Hang on now, the new ISA allowance won’t be taking effect until 6 April and it’s only February, so why am I banging on about it already?
Well, although it’s true that you won’t be able to invest any of your new £15,240 allowance, and save tax on the proceeds, until April rolls around, how many of us have fully used up our allowance for the current 2015/16 tax year? If you’ve invested your full current allowance and your investment plan for your next chunk is already in place, well done you — you need read no further.
Use it or lose it
But if your current allowance has not been fully utilized, then don’t forget — you use it or lose it. That’s right, if you still have a few thousand you can invest from this year’s allowance on 5 April, it will disappear overnight and you’ll have to wave goodbye to some potentially nice tax savings.
So, you’ve got six weeks left to use up the rest of your 2105/16 allowance — where are you going to invest it?
You could always put it in a cash ISA and not pay tax on any interest earned. But honestly, what’s the point of that? Most of them are offering only around 1.5% per year in interest, which would net you about £230 over a year — so a 20% taxpayer would save something like £46 in tax.
Shares are best
But if you invest in shares, you can get annual dividends that alone beat the pants off a cash ISA, and you’ll have the prospect of tax-free capital gains on future share price rises too.
Lloyds Banking Group (I have some in my pension but not my ISA) is on a forecast dividend yield of 5.1% (more than three times the interest rate from a cash ISA), and with its shares on a very low P/E rating of around eight (with the FTSE long-term average around 14), I just don’t see how they can’t rise significantly in the coming years.
Or perhaps something like National Grid, which is also offering cash-busting dividends of around 5%, and whose share price has risen by 71% in the past five years!
Then you could possibly go for an out-and-out growth candidate like ARM Holdings, the designer of many of today’s smartphone chips. ARM doesn’t pay much of a dividend, but its massive profit growth has pushed its share price up seven-fold in 10 years!
Diversify!
And if you’re thinking that it might be a good idea to spread your £15,240 investment (or as much of that as you can comfortably afford) across a mix of such shares, spreading the risk across different companies and sectors, then you’ve got my support one hundred percent.
I reckon that if you spread your ISA investments over the course of the year to help even out the ups and downs of the stock market, and spread them across a basket of FTSE 100 shares in different sectors, you’ll stand a much better chance of enjoying a profitable retirement than those who go for 1.5% cash ISAs.
