By admin Comment • Investment • • 0 Comments

To ISAs or not to ISA

What is an ISA?
The dictionary term is: – “an Individual Savings Account (ISA) allows individuals to hold cash, shares and/or unit trusts tax-free on dividends, interest and capital gains.
What does this mean?
Each
tax year the Government ‘generously’ gives us a tax-free allowance on savings
held within an ISA.
In
July 2014, the Government increased this allowance to £15,000.  The Government has already announced the new
ISA allowance the coming 2015/16-tax year of
£15,240.
Growth
or income from ISAs is tax-free.  You
don’t even need to declare the income you receive on your tax return.
provided
you have not exceeded your allowance for the tax year.
What’s the difference between the different
types of ISAs?
There
are two types:
CASH ISA
A
Cash ISA works pretty much the same as any other savings accounts except the
interest earnt is tax-free.
This
type of ISA is great for someone that wants to be tax efficient, but may need
access to the cash to cover unexpected bills.
Within a Cash ISA your cash remains as cash and can therefore be removed
at any time.  You can add to your ISA but
only up to the £15,000 withdrawn
The
downside to Cash ISAs is that interest rates are still very low.  Cash is an inefficient way to save for long
term goals.
STOCKS & SHARES ISA
A
Stocks and Shares ISA invests your money in other equities such as Gilts and
Bonds to Unit Trusts and Investment Trusts and OEICS a range of stocks and
shares from government stocks and bonds to unit trust and holdings in blue-chip
companies.  It can also hold cash much
the same as a Cash ISA.
Compared
to a Cash ISA, a Stocks and Shares ISA has a higher potential return but with
it comes a greater risk and cash may not be instantly available.  The value may experience fluctuations in
accordance with the market.
A Equity
ISA should be considered as a long-term investment (3-5 years) rather than a
short-term cash holding.  Most often,
this suites people with a little more cash spare or people looking at longer
term savings or goals, as their ISA allows them to invest tax-free in the
long-term, but still leaves them with liquid assets available in case of an
emergency.
Who can open an ISA?
ISAs
are open to UK residents only (Crown Employees).  Cash ISAs can be opened from the age of 16
with Stocks and Shares ISAs from 18.
There
are special Junior ISAs available with some extra rules, if you would like more
information about Junior ISAs, please contact us.
It’s
important to note that ISAs can only be opened in an individual’s name.  They cannot be opened jointly which means
that a couple can have two ISA allowances each year.
ISA Golden Rules
1.
You can only open one ‘new’ ISA of each type
each year.
2.
You have one allowance per tax year, per person.  You can choose to place this all in a Cash
ISA or all in a Stocks and Shares ISA or you can opt to mix and match and spilt
your allowance between a Cash ISA or a Stocks and Shares ISA.
3.
If you fail to use your ISA allowance before the
end of the tax year it cannot be rolled over so once it’s gone it’s gone.
4.
If you want to switch providers for any reason,
no problem, just remember do not remove or disinvest yourself.  Once it has been removed from it’s ISA ‘wrapping’
anything that was within it looses its tax-free status.  Your new provider will do the transfer for
you, which retains the ISA status and does not effect this years’ allowance.
Should
you wish to discuss ISAs or any other element of your financial planning needs,
please call us on 01636 870 069.
By admin Comment • Investment • Pensions • • • • • 0 Comments

The Real Cost of Cash

Why do we use cash so much for our investments? I think the main
reasons centre on the fact that it’s a safe investment.

