Get this right - your retirement is on the line
Tom Bulford Feb 28, 2013
It’s getting close to that time again... you have until 5 April to make this year’s contribution to your Isa, and it is an opportunity not to be missed. To remind you, an Isa is an Individual Savings Account and any money that you have therein is not only tax-free but does not even have to be declared on your tax return. For many people, myself included, their Isa is the cornerstone of their investment strategy, and by contributing over a number of years, you can build up a really worthwhile sum for your retirement.
It’s important to understand that there are no restrictions on withdrawing funds from your Isa. This gives it a significant advantage over pension products, including self-invested personal pensions (Sipps), although the latter do benefit from tax relief on contributions.
You can invest a total of £11,280 into an Isa this year. Your partner can do the same, and when the new tax year begins on 6 April, you can contribute another £11,520. So, within the next six weeks, you and your partner could put a total of £45,600 of your family savings out of reach of the taxman - truly a worthy ambition.
All logic points to investing Isa funds into shares
The question then becomes how to invest it? You can put half of the total allowance into a cash Isa, which is basically a tax-free deposit offered by a bank or building society. The very best you can hope for here is a rate of 3% per year, which barely keeps pace with inflation. In the long term the returns from investing in shares have trounced those from cash, and since your Isa is a long-term saving vehicle, you should invest the money in shares. You can do so up to the full amount of the Isa allowance.
If you have not done so already it is quite easy to set up an Isa account online with, for example, The Share Centre or Barclays. Once you have done so, and have transferred funds into the account, you are then ready to invest. You are allowed to invest in bonds, but bond yields are not attractive at the moment. In any case, returns from shares handsomely beat returns from bonds over time.
So, all logic points to investing your Isa funds into shares, but first there is one more hurdle to overcome. Many of the Isa providers will try to lure you into investment in funds, especially their own funds from which they earn a management fee. Superficially these might seem attractive: by investing in a fund, your money is instantly spread across a range of different shares, so you don’t have to worry about monitoring and managing this portfolio. You can simply relax and count the profits.
Penny shares to watch 2013
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Don’t get hijacked by fund managers
That is where the idea fails, because ‘investing in managed funds’ and ‘making a profit’ are not terms that are often associated. Sure, the fund managers profit handsomely from their fees, but for the fund investor, the best he can hope for is a return that modestly beats bonds or cash.
So, that leaves the undeniable conclusion that you should invest directly into shares, and however nervous that makes you feel, I recommend you take the plunge. Look to build up a portfolio, starting with perhaps three or four shares and then building this up to 15-20 over time. Invest with an eye to the long term. Identify businesses that you think will be successful over the next few years, and stick with them. Ignore day to day movements of share prices and worry instead about how your chosen companies are doing, and whether their long-term prospects have materially changed.
At present, you are only allowed to invest in shares quoted on the main list of the London Stock Exchange or on an overseas stock market that is ‘recognised’ by HM Revenue & Customs - you can see that full list here.
This means that you cannot invest in the many small companies listed on AIM, unless they also happen to have a listing on a recognised overseas market. A handful of companies do qualify via this back door, and a full list can be found here.
You must take this matter seriously.
According to the Office for National Statistics, the average life expectancy is now 85 for men and 89 for women. And the gap between how much people save and the retirement income they expect is currently estimated at £1.2 trillion - that's a shortfall of £50,000 for every person of working age. If you want a comfortable retirement, an Isa can really help.
As for what stocks to pick, my Red Hot Penny Shares newsletter is a great place to start. I’m proud of its record. And in the March issue I give a list of suggested shares for your Isa. If you are not yet a Red Hot Penny Shares subscriber, you can sign up for a free 90-day no obligation trial here.
• This article is taken from Tom Bulford's free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.
Information in Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Penny Sleuth is an unregulated product published by Fleet Street Publications Ltd.