Lucy Warwick-Ching Closed Live Q&A: Isas

mas_isa-coins

On Thursday March 5 2015 between midday and 1pm (GMT), a panel of experts will answer your questions about Isas.

Submit your questions in the live reader comments field (on the right-hand side of this post) or email the money team at money@ft.com.

You can also tweet questions to#FTisa

We will choose a selection for our panel to answer. On the panel are:

  • Jason Hollands, managing director, Tilney Bestinvest
  • Adrian Lowcock, head of investing, Axa Wealth

The discussion will be moderated by Lucy Warwick-Ching, Money Online editor and Adam Palin FT Money reporter.

Hello and welcome to the FT’s Q&A on Isas. I’m Lucy Warwick-Ching, money online editor and I’ll be hosting today’s live session. We have two expert panelists on hand to answer your questions: Jason Hollands, managing director of Tilney Bestinvest, Adrian Lowcock, head of investing, Axa Wealth. We are also joined by Adam Palin, FT Money reporter.

We’ll be kicking off today’s session at midday so post your questions in the comments box now.

Good morning all.

For some background reading, here is a summary of the most recent official figures, which showed that savings into cash Isas dropped off in the 2013-14 tax year, with more subscriptions being allocated to stocks and shares.

Cash Isas drop as investment picks up

From April 6, the spouse or civil partner of someone who dies will receive a one-off extra Isa allowance equal to assets held in Isas by the deceased. This was announced in the Autumn Statement, below.

The art of making a little go a long way

The government also announced that Isa benefits will be extended to cover the probate period after death, but this will not be put into law until the next parliament…

Isa benefits to extend during probate

The inclusion of peer-to-peer lending into Isas, originally scheduled for April, has been delayed until likely early next year.

Peer-to-peer platforms expect Isa delay

As to how p2p might be included in practice, a consultation is ongoing….

Here is a chart showing the number of new accounts opened in each of the past tax years.

The vast majority of accounts opened are cash Isas

According to HMRC, there were 23.2m adult Isa holders at the end of the 2013-14 tax year

Median savings in adult Isas stood at £15,830

The value of savings is higher among older age groups, as shown here:

Ok, there are so many questions coming in already that we had better get started. The first question is from James Kenton

What would the panels top 3 share picks be if they were investing £10,000 into a ISA?

Adrian – what are your picks?

Also – don’t forget I’m keeping an eye on Twitter to see what questions are coming in so do tweet us at #ftisa

Stocks and shares accounted for a greater share of Isa subscriptions in 2013-14, rising to £18.4bn out of total Isa subscriptions of £57.3bn

I like Schroder UK Alpha Income, manager Matt Hudson believes that different stocks perform depending on where we are in the economic cycle. He thinks the UK is in the later stage of economic expansion and is therefore investing in defensive companies such as Pharmaceuticals and financials which tend to perform at this stage in the economic cycle.

I also like Newton Real Return, the fund focuses on preserving capital in order to grow, which manager Iain Stewart attempts to achieve through both capital preservation and producing a real return over the longer term. The portfolio is built in two parts. There is a core element which consists of UK and international shares and corporate bonds. The managers take a long-term view which is taken with this part of the portfolio. Around this core, the fund invests in cash, government bonds and derivatives. This is used to reduce risk and aims to protect capital. The funds flexibility and pragmatic manager make this an attractive investment for investors looking to protect capital.

Finally I like Henderson European Opportunities, Manager John Bennett invests primarily in large companies and looks for businesses which have pricing power, the ability to raise prices and not suffer a loss of demand. Bennett looks for themes and invests in change, anticipating inflection points in markets.

Investors have often mixed the politics of Europe with the investment opportunity and it is not hard to see why. There is a lot of political risk in Europe with the recent Greek election having overshadowed the region. Combined with the spectre of deflation there is plenty for investors to be concerned about. However the European Central Bank have acted and begun Quantitative Easing in earnest with stock markets rising ahead of the announcement. Even so European equities remain at a high discount to their US peers. The economic outlook has also started to stablise and looks likely to improve over the next 12 months.

Anything to add to that Jason?

I personally don’t invest invest in individual stocks, I’m a fund and investment trust based investor.

Central banks have been the big drivers of markets in recent years through ultra low interest rates and massive “Quantitative Easing” stimulus programmes. However, while some are now normalising, others remain engaged in stimulus programmes. My view is to stay close to the regions where the money printing is set to continue and that means Europe and Japan.

