Why it's vital you have an Isa plan

(This article first appeared in Penny Sleuth in March 2012. Penny Sleuth is an unregulated free e-letter written by Tom Bulford and published by Fleet Street Publications Ltd.)

Right now, the government is in no position to be generous. And so we need to grab any tax break that we can get. For me the one not to be missed is the annual Isa allowance.

To remind you, Isa stands for individual savings account, into which you can put your money and thereby keep it out of reach of the taxman. Not only are savings held within an Isa tax-free, but you do not even have to declare them on your tax return. How nice is that!

The rules allow you to invest a limited amount into an Isa each tax year. If you have not already done so that means that you have until 5 April to make this year's contribution. The total allowance is £10,680, for any UK resident over the age of 18.

You can put up to half of this, £5,340 into a cash Isa, offered by most banks and building societies. Or you can put up to the whole amount of £10,680 into a stocks and shares Isa. Or else you can have a combination of the two.

How to start your stocks and shares Isa

It is easy enough to set up a stocks and shares Isa account – all online brokers, to my knowledge, offer this facility.

Naturally enough, all the big financial services providers see this as an opportunity to drag some more unsuspecting savers into their net and the newspapers are full of advertisements.

But you should only invest in shares if you are confident that you can set the money aside for at least two years, to soften the impact of any short-term market volatility. If you think that you may need the money within that time you are better off holding cash, and Isa accounts can offer relatively attractive rates. But beware! Most of the best rates require you to leave your money in the account for a fixed period of a year or more.

For me, an Isa should be the cornerstone of your long term savings strategy. And since I regard shares as the best long term home for your investments, I think that's what you should aim to hold.

But this is where you need to be strong! Because the financial services industry sees the Isa season not only as a means of gathering some more money under its roof, but also of stuffing unsuspecting savers into managed funds.

The fund management industry is hitting the skids

Fortunately, the message is now getting out that managed funds are simply not worth the extortionate fees that are routinely charged. Thanks to the efforts of Merryn Somerset Webb in MoneyWeek magazine and others, managed funds are being exposed for the rip-off that they are.

Even certain newspapers and magazines, which have historically been fearful of offending their big-spending financial services advertisers and the independent financial advisers who regularly feature in their columns, have been questioning fund charges.

I don't think I can remember a time when the fund management industry was held in such low repute. Hedge funds are closing in droves as these masters of the universe have dismally failed to deliver promised premium returns. Conventional funds, that do not gear up and do the other whizzy things that hedge funds do, have done no better. On average they habitually underperform the market as a whole, and although some do better than others over a short time period it is impossible to identify the winners in advance, so this really does not help.

Despite this, fund management and other charges will routinely trim your savings by about 2% per year. You would not think much of an estate agent if, when selling you a house for £250,000, he told you that he was going to charge you £5,000 per annum for as long as you lived in it, but that pretty much describes the deal for managed funds.

Ignore them! As usual, if you want something done properly you need to do it yourself. So the best approach is to set up a self-select Isa in which you can select your own shares.

That may sound daunting but my opinion is that you can hardly do worse that the professionals and over time you can build up a core portfolio of great shares, without having to pay anybody to do this simple thing for you.

Sadly the government in its nannyish wisdom denies us the option of buying AIM-listed shares - unless they are also quoted on an approved overseas stock market.

To get our latest opinion on Isas and other investment advice try Red Hot Penny Shares today!

Good investing,

Tom Bulford
Editor, Red Hot Penny Shares

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