How can savers and investors make the most of their ISA allowance? Read our special report to find out.
While the annual Isa allowance means you can set aside up to £20,000 a year tax-free, most people don’t have such large sums of money to spare.
But investors should not be put off from topping up their portfolios just because they can’t max out their allowance – small amounts saved regularly add up significantly over time.
Fund supermarkets usually allow investors to set up regular investment plans with as little as £25 a month. This works like any other direct debit, investing a set amount on a particular day each month, which takes the hassle out of remembering to add to your holdings.
A number of other websites and apps also offer an array of options for those who prefer to invest little and often.
Save Your Spare Change
The Moneybox app lets you get started with as little as £1. Investors choose from either a cautious, balanced or adventurous portfolio. Rather than setting up a regular investment or a certain amount, Moneybox works by rounding up your spending and adding that to your investments.
The way it works is you link a bank account or credit card with the app and sign up to its “round-ups” service. When you make a purchase of, for example, £1.80 the app will round up to the nearest pound and add the difference – in this case 20p – to your balance. At the end of each week the balance is collected by Moneybox and invested.
Moneybox says its users typically make 30 transactions a week, with an average round-up of 28p per transaction – that adds up to £440 a year, just from your spare change.
As with any investment, it is important to watch out for fees. Moneybox charges a £1 a month subscription fee as well as a 0.45% platform fee and the cost of your investments – between 0.12% and 0.3% - on top. Hefty charges eat into your investment returns and this can be particularly true when you are starting with very small amounts.
Justin Modray of IFA firm Candid Financial Advice, says: “If you only invest a couple of hundred pounds year, you could find yourself paying the equivalent of 6% or more in charges, which could easily wipe out any investment returns.”
He says those who can commit to investing a regular amount might be better off using a fund supermarket such as AJ Bell or Fidelity, which have lower charges and a wider range of investments to choose from.
Crowdfunding
For investors who want to know exactly where their money is going, websites such as Abundance Investment may be of interest. Abundance lets you choose specific projects or businesses to invest in and focuses on those with social or environmental benefits.
These investments are made through debentures, which are similar to bonds, whereby you lend you money on the basis that it is used for an agreed purpose.
Depending on the investment you select, your returns are fixed, inflation-linked or related to the success of the project. Current investment options include a tidal stream turbine in Orkney, affordable homes in Merseyside, and a biofuel production plant in Edinburgh.
This type of investing is known as crowdfunding because the projects use funding from a range of different people to get their business or project up and running. Investors need to do their homework when choosing a project and ensure they have a decent spread of investments, to mitigate the risk if one does not perform.
Crowdfunding comes in various different guises so it is important to ensure you understand the risks and rewards you are signing up for. While investment-based crowdfunding will offer a potential return on your capital, reward-based crowdfunding tends to offer free products or discounts on the business you have invested in rather than a financial gain.
Robo-Advice
For investors looking for a simpler option there are a number of apps which will do all the hard work for you. Nutmeg is one example of this. It lets you choose a ready-made portfolio based on how much risk you want to take and then a team of experts chooses where your money goes.
This type of investment is known as robo-advice because a computer algorithm is helping you invest. Users can decide if they want a low-cost option which focuses on passive tracker funds, which charge 0.45% of the value of your investment, or a tailor-made service, which charges 0.75%.
There are dozens of robo-advice providers out there and when choosing the right one for you it is important to consider the fees – which can range from as little as 0.15% right up to 1% – and how and where they are investing your money. Check the track record of the provider to see how their investments are performing compared with their rivals and find out how much money you need to get started – many let you set up an account with as little as £1 but others require £10,000.
James Daley, founder of consumer champion website Fairer Finance, says: “Anything that gets more people saving and investing is a good thing. But it is important that these firms are clear about what they’re charging and exactly where your money is being invested.
“It’s easy to make bad decisions when it comes to investing, which can undo the good work your doing by putting money aside. As long as these firms are helping customers make good decisions, then I’m all in favour.”
