Use your Isa allowance to invest against the Chancellor’s ‘Budget raid’ on savings
What are your options if you plan to use your Isa to buy stocks and shares. We explore the different assets and explain why it’s more important than ever to use your Isa allowance this tax year.
More taxpayers than ever are falling into the higher rate tax bracket of 40 per cent.
According to Bestinvest at least 5.5 million will pay the 40 per cent rate this tax-year, an increase of 15 per cent compared to last year.
Add in inflation and frozen personal tax thresholds and it is more important than ever that savers use their tax-free individual account savings allowance (Isa) allowance on their investing journey.
Jason Hollands, managing director of Bestinvest said savers and investors face a “looming pincer movement” as the amount of dividend income that can be received tax-free outside of Isa and pensions is set to be halved in the new tax year, from £2,000 currently to £1,000; it will then reduced to a meagre £500 from April 2024.
The amount of capital gains that can be crystallised tax-free each year also faces a cut with the annual exemption being slashed from £12,300 this tax-year to £6,000 on 6 April, and then a further halving to £3,000 by April 2024.
Holland added: “In his Autumn Statement the Chancellor set out plans for a Viking-like raid on people’s savings and investments and so it has never been more important for people to make use of the tax-free allowances available to them, to shelter what they have worked hard for from future taxes. In this respect, ISAs, and pensions are the two key pillars of tax-free long-term savings in the UK.
Unused pensions allowance can be carried back but Isa allowances are very much ‘use or lose it’.
“If you don’t use your 2022/3 ISA allowance by midnight on 5 April, it will be lost for good – so the clock really is ticking.”
Savers who want to invest in the stock market are being advised to spend time reviewing how they can use their allowance across different asset classes, regions and investment styles.
Hollands said: “In recent years many DIY investors rode the crest of the ‘growth stock’ wave, investing heavily in global and US equity funds with high exposure to sectors like technology and communications services.
“At the same time, markets with a skew to more traditional sectors and industries, and dividend generating companies – like the UK – have been widely shunned. And bonds have also been an asset class that have been off-the-radar for several years when interest rates and bond yields were at ultra-low levels. However, the investment environment has changed dramatically over the last year and so it is time to reassess.”
Isa savings: Are UK equities a bargain?
Retail investors have been ditching UK equity funds as fears of recession haunt the UK economy. But for bargain hunters now may be a good time to look at using their Isa allowance to invest in British companies.
Hollands said low valuations, attractive dividend yields and the UK market’s exposure to energy and commodities mean some UK companies are worth considering.
“Investors should not confuse the UK stock market with the domestic economy as the largest UK publicly listed companies – those in the FTSE 100 – generate around 79 per cent of their revenues outside of the UK, and have more exposure to the US, or indeed Asia, than they do to the UK economy. Even the more domestically exposed medium-sized companies that are listed on the London Stock Exchange earn more than half of their revenues internationally.”
Blue chip UK shares are trading at prices of 10.6 times their forecast earnings for the next 12-months. This compares to global equities, which are trading on price/earnings ratio of 15.9 times. While UK shares trade at a hefty 33 per cent discount compared to global equities, the market offers investors a circa 4 per cent dividend yield which is attractive compared to global equities (2.3 per cent dividend yield) and which is also higher than that on UK government bonds (3.8 per cent on 10-year gilts).”
UK – investing for growth or income?
For growth seekers, those who don’t need to draw a monthly or annual income then Hollands points out the Artemis UK Select and Liontrust UK Growth funds, as well as the Fidelity Index UK fund may be worth a look.
“The Liontrust fund targets large and medium sized UK companies with strong pricing power and qualities that are hard for competitors to replicate which makes them resilient across the economic cycle.”
He added that the Artemis UK Select fund was a concentrated portfolio of ‘best ideas’ which seeks out undervalued companies with the potential to be re-rated.
The Fidelity Index UK is an index tracker which provides exposure to the largest companies with very low annual costs of 0.06 per cent on the P share class.
For income seekers, Bestinvest highlights the BlackRock UK Income fund, which is invested in large, dividend generating UK companies, such as AstraZeneca, Shell and RELX, as well as two investment trusts: Murray Income Trust and Temple Bar Investment Trust.
“Murray Income Trust, which is celebrating its 100th birthday this year, invests mainly in large and medium sized companies with attractive valuations and robust earnings potential – its shares can be snapped up at a 6 per cent discount to the underlying net asset value of the portfolio currently.
