SOME people just like paying tax. That must be one reason why investors pay an unnecessary £263 million in tax every year by failing to take advantage of tax-efficient investments.
The best-known is the individual savings account. Isas are free of both capital gains tax and a higher rate tax on dividend income. There are attractive rates of interest on offer to cash Isa investors and the interest is tax-free. The annual allowan
ce this year is £7,200 and you can invest the full amount in stocks and shares.
Alternatively, up to £3,600 can be invested in a cash Isa and the balance in stocks and shares. While Isas play a useful role in retirement planning, they can also be used to help pay for such things as school fees and your children's university education.
You may feel nervous about investing in the stockmarket at the moment.
However, investing on a monthly basis can work to your advantage when share prices are fluctuating. The main benefit of investing regularly is known as pound cost averaging, because it helps smooth out the price at which you buy shares. If the market falls, your monthly investment will buy more shares. When the market rises, fewer shares will be purchased and the shares you bought at a lower price will increase more in value. Over a period of time you buy more shares when prices are low and fewer when prices are high, meaning that the average price paid can be lower than the average share price for the period.
It is important to take a medium to long-term view when investing in the stockmarket, typically five to ten years. This allows more time for investments to grow and overcome short-term fluctuations in the markets. Although, over the longer term, stockmarket returns have historically outperformed cash deposits, it can be tempting at times like this to delay making new investments or even consider selling existing investments. There is, however, a risk in being out of the market and an investor who tries to time investments is highly likely to miss the best gains. Far from minimising investment risk, trying to take advantage of market timing is likely to prove a high-risk strategy.
Investing in an Isa on a monthly basis through a fund supermarket gives you access to a wide range of investment funds from a large number of fund management companies. This means that an investor with quite modest amounts to invest can access a portfolio of funds managed by some of the top fund managers.
A diversified Isa portfolio will reduce the risks involved and help you to take advantage of the longer-term benefits of investing in the stockmarket.
• Sue Hussin is an investment adviser at Johnston Carmichael Financial Services
The full article contains 480 words and appears in The Scotsman newspaper.
