested in five investment funds, are designed to deliver long-term growth, with an emphasis on diversification. They are not recommendations, but the fund ideas should appeal to many.
Ben Yearsley, a director of Shore Financial Planning, believes equities are the way forward for Isa investors. He’s not keen on bonds, where yields are unattractive and could be undermined further if inflation picks up.
His fund choices reflect the value he sees in the UK stock market and the growth potential of many Asian markets. As a result, two are UK-focused (River and Mercantile UK Equity Smaller Companies and Man GLG Undervalued Assets) and two invested in Asia (investment trust VinaCapital Vietnam Opportunity and FSSA Asia Focus, run by First Sentier Investors). Completing the set is the global fund Blue Whale Growth.
‘It’s a portfolio that is maybe higher risk than those of the two other experts,’ he says, ‘but it would work for lump sum and regular investors looking to make money over both the short and long term.’
On his choice of the Vietnam fund, he says: ‘As a country, Vietnam is a beneficiary of companies relocating their manufacturing operations away from China. It’s got a young workforce with money to spend. This makes it a compelling economic growth story and, in terms of investing, an interesting long-term play.’
Jessica Ayres, a chartered financial planner with Timothy James & Partners, has adopted a more conservative approach. She says: ‘The aim of my Isa portfolio is to diversify across jurisdictions, asset classes and company size in terms of market capitalisation.
‘It also avoids following the herd by just buying current top investment fund picks.’
By this, she means popular funds such as Scottish Mortgage, Fundsmith Equity and Allianz Technology. The result is funds with exposure to bonds (TwentyFour Dynamic Bond), a mix of bonds and equities (Vanguard LifeStrategy 80% Equity), the UK (Crux UK Special Situations), Asia (Veritas Asian) and global markets (Baillie Gifford Global Discovery).
She says the portfolio could be used for both lump sum and regular investors. ‘It’s got a bit of everything,’ she says. ‘The Vanguard fund is diversified and low cost with an annual charge of 0.22 per cent. The Crux fund is a play on UK economic recovery while Veritas Asian offers exposure to areas of the world under-accessed by UK investors.’
She adds: ‘Baillie Gifford Global Discovery is all about investing in the growth companies of the future – something the Scottish firm does very well – while TwentyFour Asset Management is a boutique that only manages fixed income funds. Dynamic Bond is its flagship.’
Juliet Schooling Latter, research director at Chelsea Financial Services, has picked five funds with ‘long-term potential’. Like those of Yearsley and Ayres, they include exposure to the UK (Liontrust UK Micro Cap), Asia (Fidelity Asia Pacific Opportunities) and global markets (Ninety One Global Environment and Axa Framlington Global Technology).
She is the only one to include a US fund: Artemis US Smaller Companies. She says: ‘With the US consumer sitting on approximately a year’s salary, the economy is poised for a considerable boom. Many US smaller companies should do very well as a result.’
As I said, these are ideas, rather than recommendations. Check them out. But more than anything else, make sure you use your Isa allowance.
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