Nick Hungerford, chief executive and founder of Nutmeg, comments: “With the New ISA (NISA), £15,000 can be put away before 5th April 2015, and not a penny of tax on the capital gained goes to the taxman. With this tax year nearly at an end, it's a case of use it or lose it, so it's time to start thinking about how to make the most of the NISA offering. Unfortunately, many people are missing out on the benefits of an ISA because they see it as complex or not relevant to them. Here, we reveal the seven deadly ISA sins and explain how savers can take advantage of their annual tax-free ISA allowance.”
1) SIN: You have it but you don't invest it
If you're fortunate enough to have sufficient savings to take advantage of your ISA allowance then do so, ideally straight away. Nutmeg calculated that UK investors who use their ISA allowance fully, and invest in this tax year and at the beginning of each future tax year, can now accumulate a tax-free nest egg of a quarter of a million pounds in ten years, half a million pounds in 17 years and a million pounds in 25 years.*
* Nutmeg calculations based on the ISA allowance growing by 2% per year and investment returns on average of 5% per year after fees. Note that investment returns cannot be guaranteed and the tax treatment of ISAs may change.
2) SIN: Thinking ISAs are only for people with lots of money
This is not the case at all. Some companies will ask for a minimum investment in return for a higher interest rate but, for the majority of ISAs, there's no minimum required. Indeed the restriction is on how much you can invest. The maximum allowance for the current tax year, which runs from 6th April 2014 to 5th April 2015, is £15,000. You can invest all of that in either a cash or stocks and shares ISA. From 6th April the allowance increases to £15,240.
3) SIN: Not knowing your fees
It may be tempting to simply pick one of the first providers you come across or go with a big name, but it's important to do your research. In particular, check the investment management fees and any other charges associated with your stocks and shares ISA. The costs can vary hugely between providers and some have a lot of charges that are not immediately apparent at first glance – set-up fee, trading charges, admin costs, exit penalties, and so on. All of these can soon mount up and have a damaging effect on your potential returns.
4) SIN: Not keeping an eye on your ISAs
It's easy to forget about old bank accounts or ISAs that you just don't use anymore, especially if you shop around for the best deal every year and have lots of ISAs with different providers. But our research has shown that 22% of ISA holders are completely in the dark about how their previous ISAs are performing. A staggering 40% can't be bothered to review their ISA performance because it's too time consuming.[1]
Transferring all of your old ISAs into one place may help you to better understand the full value of your wealth and see how it's all doing as one cohesive pot.
5) SIN: Believing stocks and shares ISAs are for seasoned investors
Having a stocks and shares ISA doesn't mean you need to keep tabs on the financial markets and manage your investment as global stock market prices fluctuate, as with investments your capital is at risk. Typically, with a stocks and shares ISA, your money will be invested in a fund that tracks a stock market or group of companies.
'Stocks and shares ISA' is actually a confusing label. A stocks and shares ISA can, in fact, be invested in anything from equities to corporate bonds, gilts to gold, unit trusts to wheat futures. With a Nutmeg ISA, we invest your money in a wide range of investment assets to spread risk. We build and manage a portfolio that is tailored to your profile, attitude to risk and investment goals, so you don't need to research the investment assets best suited to you or track the global markets to manage the impact on your investments.
6) SIN: Assuming ISAs are complicated
They were, but they're not now. ISA replaced its predecessors PEPs (Personal Equity Plans) and TESSAs (Tax Exempt Special Savings Accounts). Neither was particularly simple. We've also had the brief era of mini and maxi ISAs to further confuse the landscape. They were discontinued in 2008. The current ISA framework is much easier to understand and needn't be feared by anyone new to saving or investing.
7) SIN: Not thinking about the long term
If you don't have the lump sum ready to invest on day one, your next best option is to drip feed smaller amounts of money each month into an investment ISA, so that each contributed sum experiences the dramatic effects of compound returns sooner. An amount invested on the first day of the tax year, has 11 months more of compounding than capital invested right at the end of the year. The key benefit is bringing a discipline to your savings – ignore daily market fluctuations and stick to your plan to reach your long-term goals.
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