With 2012 now behind us it is time to look forward to the end of the next year – 5th April 2013. For many this signals the rush to make use of unused tax allowances before they are lost. With that in mind I thought it time to “debunk” some ISA myths:
ISAs are risky – FALSE: An ISA is not an investment, it is just a ‘wrapper’ in which money is kept to protect it from the taxman – other examples being Sipps and pensions. Investors should think of an ISA as a box that prevents the taxman being able to touch their investment returns. Any risk comes from the type of investment held within the ISA (or pension).
The tax advantages of an ISA are not worth it – FALSE: Obviously a pound in one’s pocket is much better than in the taxman’s. There is no capital gains tax to be paid on gains and no tax income tax payable by the investor.
Markets are volatile so there is no point doing an ISA this year – FALSE: If stocks and shares ISAs appeal but investors are unsure where to put their money then they should ‘park’ their cash and decide later where to invest it. That way, the ISA allowance is banked without anyone being forced into an immediate decision of where and when to actively invest the money.
Investing in an ISA brings the need to fill out a tax return – FALSE: Any tax savings happen automatically within the ISA and ISAs do not have to be recorded on a tax return. Investors do not even need to tell HM Revenue & Customs they have an ISA
Investing in an ISA means the money is locked up – FALSE: There is no minimum term for which the investment must be made and the tax advantages start on day one when investing in an ISA. It is always possible to gain instant access to whole or part of the savings, subject to any specific restrictions that may be imposed on a particular ISA product.
It is best to wait until the end of the tax year to do an ISA – FALSE: The tax advantages of an ISA start the day the money is invested so by investing earlier in the tax year, there is potentially more advantage. As soon as this year’s allowance is invested, it will start to benefit from the tax saving advantages.
It is best to follow the crowd – FALSE: Investors need to understand that, once they spot a bandwagon it is too late. Usually when there is a popular trend it means a bubble is forming and they should remember their own needs and individual circumstances are different. Consider the example of the technology bubble. Losses were not caused because investments are bad but because too many people jumped on the bandwagon. Investment markets perform in a similar to any other market, whether that is the property market or commodities market.
Rather than wait until the end of March and rush to beat the deadline, if you are considering an ISA (or any other form of investment) now is the time to take stock, consider your options and seek professional advice.