Warr on...

Phew!! The curtain falls on another tax year and we breath a sigh of relief that the last minute dash to make use of the pensions and Individual Savings Account (ISA) allowances was successful…..just!!

There are a number of issues with adopting this approach: -

• The obvious stress and possible physical dashing around like the proverbial mad hatter.

• You miss out on almost 12 months of tax-free growth.

• You buy into the market at one point in time.

The recent stockmarket volatility highlights the danger with this latter point. This coupled with the increased demand at the end of the tax year for shares can result in prices being inflated at the time of purchase.

We readily accept that it is a medium to long term investment and regular use of one’s pension and ISA allowances over a number of years will typically allow you to average out the purchase costs. However, rather than be nervous about the stockmarket and ultimately not do anything, thus leaving these valuable allowances unused, there are a number of solutions.

Invest in cash

The new ISA allowances permit cash investment of up to £3,600. Under the new rules effective from 6th April 2008, at any time, these holdings may now be transferred into stocks & shares. With regard to pensions, cash can be held without restriction.

Therefore, if in doubt, take this option and leave the decision until later when you feel more confident of ‘dipping your toe in the water’.

Some stocks & shares ISA providers are offering a cash based temporary home. This is not intended as a long-term position, rather a safe haven where by last minute ISA investments need not be rushed hurriedly vested into stocks & shares. As such, whilst invested in this manner, the interest being received on the holding remains taxable, but at least the allowance is used.

Phase the investment

This can be a series of smaller lump sums throughout the year or a structured facility whereby the investment is automatically invested over a period of typically 6 or 12 months. Many ISA and pension providers offer this facility.

Contribute monthly

Investing smaller amounts over a year can bring ‘pound cost averaging’ benefits. By this we mean that instead of purchasing at a one off price, the price can be averaged as market volatility causes prices to fluctuate up and down.

An example of how this can work is shown below.

In this table above, which for purpose of demonstrating the point ignores charges, in a hypothetical year where the fund price has reduced by 15%, the pound cost averaging has meant that the value of the investment equates to £6,389.28 (7,516.8 units @ £0.85 per unit). Therefore, it has reduced by only 11%. We fully accept that in a rising market, this would have also diluted the growth. However, this may be a price worth paying to achieve peace of mind. If an individual wishes to reduce market volatility, this is a very attractive way of doing so.

Of course we must not forget that if at the end of the year the fund price returned to its original £1.00 value as at the start of the year, the investment would be worth £7,516.80, a gain of a little over 4% in what was effectively a flat market.

Regardless of how one wishes to utilise their pension & ISA allowances, choosing the right provider, right product, right funds and right fund manager to fit with your desired attitude to investment risk is equally important. If you require assistance in this regard, please feel free to contact one of our Financial Services Partners, who will be happy to assist.

Note that this approach is not exclusive to pensions and ISAs and can equally apply to other forms of investment, both personal and corporate.

Date of Article: 11th April 2008