Diversify to accumulate – is this the ISA top-up secret?
People over 50 have only a few days to add an extra £3,000 to their ISAs.
Sunday 04 October 2009
Britons over 50 have just a couple of days to wait till they can access the new and improved tax-free allowance from the Government. But where is the best place to invest their £3,000 top-up?
Individual saving account (ISA) limits will increase to £10,200 for anyone aged 50 or over from Tuesday, while the rest of the nation will have to wait until next April to benefit from the increase. Despite the early incentive, 62 per cent of people aged over 50 questioned in a recent Post Office poll admitting to being unaware of the new limits. Only one in five savers over 50 said they plan to make additional contributions.
Investors who are yet to open a cash ISA can place up to £5,100 in cash, or put the whole £10,200 in a stocks and shares ISA. For those who have already opened an ISA investment, the top-up must stay with the same organisation as rules allow investors to pay into only one cash and one stocks and shares ISA in any one tax year. Even with a flurry of new launches this month, interest rates on cash ISAs are still relatively unattractive unless you're willing to lock your money away for a long time. The best buy from Leeds Building Society pays 4.60 per cent AER, for example, but is fixed for a lengthy five years. In contrast, its one year fixed-rate ISA offers returns of only 2.50 per cent.
Despite the poor rates on offer, many people are still wary of investing their money in stocks and shares and choose to stick with what they perceive to be safe investments such as cash. However, many experts would argue that investing in cash is by no means 100 per cent safe and can be highly vulnerable to inflation in the long term.
"Over a longer investment period, this could actually be a bigger issue than investment risk," argues Daniel Clayden from independent financial adviser (IFA) Clayden Associates.
When it comes to taking risk, investors should ask themselves how much they can afford to lose. It is this figure that will determine the level of investment risk they can realistically take to reach their financial target. The investment time scale will also be a key factor. An investment period of only five years, for example, leaves little opportunity to ride out the peaks and troughs of the market, while over 15 or 20 years there may be enough time to recover from stock market falls.
Although how someone chooses to invest their money will always depend on the personal attitude of the individual, one of the riskiest strategies is to focus on one particular investment area.
"Diversification is not just a simple case of not having all of one's eggs in one basket. It is about having asset classes which behave differently within the portfolio," says Christopher Wicks from IFA N-Trust Limited.
Holding a decent percentage in fixed-interest investment vehicles such as corporate bonds or gilts will minimise risk considerably. When you buy a corporate bond you are, in effect, lending money to a company in exchange for a regular, stable income. Gilts (Government bonds) are considered one of the safest investments as they are backed by the state. However, safer savings alone are unlikely to help investors reach their financial targets, so exposure to riskier investments may be necessary.
"As a general rule, one could expect the over-fifties to have a lower risk profile than say somebody in their thirties. But it doesn't always work out that way. The over-fifties usually have a much more focused approach to saving for retirement, and as a result may need to take greater risks with investments," says Marc Ruse from IFA Fiducia Wealth Management.
Riskier investment vehicles can take many forms, each with their pros and cons, but generally investors can reduce risk though unit trusts and open ended investment companies (OEICs) which are used to invest in a variety of assets such as bonds, property or equities. These can be passively managed via a tracker fund or actively managed by a fund manager.
"UK equity income funds work well as the dividend income can be reinvested to boost the growth, then drawn later to supplement pension income," says Danny Cox from IFA Hargreaves Lansdown. The UK equity income funds Mr Cox favours are Invesco Perpetual High Income and Artemis Income.
Less experienced investors may choose to begin with index trackers which attempt to mirror the performance of particular indices. Here in the UK the main indices are the FTSE 100 and the FTSE Allshare. The benefit of trackers is that they are far cheaper than actively managed funds, as most charge between only 0.3 per cent and 1 per cent per year, with no initial fee. On the downside, critics of tracker funds say that with charges taken into consideration, they are guaranteed to underperform only the index it mirrors. Yet this is true of many managed funds too, which typically have far higher charges levied. The element of risk with this type of investment depends largely on the index being tracked. More adventurous investors may look to the Bric countries (Brazil, Russia, India and China) which are among the biggest emerging markets and have great potential for substantial returns.
"While the West faces negative gross domestic product (GDP), mounting debt and budget deficits, the emerging market economies have strong balance sheets and financial reserves which ensured the region has suffered less of fallout from the global financial crisis," says Nick Price, the manager of the Fidelity EMEA and Emerging Markets funds.
As always, substantial potential for rewards comes hand in hand with substantial risk, and emerging markets carry with them the most volatility in terms of political instability and currency risks. With this is mind, they should form only a small part of a portfolio (about 5 per cent) and should be considered as a long-term investment of at least 10 years.
Investment ISAs by their very nature are not short-term vehicles, so investors should avoid concentrating on individual countries or regions. Neil Mumford from IFA Milestone Wealth Management recommends the emerging economies of Europe, Asia and South America for investors with a long-term investment horizon. However, he advises investors to look at a single emerging market fund rather than choose one key area or country.
