Getting the most from an ISA

Weighing up the pros and cons of lump sum or phased investment
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The Independent Online

You have several thousand pounds sitting in your bank account earning minimal interest. With interest rates so low, you might fancy taking a punt on the stock market, and want to take your gains tax-free through an individual savings account (ISA).

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You have several thousand pounds sitting in your bank account earning minimal interest. With interest rates so low, you might fancy taking a punt on the stock market, and want to take your gains tax-free through an individual savings account (ISA).

But should you invest the money in a single cheque or feed it in regularly through a monthly savings plan?

The pros and cons of lump sum versus regular investment is a much-debated dilemma. There are advantages to both. Much depends on the state of the market and your own attitude to investing.

The dangers of putting all your money in at once are illustrated by Juan Orjuela, an analyst at investment specialists Hargreaves Lansdown.

"If you had invested £10,000 in the stock market in April you would have been buying shares at around 6,600 points, when the FT-SE was at its peak, but a few months later you could have had them at 6,100.

"Nobody likes to buy overpriced goods. Paying every month would average out the price at which you invest."

The lump sum is still the preferred method for the majority of investors. Patrick Connelly, director at discount broker Chartwell Investment Management, says that, although in most cases the arguments favour staggering payments, his customers are rarely swayed.

"Most ISAs will be equity-based, and stocks and shares come with a fair amount of risk attached. This means there is a strong argument for regular investing because it helps you ride over the peaks and troughs of the market." He says regular investment removes one of the most complex stock market issues - when to buy in. Get the timing right and you will make the proverbial killing. Make a mistake and it could be years before you see real gains.

"If you are unsure when to enter, you should invest on a regular basis because you don't have to worry about getting the timing wrong. The time to pay in a lump sum is when you really feel your chosen investment is about to take off. If you think, say, the American markets have gone down a fair way and could take off, then a lump sum is the way to go." He says ISA providers rarely impose extra charges on regular investors. But you should check carefully.

Mr Connelly says the reason most of his customers invest in lump sums is that the £7,000 annual ISA limit is only a small part of their portfolio, the lucky things. This means they are more willing to take a chance.

"Much depends on how much risk you are willing to take, and the more cautious investors should pay regularly," he says.

The type of investment you are choosing also plays its part. Corporate bond funds, which invest in loans issued by companies and pay a fixed rate of interest, pose much lower risks to investors than equities. Even the most anxious investors can happily invest all their money in one go.

Corporate bonds can be taken out as an ISA.

But if you are investing in a high-risk fund in, say, the Far East, the extra volatility of emerging markets can be partially offset by regularly dripping in your money.

If you do pay every month you should review your plans regularly, particularly if you have set up a direct debit, says Philippa Gee, an independent financial adviser in Shrewsbury.

"If you do not remember to cancel a direct debit to your ISA at the end of the financial year it will probably continue and you will find yourself committed to the same provider for another 12 months. Once you have started an ISA, you cannot switch mid-year so you will be stuck with it."

Much depends on how confident you are of your ability to spot future market trends. "Regardless of whether you are going for a UK tracker or Japanese smaller companies fund, if you are wary about stock markets; don't have the knowledge; or are concerned about timing, you should stagger payments," she says.

"If you feel you do have the knowledge and your chosen equity has a great opportunity for growth then a lump sum may be worthwhile, because if you feed your money in slowly you may miss out on that chance," she adds

Ms Gee says you could consider a combination of both methods. "If you were investing in two UK funds under your ISA allowance you could pay in a lump sum now and start regular payments in the next financial year."

There is still plenty of time to set up a regular ISA savings plan but the longer you leave it before this year's allowance runs out on 5 April, the more you will be tied to the lump-sum route.

As to whether the market currently favours either method, it depends on the analyst you speak to. Recent volatility has made it an impossible call. If you have any doubts, the regular saving method may be the best one for your ISA.

However, if you are investing in another tax-efficient vehicle - personal pensions - you may find it better to pay in a lump sum annually, because you may then be hit for lower charges.

It depends on the provider, but Standard Life customers, to take just one example, certainly would be better off with a lump sum. The allocation rate, the percentage of the money you invest that is used to buy units in the fund, is 95 per cent for Standard Life's regular monthly investors, but 101 per cent for those paying a one-off annual lump sum.

"This means that an extra 6 per cent of your money is invested in your pension," says Mr Connelly. "Pension companies claim this goes to meet administration costs.

"Hopefully, with the new Stakeholder pension scheme pushing pensions providers towards lower charges, this charging difference will eventually be reduced," he says.

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