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

March 2019


Tags: Investing Strategies

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% or 20% 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. Selftrade will soon offer a flexible Stocks & Shares 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 within your ISA portfolio that you may have so far not included. 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 many investments are available badged as “ethical” it’s worth doing your own research to find the most compelling individual ESG funds available.

 

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.

 

 

The smart yet simple way to begin investing

Individual Savings Accounts (ISAs) are one of the most tax efficient ways to save. But with interest rates on cash savings low, more people are looking for higher returns. 

If you are ready to plan for the long-term, a Selftrade Stocks and Shares ISA is a great place to start.

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You can start investing today through any of our account options:

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Take advantage of tax free investing with our Stocks and Shares ISA today.

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From great value to best-in-class, access the SIPP to suit your needs through our extensive network of providers.

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Selftrade does not provide investment advice. This article is the authors view and is not the view or opinion of Selftrade and Selftrade accepts no liability for any loss caused as a result of the use of this information. The opinions expressed are those of the author at the time of writing and should not be interpreted as investment advice.

The value of investments can fall as well as rise and any income from them is not guaranteed and you may get back less than you invested. Past performance is not a guide to future performance. We do not provide advice or make recommendations about investments. If you have any doubts about the suitability of an investment, you should seek advice from a suitably qualified professional adviser.

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