One day, the ISA tap will be turned off on the grounds that it is a too-generous, middle-class tax perk, predicts our columnist. But before then, he suggests how investors might approach the wrapper in the current climate.
Every year, post the deluge of Valentine’s Day cards (pull the other one, Jeffrey), my thoughts tend to turn to Individual Savings Accounts (ISAs).
Yes, those friendly tax-wrappers that allow you to accumulate long-term wealth without the taxman mithering you. Wonderful investment creatures, enabling adults to invest - or save if they are mad enough to want peanuts in return - a maximum of £20,000 in the tax year ending 5 April. This tax year and every tax year until some future government (probably a left-leaning one) decides to turn the ISA tap off on the grounds that it is a too-generous middle-class tax perk - it will happen, as sure as night follows day and tax year 2022-23 follows tax year 2021-22.
Yet this year, my thoughts on ISAs are a little clouded. They’re more turned (my thoughts, that is) to what will happen post-5 April than they are pre that date. Despite much campaigning from some newspapers - my paper The Mail on Sunday included - and a number of Conservative MPs, our pockets are soon going to be hit with higher National Insurance Contribution bills. They kick in as soon as the new tax year starts. This is on top of a nasty cost of living crisis - no cost nastier than the soaring price of the energy that we use to heat our homes.
With inflation heading to 7% before the summer is out - we’ll have an update where we’re at on that journey this Wednesday when the January inflation figures are published - the squeeze on many household budgets is going to get brutal. Financial pain, I fear, will be widespread.
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Against this difficult backdrop, it seems insensitive to talk about possible financial gain. But we do all need to think about the future and build, however slowly, a nest egg that will help see us through our dotage. We do all need to benefit from the long-term returns that can be made from investing in a basket of shares or investment funds.
Of course, those people in employment will have the benefit of a work pension quietly accumulating away in the background. That might be sufficient as some people are concerned, although I doubt it. For the self-employed, any saving may well not be a priority because of other business priorities.
So an ISA might not be for everyone. But it’s a tax wrapper that should not be downplayed simply because of the financial crisis this country finds itself in. If you’re lucky enough to have surplus income after all the household bills are paid - and you have savings put aside for financial emergencies and some of life’s necessities such as a well-earned summer holiday – putting money into an ISA could prove a shrewd investment strategy.
Although the £20,000 ISA annual limit is a use or lose it allowance – there’s no carrying forward of unused allowances to the next tax year as with pensions – I don’t think investors should be rushing to use any unused allowances between now and 5 April. Stock markets are far too volatile to be putting lump sums into an ISA just on the basis that 5 April is fast approaching. A more measured approach is required.
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There’s lots of worries on the horizon, some of which could send stock markets into a tailspin. Of most immediate concern is the potential for war between Russia and Ukraine. As I write this piece (Monday am, 14 February), the UK stock market (FTSE 100 index) has fallen more than 2% in the first 45 minutes of trading as fears over a Russian invasion rise. Oil prices are also soaring.
As if impending war isn’t enough to make stock markets nervous, there’s also a real threat that the UK economy could be heading for a dose of stagflation as the economy grunts its way into recession, unemployment begins to tickle up and inflation persists. Not an ideal backdrop for growth in company earnings, the bedrock on which strong stock performance is built.
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So, for investors, I think a drip-drip ISA approach makes the best sense in the coming months. Forget 5 April. Invest on a monthly basis and diversify your holdings. Think collective investments such as unit trusts and stock-market listed investment trusts – and don’t just invest in the UK. Buy global funds – in particular, global investment trusts that have been around the block a few times. They won’t necessarily shoot the investment lights out, but these vehicles have survived world chaos before – be it triggered by economic or geopolitical events – and will do so in the future, in the process enhancing your long-term wealth.
A good starting point is to look at some of the facts available on individual investment trusts at the excellent Association of Investment Companies (AIC) website.
So, use it or lose it? Forget this ISA message. Use it shrewdly? Absolutely. Happy ISA hunting.
Jeff Prestridge is a freelance contributor and not a direct employee of interactive investor.
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