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A Guide to Lump Sum investments

 

ISAs

ISA stands for Individual Savings Account. ISAs are pretty well understood these days as a means of an individual holding investments and not having to pay tax when withdrawing part or all of the investment, or taking income from the investment. Also there is no Capital Gains Tax liability from such investments.

An ISA is not an investment in itself but simply a tax 'wrapper' in which you can shield your investments from tax – whether the investments are held in funds or directly made in a combination of eligible assets such as cash, fixed interest, property or equities (stocks and shares).

The tax breaks are given throughout the holding period and on encashment, not when the investment is first made, so all investments are made using net (or after taxed) income, but correspondingly the proceeds on disposal are tax free. However, ISAs are not entirely tax free as, just like a pension fund, tax is paid on dividends received within the fund.

Investment limits

  • For the tax year to 5 April 2013 the annual ISA limit is £11,280 for all eligible ISA investors;

All of the above limit can be invested in a stocks and shares ISA, or you could invest up to half of the annual limit in a cash ISA with one provider (usually a bank or building society), with the balance being invested in a stocks and shares ISA (with the same or other provider);

If you want, you can convert / transfer your Cash ISAs into a stocks and shares ISAs at any time.

Cash ISA

Cash is generally thought of as a low risk investment, and certainly there is no volatility in the amount of capital originally invested and usually little or no volatility in the levels of interest paid, so it can be an effective investment for those that have little or no tolerance to risk.

Remember though, there will be no growth on the amount originally invested, and in some market conditions (such as those being experienced currently) the interest earned may not be enough to counter the effects of inflation on your investment.

However, the rates of interest offered by some institutions on cash ISAs are often higher than on their normal savings accounts, so this fact, coupled with the tax free status of a Cash ISA, can make them very attractive for many investors.

Stocks and shares ISA

A stocks and shares ISA can include almost any authorised unit trust, open ended investment companies (OEICs), or investment trust, as well as most equities (stocks and shares) quoted on a recognised stock exchange. If you are unfamilar with these read the more detailed section on Unit Trusts, Investment Trusts or OEICs

Equities are viewed as more risky than cash in the short term, and are certainly more volatile. However, if you are able to take a long term view, the returns should be much higher. Diversification can reduce the risk you take by spreading your investments in a portfolio of shares or via unit and investment trusts, or OEICs.

There are a myriad of investment funds available and you can choose funds focused on UK, Emerging economies, Small companies, Special situations, Index Trackers and much more and designed to provide income or to provide growth or a combination of the two. If you want to get an appreciation of the types of funds available (over 2500 available in the UK) just take a look at the IMA (Investment Management Association) web site and navigate to http://www.investmentfunds.org.uk/fund-sectors/sector-classification/ which shows the different funds by sector.   

What are their charges?

The vast majority of ISAs will have some form of initial and annual management charges.

The initial charges can range from nil to a maximum of 5%, although it is often possible to get a discount of up to 3% off initial charges.

The annual management charge (AMC) is usually between 0.5% and 2% p.a, depending on the type of fund selected.

If you purchase individual shares in an ISA you will be subject to the normal stock broking charges, which are typically between £10 and £25 for a single purchase. In addition, the ISA wrapper is also likely to levy an additional annual administration charge of up to 0.5% per annum.

An ISA is a very tax-efficient way to invest, with no tax liability when the proceeds are withdrawn. Also, your investment is free of capital gains tax and you will have no liability for tax on any income that you may take from the fund.

Junior ISAs

Junior ISAs are a relatively new investment, created to replace child trust funds (which were closed to new entrants in 2010). Just like child trust funds, they were created to offer parents some form of incentive to start investing for their children.

Junior ISAs work in a very similar way to their ISA equivalent, and are fairly similar to the child trust funds that they are replacing. They offer tax free savings of up to £3,600 a year in either cash or stocks and shares accounts (or both), however unlike adult ISAs, anyone can put money for a child into a Junior ISA: parents, family and friends.

The biggest difference between a Junior ISA and a child trust fund is the ‘child trust fund voucher’, which was a government guarantee to invest at least £250 when a new child trust fund was opened and then a further £250 on the child’s seventh birthday. This was done as an incentive for parents to start saving for their children. Junior ISAs do not offer any such vouchers.

Currently, the child trust fund cannot be transferred into a Junior ISA, however the government has indicated that it wishes to bring the two products ‘closer together’, which may mean that transfers become possible in the future.

When a Junior ISA is opened, the money is ‘locked away’ until the child reaches age 18, however, the account is put into the child’s control from age 16 – so they can invest it how they wish.

A Junior ISA will automatically be switched into the equivalent adult ISA when the child reaches 18, however if they do not wish this to happen, they can either withdraw it or reinvest elsewhere.

NEXT STEPS

To learn about other investment options, return to the Introduction to investments section.

To learn about the following investments, if you aren't already familiar with them click on the relevant link:

However if you feel that you need some help from a financial advisor, then visit our section on obtaining financial advice, or our page on Laterlife selected services and associated advice.

 

   
 
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