The ISA concept was introduced by the then Chancellor, Gordon Brown, in his first ever budget and these investments were first made available to the public in 1999.
They are widely considered as highly tax-efficient wrappers for investments that protect funds deposited in them from both income and capital gains taxes, although it should be noted that unlike pensions they do not benefit from tax relief on contributions.
An ISA does also have the added benefit of being easily accessible and funds can be removed as and when the investor wishes, although there are limits on contributions within each tax year.
Currently, ISAs (or individual savings accounts) are held by more than 16 million individual investors, with policies worth more than £180 billion.
In the current 2010-11 tax year, people will be allowed to save up to £5,100 into a cash ISA and up to £10,200 in a stocks and shares ISA, within a total overall annual savings limit of £10,200. This is an increase on last year’s contribution limits which were limited to £3,600 into a cash ISA and up to £7,200 in a stocks and shares ISA, within an overall annual savings limit of £7,200.
Two per tax year
In addition, ISA savers should be aware that they will be able to invest in two separate ISAs each tax year: a cash ISA (with a bank or building society) and a stocks and shares ISA (with an investment management company).
For example, investors can choose to save £2,000 in a cash ISA with one provider and £8,200 in a stocks and shares ISA with a different provider should they wish to combine the liquidity of tax-free cash savings with some more adventurous investments.
It should also be noted by those who have not recently used their ISA allowances that on 6th April 2008, all personal equity plans (PEPs) automatically became stocks and shares ISAs and therefore carry the same taxfree advantages one could obtain by subscribing to a new ISA today.
Rather than opening a new account, investors will still be able to invest in this re-labelled PEP, just as long as they haven’t subscribed to another stocks and shares ISA during the current tax year.
The government also announced that any cash saved so far in ISAs can be rolled forward into a new stocks and shares ISA, without infringing that year’s contribution limit. This means ISA savers will be able to transfer money saved in their cash ISA to their stocks and shares ISA should they wish to take a more adventurous approach with their monies in the pursuit of higher returns.
So now we have dealt with the basic details, here are my top tips for stocks and shares-based ISA investment in the forthcoming tax year.
1. BlackRock Gold & General
During periods of economic uncertainty, like the one we are currently facing, investments into gold can be a highly attractive option. This is because gold is a stateless investment that has a universal appeal. The climate for gold is as good as it’s been in recent history.
The jewellery industry is the major market for this commodity and the enhanced wealth in the middle classes of India and China has dramatically escalated the demand for gold. Even at current prices it looks excellent value and we think growing demand could continue to bolster the price. Although it must be remembered that this is not certain, and that prices may well go down as well as up.
I believe the BlackRock Gold & General Fund is an excellent way to invest in this sector and a great way for investors to benefit over the long term from the increased demand for gold.
2. Aberdeen Asia Pacific
Whilst many Western governments struggle to cope with their sizeable debt burdens and provide growth opportunities for investors, many emerging markets face no such difficulties. In particular, many Asian countries, for example, have sound financial systems and also benefit from having strong balance sheets on both governmental and personal levels.
The Aberdeen Asia Pacific fund particularly favours the Asian financial sector at present, in the belief that many companies have transparent business models, making it easier to identify investment opportunities.
While many of Asia’s economies are in great financial shape, Hugh Young, fund manager at Aberdeen Asia Pacific, clearly has reservations about China. Its massive stimulus programme and record credit expansion has led to a surge in the property market, and the authorities are now taking steps to avoid asset price bubbles without damaging long-term growth and thus shattering consumer confidence.
Huge growth potential
In addition, the vast majority of Chinese companies are still state run with many continuing to be poorly managed. It goes without saying that the growth potential of China still remains huge, but Hugh Young and his team clearly believe that using Hong Kong-listed companies to access this potential is far less risky, as they have superior standards of both business management and accounting.
Like my previous selection, I would recommend this fund for those looking to tie their money up for five years plus in the pursuit of making significant long-term gains. I believe that valuations in Asia remain reasonably attractive and am confident that earnings will continue to improve this year.
That being said, I would want to make sure investors remain wary of the likely short-term setbacks in these markets and that they must be prepared to weather any storms in the pursuit of their long-term growth objectives.
As with any investment in stock market-linked investments, it should always be remembered that the value of any investment can go down as well as up, whilst past performance is no guarantee of future returns.
That said, a well-diversified portfolio, including the funds mentioned above, could serve long-term ISA investors very well in the future and benefit from considerable capital growth.
- The author can be contacted at: Allchurch Bailey Wealth, 93 High Street, Evesham, Worcs. WR11 4DU; telephone 01386 442597, email andrew.neale@abwealth.co.uk; website www.abwealth.co.uk.
