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Sometimes, it is what you know: Breaking down investment jargon

March 2019


Categories: EQi explains

For investors yet to shelter the maximum £20,000 for the current tax year, it’s important to work out the best route to take full advantage of the allowance.

And even though ISAs were designed to be straightforward savings vehicles, there’s plenty of jargon to get your head around - even for seasoned investors.

Here we explain some important terms that will help you learn more about how to maximise your ISA savings.

Bed and ISA

Holding shares in an ISA is a tax efficient way to hold your investment as it means less money is handed to HM Revenue & Customs. Yet savers are not allowed, under current ISA rules, to transfer existing holdings directly into the ISA. The shares need to be sold and bought back again, this time inside an ISA. The process has the name: Bed and ISA. It is widely used but there are charges to consider and the sale of the shares could trigger a capital gain, on which tax may be payable.

Capital Gains Tax

This tax is charged on profits when you come to sell your investments. Everyone has an annual exemption, which is £11,700 in the 2018-19 tax year (increasing to £12,000 in the 2019-20 tax year). Gains over the annual exemption are charged at 10 per cent or 20 per cent depending on your other income. However, gains made from ISAs are exempt.

Flexible ISA

A flexible (Stocks and Shares or Cash) ISA allows you to withdraw your money without affecting your tax-free allowance. New rules introduced in 2016 for certain ISAs to become ‘flexible’ mean that even if you have used up all of your allowance and then withdraw money, you can top it back up — as long as you don’t exceed the limit for that year. So if you have already invested the full £20,000 and need to get hold of some money temporarily, a flexible ISA means you can withdraw, say, £5,000 and replace it that same tax year. EQi offers a flexible Stocks & Shares ISA.

THE EQI FLEXIBLE ISA


Investment trusts

These are often forgotten by investors who plump for the ever more popular unit trusts. Investment trusts are companies that hold assets such as shares. Unlike unit trusts, the trust itself has a fixed number of shares and as such is known as a closed-ended fund. They are run by a fund manager and backed by an independent board, which is appointed to act in the best interests of shareholders. There are many impressive dividend-paying investment trusts worth considering.

Multi-asset funds

These funds invest across many different types of assets including equities, cash or bonds. That means they give an ISA investor greater diversity than a fund investing in a single type of asset. It is a good way of spreading risk between several markets that you may have so far not included within your ISA portfolio. A multi-asset fund manager can quickly move money around between the different asset classes to fully take advantage of new trends and market changes, and tweak their overall asset allocation depending on the economic outlook.

Pound cost averaging

One reliable way for an ISA investor to reduce the risk that they enter the market at a disadvantageous time is to drip-feed money into an investment on a monthly basis throughout the year. This strategy benefits from what is known as pound-cost averaging. When stock markets fall, your regular monthly payment buys more shares or fund units; when markets rise, fewer shares and units can be purchased with the same sum. Something worth considering for the new tax year - if not before.

Socially responsible investing

Environmental, social and governance (ESG) factors are the primary driver of a fund manager's investment selection process of a growing number of ISA-able funds today. Many people feel passionate about supporting environmental and social issues. Plus, according to research by Hermes, well-governed companies tend to outperform poorly governed ones by an average of over 30 basis points per month. While there are many "ethical" investments available, it’s worth doing your own research to find the most compelling individual ESG funds.

Tax wrapper

An ISA isn’t an investment itself. It’s simply a tax wrapper that you put around savings or investments, which shelters the money from tax on capital gains and dividends, as well as interest paid.

HT
Author: Holly Thomas Categories: EQi explains