Ten money-saving tips: Isas

Derek Stewart, managing partner at Glasgow-based SAM Wealth, offers his top ten tips for getting the most from your Isa.

1 Tax-free allowance

Isas are a tax-free wrapper in which you can invest during the year. It is only broken when we remove funds from the account. Ensure you make the most of the annual allowance (£11,520 in the new tax year) to invest as tax efficiently as possible. This might mean you move funds from a taxable investment utilising your capital gains tax allowance to an Isa product to achieve this.

2 Think about your objectives

Are you investing for a special occasion or a particular life event, as this might determines how long you will be investing for? I wouldn’t recommend investing in an Isa – or any stock market-related investment – for less than five years, so you have enough time to smooth out the fluctuations.

3 Risk and reward

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Risk and return usually go hand in hand, so the greater the risk you assume the higher the potential return. But the reverse is also true: the higher the risk you take, the greater the potential losses.

4 What’s your risk appetite?

If you could be classified as a “balanced” or cautious investor, what is the potential return and what is the potential downside? If the downside (loss) would affect your standard of living, can you afford to take the risk? This is known as your capacity for loss.

5 Emergency cash

Before investing in investments that can fluctuate in value you need to make sure you have an emergency cash fund behind you. This allows you to leave your Isa untouched if you needed to call on capital therefore removing the risk of being forced to sell when the market was low resulting in a loss.

6 Accessibility

An investment product is not suited to everyone and some people might prefer to have easy access to their savings. Cash Isas therefore provide the best of both worlds, with easy access as and when you need funds and giving you tax-free interest while it is within the Isa vehicle.

7 Which funds?

Selecting an investment fund from over 2,000 collective investment funds (such as unit trusts and investment trusts) isn’t easy. Picking last year’s top performer is a popular method, but history has shown that doesn’t guarantee you the same top performance. Think about whether to select a particular asset class (eg equities) or go for multi-asset funds to spread the risk (or both).

8 Watch the cost

The charges will vary on the funds, depending largely on whether you are going for an actively managed fund or a passive fund. There is lots of evidence that active funds, which are more expensive, on average do not outperform their benchmark (such as the FTSE 100 index). A passive fund can track a benchmark and will cost you less money. But beware that in a falling market there is no fund manager in a passive fund making decisions to reduce the impact.

9 Buying online

If you want to save money on adviser fees but take full responsibility for the decision you make, then you could buy an Isa from a discount broker or through a website. You should only consider this where you are confident in your ability to make the right decision. Some websites offer guidance but not advice. Make sure it is an established website or if new, run by reputable individuals.

10 Due diligence

If you’re buying your Isa investments through a financial adviser, check their status (independent or restricted), experience and ask about the service they provide in the future. Some advisers offer “restricted” advice, which may limit your choice, whereas fully independent advisers have no such restrictions. They may want an ongoing fee, often around 0.75 per cent a year. If so you should ask what you are receiving for it.