"The First State team is in my opinion the most consistent in this market both through good and bad times. The Emerging Markets Leaders fund is my favourite and although it may lag in a bull market, it will certainly minimise the risk in a bear market," says Mr Mumford.
Investors should proceed with caution when it comes to structured products such as guaranteed bonds. With unit trusts, the investment can be cashed in at any time without incurring a penalty. However, with guaranteed bonds investors are far less flexible and investors are hit with a charge if they try to cash in early. And there is no dividend income as there would be from investing in shares directly.
"Investments such as guaranteed bonds need to be approached with great care since they depend on financial institutions, such as the late Lehman Brothers, for the guarantees," says Mr Wicks.
Instead, safety-conscious investors can drip-feed monthly payments into an ISA which will help to smooth out the ups and downs of the market. Although an investor's risk profile will not necessarily correlate directly to their age, exposure to long-term investments should decline as retirement approaches to preserve what has been accumulated. This generally requires savers to move more of their money out of equities and into safer investments, such as cash, gilts and corporate bond funds.
Apart from any pension plan, experts say that people retiring should hold between 25 per cent and 40 per cent of their liquid assets as cash. With tax-free returns that are guaranteed to beat inflation, National Savings index-linked certificates are a good cash investment option and ideal for those looking for more security in their portfolios as they are backed by the Government.
This is also the time to reduce exposure to overseas investments to protect against currency risk. Savers can still access international growth markets here in the UK as approximately 60 per cent of FTSE 100-listed companies generate earnings abroad.
Buyers beware of new-build home headaches
Is 31 May really the day when we have paid all of our tax for the year?
Dirty tricks in a divorce can cause some nasty surprises
10 tips for taking out a personal loan
Women born in 1950s facing severe financial hardship over pensions could have fates changed by Ros Altmann - should she choose to help
- 1 Man on naked bike ride gets ejected after becoming aroused
- 2 Fifa corruption: Europe plots to stage an 'alternative World Cup' in place of Russia 2018
- 3 How much sex should I be having?
- 4 Jaden Smith wears gender fluid dress to high school prom with Hunger Games actress
- 5 Live football streaming sites Rojadirecta, LiveTV and Drakulastream all completely banned from UK browsers
Migrants in Kos: Photos show real tragedy after Brits abroad complain of 'awkward' holidays
British tourists complain that impoverished boat migrants are making holidays 'awkward' in Kos
Michael Gove determined to scrap the Human Rights Act – even if Scotland retains it
Thousands of teenage girls enduring debilitating illnesses after routine school cancer vaccination
Threat to scrap Human Rights Act could see UK follow Nazi example, warns UN official
Why this year's general election was the most unfair in Britain's history
iJobs Money & Business
£23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...
£13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...
£25 - £30K: Guru Careers: We are seeking a highly-motivated and ambitious Comm...
£30 - 35k: Guru Careers: We are seeking a Pricing Analyst to join a leading e-...
Day In a Page
In the pretty market town of Bungay, this grade II-listed Mill House is arranged over four floors, offering four bedrooms and three reception areas.
This four-bedroom Edwardian home offers a combination of original features and contemporary design after a renovation by the current owners.
This four-bedroom home offers a vaulted ceiling in a breakfast room that's ideal for summer entertaining with doors that open to the patio and garden.
On the market for the first time in more than 50 years, this six-bedroom home is a project with vast potential - spread over three floors of living space.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Surrounded by rolling countryside, this four-bedroom barn conversion comes with a self-contained, one-bedroom annexe that could serve as an office or a holiday let.
Located near Harrogate town centre, this five-bedroom Victorian terrace is arranged over three storeys while a current study serves as an optional sixth bedroom.
A ground-floor flat in a country house, located a mile from Sway; this two-bedroom home would make an ideal weekend retreat on the edge of the New Forest.
On a popular residential lane in Caterham on the Hill, this four-bedroom family home offers a secluded garden and a convenient location for local schools and public transport.
Just a short walk from Westerham green, this three-bedroom cottage has a light kitchen with exposed brickwork and double doors that lead to a south-facing garden.
In a prime spot opposite the River Thames, this one-bedroom flat has an 18sq ft reception room with glass doors that open out to a private terrace.
Set in the hills above Llanwrda Village, west Wales, this 18th-century three-bedroom farmhouse has holiday-let potential from a separate barn conversion and annexe.
This charming end-of-terrace townhouse is arranged over three floors, with two double bedrooms and a private courtyard garden located at the rear of the property.
Located in the University area, this semi-detached five-bedroom home is arranged over three floors - there's even a rear garden and off-road parking too.
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
Surrounded by the Western fells, this five-bedroom Georgian home retains many original features including panel-plastered ceilings, sash windows and fireplaces.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B, subject to change of use permissions.
A former period coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, office, kennels and an outbuilding that's currently used as a gym.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool