Joe McGrath considers which techniques will work best for investors looking to maximise their ISA allowance.

ISA season is well and truly under way now and, with the end of the tax year fast approaching, investors are running out of time to spring-clean their finances.

For most people, ISAs form an essential part of the foundations of a portfolio. Aside from instant-access savings accounts for emergencies, there are some great notice and fixed-term savings accounts too, depending on individual risk attitudes and circumstances.

To achieve a balanced portfolio, it is vital that investors weigh up all the options, no matter how time consuming this can be.

Just like everyday savings and investments, ISAs come in many forms to suit all risk appetites. Cash ISAs – sometimes marketed as easy-access or fixed-rate cash ISAs – are simple deposit accounts that may be ideal for cautious customers or those wanting a place to hold emergency funds. However, they are unlikely to make anything like the impressive returns that can potentially be achieved elsewhere.

Stock market links
It is possible to find cash ISAs that are linked to the stock market, although these are not to be confused with stocks and shares ISAs. An example can be found at Nationwide Building Society, which is currently offering the Legal & General Stock Market Linked Savings Bond ISA through its branches.

This ISA, unlike some investments that are linked to stock markets – is designed to provide the potential for stock market-linked growth, with a promise to return at least the investor’s original capital plus a minimum amount at the end of the investment period.

Robin Bailey, director of investments and savings at Nationwide, says the importance of assessing individual circumstances prior to buying an ISA cannot be overstated: ‘Some people will not have a lump sum to invest immediately, so they may prefer to invest into an ISA on a monthly basis.

‘On the other hand, if you do have a lump sum available, you may be able to maximise your potential tax-efficient returns by investing in an ISA as early in the tax year as possible, and ensure that you use your full £10,200 annual allowance.’
For those investors who are looking for stocks and shares investments, investors must look to the medium and longer term, which the majority of financial advisers will tell you is a minimum of five years.

Even then, the diversity of a portfolio is key to its success, so holding a mixture of corporate bonds, property, and UK and overseas equities is advisable.

The majority of investment commentators say that 2010 will be a volatile year for the markets so investors considering stocks and shares ISAs are advised to select funds that are run by managers with long track records and a proven ability for outperformance in difficult markets.

Goal setting
Rick Girling, head of business development and marketing at Halifax Share Dealing, says, ‘It is important to think about what your long-term goals are. Some people will be prepared to take more of a risk to gain greater returns, while others will be happier with an ISA offering cash interest payments.

 ‘You should also consider how much access you want to your money,’ he explains. ‘Some ISAs will require you to keep cash in the account for a fixed period’

Those considering a structured product or packaged investment must make sure that they understand all the terms of service that apply. There is nothing worse than realising that you are not entitled to compensation if your investment doesn’t perform how you expected albeit within its agreed terms of service.

James Daly, investor centre representative at TD Waterhouse, says that if some investments seem overly complex, don’t forget that a basic FTSE tracker can always be held in a full self-select ISA: ‘This gives you the option to close the position at any time and change into a different asset class. Consider how much you plan to put into the ISA over the years. This is especially important if the ISA has any flat fees, such as an annual management charge.

‘Flat fees can sometimes be more cost effective than a percentage charge, but if your investment is small, any fixed charges can make a real difference to the performance of the investment.’

Choosing income or growth
Just as important as assessing attitudes to risk and individual circumstances for any investor is the decision about how an ISA should work.

Some people are looking for income, while others are looking purely for capital growth. Naturally, there will be those looking for a mixture of the two.

David McDonnell, senior financial planning director at Rensburg Sheppards Investment Management, says that ISAs remain one of the most popular of a seemingly endangered breed of tax-favoured savings schemes for both types of investor.

He explains, ‘ISAs offer the potential for superior real returns over the long term within a highly tax-advantageous wrapper.

‘Given the increased ISA allowances announced in the 2009 Budget, allied to a top rate of income tax of 50 per cent, effective from the 2010/11 tax year, the appeal of ISAs to investors and, in particular, to higher rate taxpayers, has never been greater.'

This point doesn’t really hit home, however, until the impact of tactical ISA financial planning over ten years is measured.

McDonnell explains, ‘How generous is the annual ISA allowance? Consider the fact that since the introduction of ISAs in April 1999, investors who have made use of the maximum ISA subscription every year have sheltered £79,400 from tax – or £82,400 for those who were aged 50 or over on 6 October 2009.

‘For a retired husband and wife partnership, this equates to a cumulative, tax-exempt investment of £164,800, excluding any income or capital growth generated.’

Those looking at unit trusts or investment trusts should also consider the objective of the fund and the performance of the manager in the past.

Looking at the year-on-year discrete performance against a fund’s benchmark will enable an investor to see how the manager performs in both bull and bear markets. Further scrutiny of portfolio holdings, charges and performance fees will help bolster an all-round understanding, and for investment trusts especially, knowledge of the gearing figure
is vital.

Annabel Brodie-Smith, communications director at the Association of Investment Companies (AIC), says that investors have often overlooked investment trusts when it comes to ISAs, but that trend may be changing.

She explains, ‘With the launch of a China investment trust managed by Anthony Bolton of Fidelity this ISA season, the spotlight is on investment trusts. Investment trust ISA sales held steady in early 2009, but we saw a pick-up in interest towards the end of the year and this has continued this year.

‘The beneficial features of investment trusts include a closed-ended structure, reasonable charges, the ability to gear [borrow money] and independent boards of directors, who are there to look after shareholder interests.’