This article is part of Morningstar’s Guide to Financial Planning, your handbook for making the most of your tax-free investing opportunities, reducing your annual – and lifetime – tax bill while keeping HMRC onside.
Emma Wall: Hello and welcome to the Morningstar series, 'Ask the Expert.' I'm Emma Wall and here with me today is Tom Stevenson, Investment Director for Fidelity.
Hello Tom.
Tom Stevenson: Hello Emma.
Wall: So, it's ISA season, less than a month to go to take advantage of this tax year's allowance. I mean, ideally you should have done it before now, but if you are just choosing your ISA-able funds what should you be looking for?
Stevenson: Well, I mean, the first point which you made is that the new allowance is much larger than it was before the changes made last year. You have now got up to £15,000 each. If you are in a couple, that's up to £30,000. So, it's a very generous allowance. So, the first thing I would say is just do it. It is very easy to let the moment pass and it is a use it or lose it allowance. So, if we get to midnight on April 5 and you haven't used it then it's gone. So, definitely use it.
So, then I think the second thing to think about is costs. Keep your costs manageable. That doesn't mean that you should necessarily go for a cheap passive fund. You may choose to do that. But if you are going for actively-managed funds then make sure that you are paying a reasonable fee for that.
Then of course you have to think about what to put in your ISA and that's the bigger challenge.
Now, one of the things which is quite popular at the moment is multi-asset funds and there is a lot of merit in a multi-asset fund because what it is, is a fund which invests in different assets as the name suggests, equities and bonds and maybe property and maybe cash and they do the work for you. So, if really you know you want to do an ISA but you don't have that much interest or you don't have the time then actually getting someone else professional to do the asset allocation for you makes a good sense. So you might want to consider a multi-asset fund.
But then if you want to invest directly in single-asset funds you have to think about where the markets are going and that gets very interesting then because I think that markets are at a bit of a turning point at the moment. So, if you look at the U.S., for example, the U.S. market has done fantastically well, been very strong, it's led the market. And I think people are just beginning to get a little bit concerned about the valuation in the U.S.
On the other hand, places like Europe and Japan where the governments are stimulating the economies with quantitative easing I think they have got a real tailwind behind them. So, I still like America. There is a lot of growth there, a lot of good things going on there, but I think at the margin places like Europe and Japan look quite interesting this year.
Wall: And you have got a month. But say for whatever reason you are extremely busy over the next four weeks, you can make sure you put that money aside on a platform before taking the time to consider some of the points you have just made, haven't you? You can allocate in cash this year's ISA allowance on a platform, it’s using the allowance, you are not going to lose it?
Stevenson: Yeah, absolutely right. I mean, most platforms – I mean, our platform has something called a Cash Park where you can, as the name suggests, park your cash until you have decided where you want to invest it and that's a really sensible thing to do because you have secured this year's allowance and then you can take your time.
Wall: And you no longer are charged any tax on that, are you? That's a change that has come in. That is tax-free just as any other ISA investment?
Stevenson: Yes. I mean, the changes last year actually improved what was already a very good tax savings vehicle. So, you can now move money freely between cash and investments and back again. That's an important change. And yes, as you point out, you are no longer being taxed on money which is sitting there in cash. So, it's a very flexible vehicle now.
Wall: And for those people perhaps for whatever reason don't have a £1,000 to put aside, now is a great time to set up regular saving.
Stevenson: Yes. I mean, we are talking about ISAs because we are coming up to the end of the tax year, but there is absolutely no reason why you should leave it until the end of the tax year. In fact, if you save regularly through the year then history shows that actually your returns are better because you are obliging yourself to invest maybe when you don't feel like it, when you feel nervous about the market when the market is cheaper. So, putting in a monthly savings plan is a really good idea.
Wall: And you can do that from as little as £50 a month, can't you?
Stevenson: Yeah, that's right. You don't have to save an enormous amount and it just gets the habit going and that's the important thing. The important thing about investing is just doing it.
Wall: Tom, thank you very much.
Stevenson: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
