Use it or lose it

Everywhere you go it seems you get taxed. Income tax is taken from your salary, you pay VAT on goods and services and even your insurance premiums are taxed. And then there is the council tax.

But you can at least avoid paying tax on some, if not all of your investments. Every year you are entitled to tax breaks on investments up to £7,000 if you invest in a fund through an Individual Savings Account or ISA. But you lose the breaks if you fail to invest by April 5.

The period just before the end of the tax year is sometimes known as the ISA season, when many people rush to put money in investment funds to exploit their tax breaks.

The recent rollercoaster ride seen on stockmarkets around the world may well have discouraged some of us from investing. Others will see the lower prices as a good chance to buy. If you feel lucky then let help you to invest in ISAs.

There are limits

Each tax year, UK adults are entitled to invest up to £7,000 in ISAs. All of this can be invested in a single fund – a Maxi ISA – or £4,000 can be invested in an investment fund mini ISA and another £3000 in a cash mini ISA. You cannot have a mini and a maxi ISA in the same year. So no mixing the minis and maxis.

What are the breaks?

Capital gains made within an ISA fund are tax free. So if the shares you invest in double in price you won’t be taxed on the money you make. Those who invest in bonds are also able to reclaim the 20% tax deducted at source on their interest payments.

The dividends on shares held in ISA funds are though subject to tax. However, at least higher rate tax payers do not have to pay any more tax than what is taxed at source on the dividends, so it is still worthwhile for them to have investments in ISAs.

The choice is wide

Picking an investment can be a tough decision. There are around 2,000 unit trusts and open-ended investment companies – so-called Oeics – registered in the UK, many of which are open to ISA investments. These are investment funds into which a large number of investors pool their cash to invest in a wide range of stocks and shares.

Another kind of pooled investment is an investment trust. Some of these trusts are also open to ISA investment, although the choice is more limited.

ISA-able funds are available in all kinds of investments. You can invest in UK companies, large or small, for example, but you can also invest in Far East or Latin American stocks, too. Specialist sectors such as technology, property or pharmaceuticals are also an option. Nor do you have to invest in shares. Funds that invest in the safer option of bonds are open to ISA investment, too.

But there are still charges
While you enjoy tax breaks with an ISA, you still have to pay charges on the funds themselves.

The standard initial charge for a unit trust or Oeic is 5-6%. This is used to pay commission to brokers and cover the fund management companies’ administration fees. There is also an annual management charge of around 1.5% of the value of the fund. A third of this is used to pay brokers an ongoing, or ‘trail’ commission. The rest goes to the fund management companies.

But you can get a discount on the initial charge by buying your funds through, which charges 0% initial commission. Click through on the Investment button on to find out more.

Choosing a fund
An increasing number of investors have a good idea of where they wish to invest. A tremendous amount of information on funds can be found on the internet as well as by reading the press.

If your ISA is your main fund investment then you might want to consider a fund that invests in a broad range of mainstream UK shares.

If you want to broaden your investment, you might consider a ‘fund of funds’. This is a fund that invests in a portfolio of other funds. The downside is that there is an extra layer of charges from the underlying funds. But the advantage is that a full-time fund manager will manage the portfolio for you, switching investments according to market conditions and keeping a control on risk. If you intend to invest every year in an ISA and build a substantial investment over time, a fund of funds is a good option.

If you are unsure about where to invest, either seek help from an independent financial adviser or take a look at a panel of best performing funds by clicking through the Investment button on There is a choice of 1,000 funds to choose from, as well as the option to speak to an adviser.

Lump sum or regular savings?
If you want to use your ISA allowance for this year and have not done so yet then clearly a lump sum investment is your only option this side of the tax year-end.

But for the next tax year, you might wish to consider a regular monthly payment into an ISA fund. You can make monthly investments of £333.33 into a mini ISA and £583.33 a month into a maxi ISA.

This diversifies your investments across time and is known as pound-cost averaging. It reduces the risk of investing a lump sum at the wrong time and sometimes means you can take advantage of market dips.

Keeping track
Make sure you note down the price of the units when you buy your ISA fund and check how they progress by following them in the listings online.

Sometimes a mid-price is quoted, although two prices are often listed – bid and offer. You buy at the offer price but the value of the units if you sell is the bid. The difference is known as the bid-offer spread and is effectively another charge.

It can be stressful checking the value of your investments every day because they will undoubtedly go up and down. But check them every three or six months and the chances are you will be pleasantly surprised.

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