Wrap up to shield your savings from tax

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The Independent Online

When investing for growth, it is well worth using an individual savings account (ISA) as a tax-free wrapper for your investments. Capital gains tax (CGT) is payable on any gains arising from the sale of shares. Each of us has an annual allowance of £7,200, so if we sell shares above this value, we are subject to CGT. Using an ISA wrapper avoids this. Even though few people actually sell enough shares in one year to use up their annual CGT allowance, over the long term, returns on shares, unit trusts or open-ended investment companies (Oeics) can considerably exceed this sum. So the tax advantages of using an ISA can be significant in the longer term.

When investing for growth, it is well worth using an individual savings account (ISA) as a tax-free wrapper for your investments. Capital gains tax (CGT) is payable on any gains arising from the sale of shares. Each of us has an annual allowance of £7,200, so if we sell shares above this value, we are subject to CGT. Using an ISA wrapper avoids this. Even though few people actually sell enough shares in one year to use up their annual CGT allowance, over the long term, returns on shares, unit trusts or open-ended investment companies (Oeics) can considerably exceed this sum. So the tax advantages of using an ISA can be significant in the longer term.

"By putting your investment in an ISA wrapper, the capital is taken out of the CGT bracket completely," says Craig Whetton, chief executive of independent financial adviser (IFA) Chartwell Investment Management. "ISAs aren't the be all and end all, but that type of tax advantage is there, so you might as well make use of it. If you don't use your ISA allowance each year, you lose it - there's no chance of mopping it up in the future."

Michael Owen, director of IFA Plan Invest Group, advises that, when investing for growth: "You need a five-year time horizon, at least, to smooth out stock market fluctuations."

People looking for growth tend to be looking longer term, anyway, but where you put your money depends on your attitude to risk and your existing portfolio. People are increasingly choosing to invest money at an earlier age, and there are two main reasons for this. One is that we have more disposable income than ever before, and the other is concern about retirement provision.

"People are desperately worried about their future because the prospect of getting a decent [state] pension is a thing of the past," says James Bevan, director of client investments at Inscape, Abbey National's wealth management service.

ISAs are becoming an increasingly popular tool for pension provision, so should certainly be considered. "ISAs fit well with personal pensions," says Vivienne Starkey, partner at IFA Equal Partners.

The flexibility offered by ISAs means that not only do you get the tax breaks but you also have the choice of switching to an income fund if you want regular income rather than growth.

If you can put money away for 15 years or so, the chances are you'll build up a healthy nest-egg, whether you're investing for your children's education or for your retirement. For example, if you'd invested £5,000 in Foreign & Colonial's Investment Trust 15 years ago, your investment would now be worth £45,681. The same amount invested in Fidelity's Special Situations fund would be worth £70,442. And, if you had taken a greater risk and opted for Aberdeen Technology, your £5,000 would now be worth £104,250.33. The Aberdeen fund is very high-risk, as the volatility of the last 12 months has shown. But when you are investing for growth you have more time to play with, so you can afford to opt for a more volatile fund. Nevertheless, these figures show that, even with a lower-risk fund, long-term investment is likely to provide significant growth.

Mr Owen points out that you don't need a lump sum to invest for growth. "Monthly savings are a good idea," he says. "You haven't got the problem of timing, and it's amazing how it builds up." An investor who's been putting £50 a month into Aberdeen Technology over the last 15 years will now have an investment worth £85,953.

So, which fund should you opt for? "Where you invest your money depends entirely on what you've already got in place and your attitude to risk," says Ms Starkey.

In general, the core of a portfolio would be a reasonably low-risk UK-based fund, for example Aberdeen Progressive Growth, Newton Income, HSBC Growth and Income or Fidelity Special Situations. Mr Whetton also likes investment trusts such as Foreign & Colonial and Scottish Mortgage.

However, it is a good idea to seek advice if you have no experience of investing in equity funds. "If you can get it right at the beginning it's going to pay dividends in the longer term," says Mr Whetton. "If you get the core right you can afford to play around the edges a bit."

Once you have the core investments, it is time to look to a European or international fund. The key is to understand where you are investing and the risk involved. It is important to keep track of how the fund is performing because of the volatility of the stock market.

"If you look at it on a monthly basis it'll probably drive you crazy because it's bound to go down the day after you put your money in," says Ms Starkey. "But it is worth looking at it once a year as you'll know then if it's a dreadful fund."

Mr Owen advises against sitting on the fund if it is under-performing. While it is not a good idea to switch funds too frequently - largely because of the charges involved - don't think that you're bound to get good growth just because you're investing for a long time.

It may be worth moving your capital to another fund with the same provider; or you could opt to put money into a completely different sector with a different investment house. If you are at all concerned about the performance of your investment, seek advice from an IFA.

Contacts: Chartwell, 01225 321700; Equal Partners, 020 7867 0038; Plan Invest, 01625 429217

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