Introduction to ISA Planning
It is not uncommon for investors to put their entire allowance into the best account offering, every year, and then to neglect the longer term implications of this saving. A definite tendency exists simply to plough the investment into whichever account is the most convenient, without much further consideration. Although the most important factor is that the investment is made in the first place, much more can be achieved in terms of financial gain and stability by actually considering the long-term strategy of your ISA portfolio.
Pure Cash Savings
The vast majority of people invest purely in cash ISAs of £3,000 a year. This may be because investing in a cash ISA is seen to offer a straightforward and favourable savings account, whereas investing in shares is viewed as more risky, in some way. With this in mind, reviewing one’s portfolio of cash ISAs should be an annual consideration.
The best interest rates are almost invariably offered for accounts that are either for a fixed period of time or accounts that have a set notice period for withdrawal. Anyone who is able to invest regularly should consider having at least half of their portfolio as long-term. By maintaining a long-term approach with at least some of the ISA savings, the best rates can be obtained. One common approach is to invest cash in a fixed term ISA of approximately 5 years and to do this every year for 5 years. This way, every year, a sum of cash will be released that can then be re-invested into further ISAs.
Share Based ISAs
Share based ISAs require a little more thought because although the principles remain the same as with a cash ISA, the investment choices are potentially much greater. It is possible to invest the full £7,000 allowance in share based ISAs, which offers a better investment opportunity than a £3,000 cash investment.
When selecting the best share ISA, there is more to the decision than the simple interest rate. In fact, with a share ISA there are no interest rates offered; instead, you will have to make a strategic decision. For example, do you want to make a low risk share investment in entities such as Blue Chip companies or would you rather invest in riskier entities such as emerging markets
As with a traditional share investment, it is important to recognise that the value of the investment can go down as well as up; riskier investments may return a greater financial benefit but also are more susceptible to significant losses.
An investor should not simply consider the ISA investment as a one-off decision;
ideally, those who invest regularly should consider all of their ISA investments as an entire portfolio;
with cash ISAs, it pays to have a good mix of readily available ISAs and longer term, higher interest ISAs;
share ISAs offer the same potential returns and risks as traditional share investments and strategy should be considered, carefully.