Risk is a word that investors are preoccupied with at the moment, as the global recession shows few signs of coming to an end.

But, you only get one ISA allowance each year, and if you are going to maximise the amounts inside your tax-free portfolio then you have to consistently make new investments, year in and year out, irrespective of whether the short-term investment environment is attractive or not.

Boxing clever
However, this doesn’t mean simply putting money blindly into any ISA plan you happen to see advertised.

Adopting a prudent investment strategy will have a significant impact on your overall returns and it is a point often stressed by successful fund managers that the key to long-term outperformance is limiting the damage to your portfolio in the down times, rather than making money when markets are generally rising.

The latter is important, of course, but the truth of the matter is that those who emerge from a bear period having lost the least have a head start in a bull market that is very difficult to overtake.

The main hook is undoubtedly the fact that investments put into an ISA don’t incur income tax or capital gains tax, but there is much more to making the most of your ISA allowance than the tax reliefs.

A degree of flexibility
Since the rules covering ISAs were made more flexible in April 2008, the yearly ISA limit has risen to £7,200. This means that investors can invest this amount each year in a combination of cash and ‘stocks and shares’, the rather clumsy term that covers all other permissible assets.

Indeed, one of the ISA’s main attractions, along with its tax breaks, is its flexibility. As a result, ISAs have undoubtedly been successful.

During the 2007/08 tax year, 14.7 million ISAs were subscribed to and more than £220 billion in value was held in ISAs at the end of this tax year. Room for improvement But ISAs are not perfect.

The annual investment limit has failed to keep pace with inflation and the restrictions on cash holdings are frankly absurd. The current dilemma facing ISA investors who want some security for their tax-free investments, makes it all the more baffling that the rules as currently framed allow investors to move money from a cash ISA into one investing in equities, but not the other way round.

It seems perverse, to put it mildly, that when other changes to the legal framework for ISAs have sought to make them as flexible as possible, there remains this anachronism that prevents ISA investors going largely or wholly liquid if that is the sensible thing for them to do.

This restriction, however, makes it all the more important for ISA investors to understand the full range of investment options open to them and know how to make best use of them to maximise the taxfree return on their ISA holdings.