Equity ISAs – are they worth the worry?

With turbulent stock markets causing concern throughout the world’s financial community the average investor might be thinking twice about investing their hard earned savings in an equity ISA.

The Investment Management Association has revealed that sales of equity ISAs fell by £68 million this month, but with the price of most stocks falling, now could be the time to pick up a bargain.

What’s an ISA?

ISA stands for Individual Savings Account and unlike other forms of investment they are tax free, meaning that you can save up to £7200 in an equity ISA or £3600 in cash ISA without the Chancellor getting his hands on your cash, unlike the money sitting in your current account or savings account, but if you want to take advantage of this year’s tax break you’ll have to get your ISA set up before the 5th April.

An equity ISA is managed by companies who then put your money into stocks and shares, meaning that your money can go up and down depending how these shares perform. A cash ISA on the other hand provides a guaranteed return on your cash which could be as high as six per cent, meaning at this rate £1000 would grow by £60 over the course of the year.

Taking the plunge

For many investors the risks posed by an equity ISA are too high and they would rather take the guaranteed return of a cash ISA instead, but if you look at figures, history indicates the stock markets to be a good investment. Over the last three years the FTSE 100 has returned almost 30% and over the last five years it has returned a staggering 90% on investments.

Why invest in equities?

  1. Invest for the long-term – current instability will probably pass and if you’re investing for five or more years then you could see a significant growth on your cash
  2. Take away the temptation – by putting your money away as part of a long term savings plan you remove the temptation to dip in and withdraw your cash in the same way you might a current account
  3. Not a risky as you think – many ISAs are designed as "cautiously managed" funds meaning that they’ll invest in a way likely to provide a stable return.

Who to invest with?

Deciding who you want to invest with will require a bit of research but companies such as Invesco Perpetual, Jupiter and New Star all rate highly.

Cash alternatives

If you still feel safer with a cash ISA then Abbey or Alliance and Leicester’s Direct ISA offers a guaranteed return of 6.25%.

Make the most of your allowance

Anyone looking to put money away should be thinking about their ISA allowance as it’s not often that the tax man will give you such a good deal. Weigh up the risks involved before you invest and remember that an equity ISA should be considered at least a five year investment. If you feel more comfortable with a guaranteed cash return then be sure to choose an ISA with as high a rate of interest as possible.

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