For some time now, an argument has raged within financial markets as to whether ISAs and PEPs (ISA) are superior to pensions, and of course, vice versa. At Mattioli Woods, we believe such a debate misses the point because both pensions and ISAs are best managed as part of an integrated strategy.
Experience shows us that most people develop ISA portfolios in a relatively unstructured fashion, often investing as the tax year fast closes, buying the latest and most seductive offer from the wide variety of institutions selling ISA products.
At Mattioli Woods, we integrate ISA investment with pension planning because, whilst ISAs need not of course be restricted to retirement, they can be an extremely tax efficient complement to more conventional pension provisions.
The principal attraction of any ISA is that, whilst unlike pension contributions, there is no tax relief on making the investment; ISAs are tax-exempt investment vehicles. Accordingly, investing in an ISA is simply transferring money from a taxed environment to a tax-exempt environment. Investing the full annual ISA allowance (£11,280) over a ten-year period, even assuming it remains unaltered, you are likely to accumulate a tax-exempt portfolio of around £157,000 or more (assuming an investment return of not less than 6% per annum). Over 15 years the fund would accumulate to circa £278,000, based on the same very broad assumptions.
Since partial or total encashments can be made at any time, this is an extremely tax efficient supplement to other income, given that earned income, private and State pensions are liable to income tax, whereas partial encashments from your ISA portfolio are not. This will help you keep your top rate of tax as low as possible, but still keep your spendable ‘income’ high.
With tax rates currently so high and interest rates so low, now has to be a good time to look at all ISA investments and build a working strategy that maximises their usage.
It is important that, for such a potentially large amount of money, the investment strategy is appropriate in the context of your chosen level of risk and equally importantly, balanced with your pension strategy. For example, if you had adopted a relatively low-risk approach for your pension scheme’s investments, it may be appropriate to adopt a higher investment risk with an ISA strategy, or vice versa. Usually we have found that most clients’ ISA portfolios are not constructed in this way and are sometimes invested in funds which are no longer the most appropriate, either from the perspective of performance in their peer group, or simply in the context of changing investment markets. Some cash ISAs could now be earning less than 1%.
Whilst investing in ISAs is straightforward, to get the best out of the opportunity we recommend a fully detailed review of your existing portfolio in order to discuss and then agree with you whether changes are appropriate or not. Having done so, we then generally recommend future ISA investment is made monthly for the following reasons:
• Investing by way of a lump sum close to the tax year-end is unlikely to be the best time to invest in most years. Conversely, monthly investment averages out the price at which you buy into the market, particularly important when investing in equity-based funds
• Once established, such an approach is administratively simpler, and avoids the risk of failing to take advantage of your annual ISA allowance
In exactly the same way as we place most clients’ pension fund equity and bond investments, our clients ISA portfolios are managed on the Cofunds platform. This provides you with on-line viewing of your ISA portfolio, detailed analysis, and facilitates changes to the underlying investment strategy, when appropriate.
It may well be that you are already well-served insofar as advice for your ISA requirements is concerned. However, if you are not, we would very much like to assist you.
Since we regard this as an important and complementary part of your retirement wealth management, we are very happy to provide an initial review and any initial restructuring that may be required to your existing ISAs.
We will explore your needs and investment strategy, and to build up a full picture of your existing ISAs, PEPs, etc. If current information is not available on your plans, letters of authority will be required so that we can review your existing schemes. Once we have all the relevant information, we will prepare and issue our report, looking at the history and, more importantly, the future.For a free of charge review, please contact us.