But that’s not entirely the full picture….
Inflation is eating away at your savings or cash investments
every single day, inflation can wipe out its value just because its sitting in
a bank account.
Why: The Technical bit
The Consumer Prices Index (CPI) is 2.9% the very best Fixed
rate Cash ISA is 2.75% (Virgin Money 2.75% for five years fixed). Even with the
best Cash ISA you’re losing 0.15% each year. It gets worse if your money isn’t
in ISA’s as you’ll pay tax on the interest. The best non ISA savings bond is
3.5% (Skipton 3.5% fixed 7 years) take off tax (20%) you’re down to 2.8%, then
inflation and you are down to a loss of 0.1%.
All the above assumes you are using CPI index not the more
well known RPI which is higher at 3.3%, use this and the figures look somewhat
worse, add in that you could be a higher rate tax payer and the loss per year
is quite startling.
From 2002 to 2012 the total rate of inflation has been
37.80%, between 1992 & 2002 its been 27.22% and between 1982 and 1992,
70.74%.
If you invested £50,000 in tax-free cash savings in 2002 and
spent the interest (a common situation for older people who need to top up
their pensions) in 2012 you would have a sum worth £34,011 in real terms.
Interestingly the average interest rates over the same period
(source-Association of Building Society’s) is 3.91% so taking into account
inflation & interest you would have a miserable £650 extra in real terms,
if you hadn’t spent the interest.
Therefore Are Cash Investments & Cash ISA’s. SAFE?
Not against inflation that’s for sure, this demonstrates that
we should not use CASH for long-term investments. Short-term cash is ok; foregoing
growth or income because we intend to spend the money. But, for longer-term,
losing money each year against the costs of those items that you intend to buy
seems a little foolhardy to me.
What about for those topping up pension income? There are
two major problems facing people at present, inflation we have already
discussed, ignore inflation the interest rates themselves are insufficient to
maintain the income requirement for most and their lump sum is being eaten away
in real and actual terms. The current rates of return on cash investments are
simply insufficient.
Is there a solution?
Yes: The facts are longer term investments, such as fixed
interests, bonds, gilts and equities and there are more such as property, art,
fine wine, cars and antiques, which usually outperform cash. What’s the price of
a better return? RISK. I have always felt that it is a simple truism of life: That
the more risk one takes, the higher the potential for rewards, but like
Newton’s 3rd Law. With the higher potential for reward comes the
higher potential for loss. So like many other things in life, Investment Risk
is a balance. 
Look at these examples:
A house purchased at £50,000 in 2002 would have been valued
at £85,000 in 2012 – above inflation growth and it appears a fairly low risk
investment. Bricks and Mortar investments & Buy to lets are increasingly common,
but there are more risks associated with property than many realise – we can
offer buy to let advance and help in setting up your investment portfolio,
letting you understand the risks. (Source Nationwide house price index)
A Medium/ cautious risk fund such as the Invesco Perpetual
Monthly Income Plus – £50,000 invested in 2002 would now be worth around
£120,990. This is the gross amount, but there are many straightforward ways to
minimise the affect of tax on your investments, ISA’s for example are not
limited to just over £5000 per year currently in equity ISA’s you can invest
£12,520. Add this to a capital gains tax allowance each year and there is every
chance that the impact of tax would be significantly less than a
straightforward savings account. This fund mainly invests in Gilts, fixed
interests and bonds with currently 20% invested in equities, the fund is
available in a number of formats such as ISA’s and through many platforms.
(Source – Morningstar Fund Data)
A Higher risk fund (keeping with the same brand) is the
Invesco Perpetual High Income fund managed by the very highly regarded Neil
Woodford. If you had invested £50,000 in this fund 10 years ago, this would now
be worth – £168,475. With regard to tax and availability the same is true about
this fund as above. (Source – Morningstar Fund Data)
I have not taken inflation into account with the above
examples of the house, and the two funds for the simple reason that there is no
need its fairly clear that the effects of inflation will have some impact, but
all three examples out perform either the CPI or the RPI, and therefore you
would have kept your money or increased it.
Conclusions – Moderation in all things.
Is cash “A bit rubbish really” well yes it is if your
investing for the long term, don’t have any specific goals in mind or just need
an income, but cash investments do have a role to play within any portfolio of
investments. They give us a safety buffer, they are a safe place for money
that’s going to be needed, but for anything else investments of a different
type are necessary, investment advice is really worth seeking out to see how
you can reduce the impact of inflation on your savings and investments.  
Philip Dales Dip PFS Certs CII (MP&ER)
Director
For more information or advice on Investments contact Philip
Dales at DALES Independent Financial Advisers: advice@pndales.co.uk or go to our web
site www.pndales.co.uk or call our West
Bridgford office: 0115 832 0265 or Newark Office: 01636 870 069
Important information.
The investment returns and any income can fluctuate, and
investors may not get back the full amount invested. Past performance is not a
guide to future returns. Where Philip Dales has expressed views and opinions
these may change and do not constitute a recommendation. For individually
tailored advice please contact either our West Bridgford (Nottingham) office
0115 832 0265 or our Newark office on 01636 870 069
Sources: All CPI and RPI data – Office of National
Statistics, Fund information – Morningstar, Savings & ISA rates– Moneyfacts.
Historical Average Savings rates – Association of Building Societies. House
price growth – Nationwide Building Society’s House price Index.
P N DALES LTD are regulated by the Financial Conduct
Authority: 496107.