Isa savings: Asia and Emerging Markets boost as China surges post Covid
Hollands points out the last couple of years have been particularly tough ones for investors in emerging markets, dragged down in large part by the performance of China – the largest country constituent of Asian and Emerging Market benchmarks.
“While a number of concerns about China haven’t gone away – including its deteriorating relationship with the west – the abrupt ditching of China’s lockdown approach in December, following mass demonstrations, has led to renewed investor optimism towards China and the wider Asia and Emerging Market regions on the back of this.”
“It is estimated that over the last few years of harsh restrictions, the Chinese population have amassed 5.7 trillion Yuan (£690 billion) of excess savings, much of which is expected to come pouring back into goods and services as we saw in other countries when they reopened their economies.”
Funds on Bestinvest’s top-rated list include Aubrey Global Emerging Market Opportunities, which is focused on the rise of the emerging market consumer and currently has 41 per cent in Indian and 30 per cent in Chinese companies; FSSA Asia Focus, which has 26 per cent in India and 22 per cent in China. Investment trust fans might consider Templeton Emerging Markets Investment Trust, which has 29 per cent exposure to China and is trading at a 13 per cent discount to NAV.
Isa savings: Bonds are back
Bonds have traditionally been a mainstay for more cautious investors who are seeking a combination of reliable income and a buffer against the performance of more volatile equities.
“However, in recent years they had fallen off the radar of many investors due to very low yields as a result of central bank bond-buying stimulus programmes that were designed to keep borrowing costs extremely low.”
Rises in interest rates and the ending of the bond buying spree by central banks, hitting bond prices hard as both equity and bond markets declined in tandem .
“However, this has now created a much more favourable environment for investors contemplating adding bonds to their ISAs,” said Hollands. He caveated this by cautioning that “investors should however be a little wary of ‘high yield bonds’ bonds – those issued by companies with weak or no credit ratings, as there could be a rise in companies unable to repay their debts in full, or on time, or needing to skip interest payments if economies slip into recession, so focus on bond funds that primarily target high-quality issuers”.
What to choose: TwentyFour Corporate Bond fund, yielding 3.6 per cent is, managed by TwentyFour Asset Management and fund invests primarily invests in investment grade bonds (those issued by high quality, financially robust companies). An alternative is the Invesco Tactical Bond fund, currently yielding 3.6 per cent, which has a wide and flexible ‘strategic bond’ remit to invest in government and corporate bonds from across the globe.
What about property?
Uma Rajah, chief executive of property investment specialist CapitalRise, urged savers to get to know the different types of Isa and the investments they can include.
There are four different types of ISAs – Cash ISAs, Stocks and Shares ISAs, Lifetime ISAs, and Innovative Finance ISAs (IFISAs).
“It is important that you research each of these, so you understand which type best suits your personal needs.
One type worth considering is the IFISA, the variety that is offered by CapitalRise. Introduced in 2016, the IFISA is a tax wrapper for money invested in certain alternative investments.
“With these types of Isa funds may be invested in a loan to a developer, for example, who is looking to fund new prime property projects in areas such as Mayfair or Chelsea.”
Box out:
One: Use your Isa personal tax allowance
ISAs provide a personal tax-free allowance of up to £20,000 per tax year – this can be split between different ISA types or put all into one. You do not need to pay income tax, tax on dividends, or capital gains tax on funds in an ISA, potentially saving you a lot of money. If you can afford to do so, you should aim to max out your tax-free ISA allowance each year, because whatever is not used is lost.
Two: It’s flexible and easy to open different types of ISAs, just so long as you remember the rules and restrictions
There are some guidelines that must be considered when managing investments. One is that you are restricted in the number of new ISAs you are permitted to open each tax year. Currently, you can open one of each ISA type per year; the £20,000 personal tax allowance can be divided between ISAs or all put into one product. For example, you can
open a new IFISA, Cash ISA, Stocks and Shares ISA, and a Lifetime ISA in a given year, but you are not able to open more than one of each type.
Three: Stay organised with your accounts
You may find keeping track of your ISAs difficult – in fact, it is not uncommon to forget about an ISA you might have opened years ago. Now is the perfect time to dig through your records, locate where your money is, and assess whether it can be put to better use elsewhere.
Four: You can move your ISA funds as much as you like, at any time, without it affecting your current tax year allowance
If you already have an ISA, an ISA transfer is a process that lets you move money you have built up in ISAs over previous tax years to a new provider, while retaining its tax-free benefits. Moving existing funds around does not impact the present tax year’s allowance, either. A common mistake to make is to not actively manage your ISA – instead, you should regularly monitor whether making a transfer would be worthwhile.