ISAs: Use them or lose them

19 February 2009 / by Rachael Stiles
As the end of what has been a tumultuous tax year approaches, Brits who have not given a second thought to their ISA allowances since this time last year will be deciding whether to use it or lose it.

The markets having taken a beating over the last 12 months, with FTSE falling 30 per cent, so some investors are in a quandary about whether to take their chances with Stocks and Shares ISAs, and falling interest rates have taken their toll on returns from Cash ISAs.

But, whether they opt for the stock market or the currently limited rates of investing in cash, investors would still do well to protect their money from the taxman, wrote Fidelity International investment commentator, Tom Stevenson, in the Telegraph.

This year's decision is harder than last year's, Mr Stevenson explained, as last year it was a fairly attractive prospect for savers to leave their money in the bank, where it could accrue five per cent interest in a savings account, but now returns on cash investments have dwindled.

It is unclear to Mr Stevenson why savers have "turned our backs on ISAs", not realising what a "fantastic break the ISA is."

"Once you have put money into an ISA, it remains out of the clutches of the taxman for ever," he said, "no capital gains tax, no further income tax on dividends or interest, nothing. You don't even have to tell the Revenue."

The reason that some people think ISAs are not for them is that they underestimate the benefits of their tax-free savings allowance, he said. But if someone has built up a nest egg of £50,000 in a standard savings account, they could accrue £17,192 over 10 years at an interest rate of five per cent, but when the money is put into an ISA this figure rises to £31,445.

Not only would investing this money in an ISA mean an increase of 83 per cent in returns, but the other reason for investing in a Stocks and Shares ISA right now is precisely the reason that nobody wants to – because the value of shares have taken such a knock in recent months.

But history shows that "extended periods of investment underperformance usually lead to periods of outperformance," Mr Stevenson reassures wary savers. Buying shares at a time when other investors are running for the hills has often proved to generate higher returns than buying when investors are displaying extreme confidence, he claims.

"You can use your ISA allowance or you can lose it", he concluded, "but, if you are going to pass up the opportunity, at least understand what you might be missing."

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