David Prosser urges you to take more time to consider the use of your annual ISA allowance.
Nobody likes to be rushed into making an important decision. Yet every year, thousands of us wait until the final few days of the financial year to use our annual individual savings account (ISA) allowances. As a result, we often make snap decisions about where to put sizeable amounts of money – the annual ISA allowance is £20,000 - as we race to beat the deadline.
Over the next few weeks, you will see plenty of advertising and marketing that reflects this reality. With the tax year coming to an end on 5 April, fund managers are eyeing an opportunity to persuade you that their funds are the best way to take advantage of your ISA allowance. Use it or lose it, they will tell you.
However, try not to be rushed in this way. When savers get fixated on using their ISA allowances, they forget that ISAs are not investments in their own right. As a result, they make isolated decisions each year simply to use their allowance. Then they end up with an assorted pack of investment products chosen with little thought for what has gone before – or for what they are hoping to achieve.
Look past the tax wrapper
Remember, ISAs are simply wrappers within which you may hold a variety of assets in order to shelter them from income and capital gains tax. The important thing is to make sure those assets reflect your attitude to risk and your financial objectives. Are they the best way to work towards your individual goals? What assets do you already own? Should you make further investments into the funds you have already chosen, or do you need different assets in order to spread your risk?
It certainly makes sense to use your ISA allowance each year if you are making savings and investments on which you would otherwise be liable for tax. But if you try not to leave these decisions until the last moment, you will have more time to think carefully about the best way forward.
That means, for example, not simply investing in those funds that currently top the performance tables. These might not be the right funds for you – and anyway, past performance is no guide to the future. Yet figures published in recent days by the online investment platform Interactive Investor show the most popular fund purchases on its site over the past few weeks have overwhelmingly been these recent top performers.
Instead, invest on the basis of what you are trying to achieve – are you putting money by for retirement many years into the future, say, or thinking about buying a new car next year? Aim to build a diversified portfolio of holdings, so that you will have some protection if some of your investments fall in value. And keep your investments under review rather than forgetting them once the financial year comes to an end.
New tax year, new start
A helpful way to get into good habits is to treat the beginning of the financial year as a signal for reviewing the progress of your saving and making decisions about what to next. An annual review certainly makes sense – are your investments still fit for purpose, or have your objectives changed? And it is also a decent amount of time to judge performance over – how have your investments performed relative to similar holdings and the markets to which they offer exposure? Armed with the answers to those questions, you can begin to plan this year’s strategy.
Investing at the beginning of the year has other advantages too. For one thing, your money will be working for you earlier – in a rising market that may make quite a difference. Also, many people don’t have the disposable cash to make full use of the ISA allowance in one go – but drip-feeding your money in over the course of the year can be an affordable way to get as close to the maximum as possible.