FINANCIAL ADVICE WITH KEVIN CLANCY

FINANCIAL ADVICE KEVIN CLANCY ISAS

Get the most out of your ISAs

Investing a £1 coin when it entered circulation in 1983 could have seen its real value grow more than tenfold, according to an investment firm.

Asset manager M&G calculated that, if left in a piggy bank, inflation since 1983 would have corroded its buying power to the equivalent of 32p. Investing in shares would brought a much higher return, it said. If the £1 had been invested in shares in 1983 and tracked the rise in the FTSE all-share index, it would have had a value of £11.66 by the end of 2016, after allowing for inflation. This would have required any income to be reinvested each month – to make the most of compounding over time.

Ritu Vohora, investment director at M&G, said that the replacement of the old round pound coin was a “timely reminder” of the corrosive effects of inflation – the rising cost of living. Any investment carries a risk of losing money, unlike saving, but Ms Vohora argued that there were potential rewards.

“Our analysis shows that you can turn even a modest investment into a healthy pot of money if you are willing to accept an element of risk and are in a position to make a long-term investment,” she said.

So what is the best way to invest your money over the mid to long term, without unnecessary risk? The answer, if you are prepared to accept some risk, is to fully utilise your ISA allowances. Keeping your money in cash means that you are suffering the long term risk of inflation. At present each individual has an ISA allowance of £15,240 per financial year.

A married couple can therefore invest £30,480. After April this increases to £20,000 per individual and £40,000 for a couple. The growth of the ISA is tax free and any income generated is also free of tax. There is no term on the investment and money can be accessed at any time either in whole or in part.

Invest

Before you invest you need to plan how long you wish to invest for. Any equity based investment should be for a minimum of 5 years. The longer the time period the lower the risk. Investment in ISAs can be by a lump sum, monthly instalments or a combination of both. The risk is lower if the instalments are made monthly as this takes advantage of markets rising and falling.

ISAs are like Unit Trusts with additional tax advantages. They invest in a wide area of companies across many sectors both geographical and industrial.

An analogy would be like investing in a brick wall. If one brick fails the wall still stands. The larger the amount of bricks used, the lower the risk.

Therefore using several different funds within your ISA again lowers risk. It is also a good idea to use what are known as passive funds. These are funds that follow the various international share indices. They rely less on fund managers and thus the charges will be lower.

If you do not wish to withdraw income then any dividends from the investment should be reinvested. Using a qualified financial advisor is important as your investment needs to be reviewed on an annual basis. Funds will need to be rebalanced in order that your financial needs are being met.

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