With the tax year end fast approaching and a new tax year beginning, many savers will be looking to set up new ISAs (Individual Savings Accounts) or top up their existing ISA portfolios. Typically, many would have left it until the last minute and many may panic buy, trying to get invested before the end of the tax year. This can lead to costly mistakes.
Are ISAs any good?
Yes, ISAs are a good thing.
The first good thing about ISAs is that they are tax free; this means that interest on a Cash ISA or capital growth on a Stocks and Shares ISA is completely free of tax. Because of this, they encourage people to save; whether by lump sum or on a regular basis. The second good thing about ISAs is that they are largely liquid, which means access to your money is usually without much restriction. And thirdly, if you do your research right, you might find an ISA matched perfectly to you. There are some absolute gems out there, if you have the time and resolve to find them. So what are the pitfalls and mistakes people make when choosing an ISA?
1: Panic buying a Cash ISA: Many investors, in their great haste to get an ISA before the end of year deadline end up panic buying the first advertised ISA they see online. Typically, these online adverts trick you into jumping in with an attractive introductory rate only for the rate to drop after 6 or 12 months. After the honeymoon period ended, you’d end up with an interest rate no better than a typical high street bank deposit account.
2: Panic buying a stocks and shares ISA. The science behind stocks and shares can be a complex one so getting the right ISA for you isn’t always straightforward. The danger is, investors see adverts online and jump into investments without making an informed decision. An archetypal example would be someone investing in an advertised FTSE tracker ISA without actually understanding how the product works. Disappointment could follow without a careful assessment of appetite for risk.
3: Confusing Cash & Shares. 75% of ISAs sold today are Cash ISAs. There is nothing wrong with that for short term money. However, in these days of super-low interest rates, many Cash ISAs are unlikely to give a return able to keep pace with inflation. This is where the Stocks & Shares ISA comes to its own. For anything longer term i.e. 5 years or longer, investing in Stocks & Shares is likely to give a more satisfactory result, albeit with your capital being at risk.
4: Not taking advice. Choice is a great thing but with literally tens of thousands of products out there, pinning down the right one for you could be a bewildering and debilitating experience. Getting it right is crucial and discussing your options with an independent financial adviser should be a price worth paying. Your adviser would, amongst other things, discuss your objectives for the investment, assess your risk appetite and investment time horizon before helping you select an ISA provider and investment strategy.
5: Waiting until the end of the tax year. This is very common. Use it or you lose it, granted but why wait until the end of the tax year to invest? Do it well before. Why? Well, there will be more time for you to speak to an adviser and carefully select the right product for your personal circumstances. Rushing out and panic buying the first ISA you can get your hands on really isn’t the way to do it and investment mistakes are usually costly. You have been warned.