While Quantitative Easing programmes in these regions should be supportive to share prices, they also put downward pressure on currencies, so I like European and Japanese equity funds that remove exposure to the Euro and Yen.

Ones that do this are Artemis European Opportunities I Hedged fund and the GLG Japan CoreAlpha Equity I H GBP fund.

My third choice? For a UK fund I would go with one that invests across the market cap spectrum and picks companies that are less cyclical in nature, targeting businesses that should be resilient. Liontrust Special Situations has such an approach.

Thanks Jason. The next question is also on equity Isas – from more of a ‘buy and forget’ type of Isa investor

I don’t want to switch my isa on a yearly basis – what funds have the potential to ride out different economic cycles and deliver solid long-term returns?

I would suggest going for a well diversified fund with a broad investment mandate;

Henderson Cautious Managed ticks this box as the fund invests in both equities and bonds and aims to generate a mix of income and growth. The equity portion is managed by Chris Burvil and uses a contrarian, value-based approach and will be no more than 60%. It includes stocks across the market-cap, and incorporates his economic views. The fixed-income part of the portfolio is managed to complement the equity element and reduce volatility.

Alternatively Schroder Managed Balanced provides a different strategy. It focuses on Asset Allocation to drive returns which I like. Manager Johanna Kyrkland focuses on the wider economic picture to make shrewd asset allocation decisions to drive performance. The fund invests in a wider range of assets including global equities, bonds and cash. It is designed to protect in falling stock markets whilst benefit from rising markets.

Our most recent reader question was along these lines –

I am time-poor, find finance boring and am wary of being ripped off. I hold £65,000 of shares in the company that employs me and I think I should diversify.

How can I set up a low-maintenance portfolio?

For a less volatile ride and a multi-asset approach I like targeted absolute return funds. Take a look at Invesco Perpetual Global Targeted returns – it aims to deliver positive returns across all market climates with low volatilty. The fund has around 25-30 underlying trading strategies across a wide range of assets: equities, bonds and currencies

Here’s one on dividends –

Should I reinvest the dividends on my Isa? Is these are reason not to?

If you don’t need the income reinvest the dividends to compound growth. Most of the real return from UK shares over the long-term has come from dividends.

Yes if you need the money , either you are retired and need the income or you have cashflow problems and the income from your Isas would be better used to pay off expensive debt for instance.

Otherwise the dividends could be reinvested and contribute to the performance of your portfolio. Reinvesting dividends is known as compounding and was described by Einstein as the 8th wonder of the world. It is indeed a very powerful force and if you have a long time to invest is essential for successful investment returns.

Next question

I have been assessing my Isa portfolio and there are some investments that have performed well – is it time to bank the profits?

It depends on your view of their future prospect, for example are these stocks or funds?

It certainly makes sense to periodically rebalance a portfolio so that you don’t become over exposed to a market or asset class that has had a great run – portfolios do drift over time and you can unwittingly become exposed to too much risk.

In practice rebalancing means you’ll take some profits and reallocate into areas which might represent better value.

Stock markets have been on a strong run over the past 6 years with the FTSE 100 finally breaking through to a new record high in February. However, it remains cheaper than it did when it last reached that level in 1999. Equities are on the whole neither expensive nor cheap, but fair value.

Within this there are areas which are good value. It would be worth reviewing your portfolio and maybe switching some money into areas that have lagged behind, taking profit from those areas that have done well. Also if you are investing in active fund managers then it is important to member they will be doing this to some extent already, seeking companies whose valuations are more atttractive.

A reader asks:

I want to stay in cash for now with a view to buying funds later this year. Can I do this in one Isa without incurring a miserable rate of interest on my cash?

Unfortunately not. Most fund supermarkets and brokers do not have banking licences and are therefore unable to offer competitive cash accounts compared to what you might get with a building society – up to 3.25%.

The best option is to find a platform with an attractive rate for cash. For instance AxA Self Investor offers 0.65% at present. A market leading rate. In addition they offer 0% platform fee until May 2016 for any new ISA (including transfers) taken out by 30th April.

The market value of Isa savings reached £470bn in 2013-14, up 6 per
cent from the value at the end of 2012-13.

The split between cash holdings and those in stocks and shares was pretty equal

The questions are coming in fast – but do keep sending them in. This reader asks about ETFs –

I prefer to use ETFs than tracker funds, but I was thinking of investing monthly. Will I be charged commission each time I buy?

Regular savings usually come with a small charge of around £1.50 per month/trade. However this facility is often not available for every investment, being restricted to the largest companies of the LSE. E.g the FTSE 350. Therefore you might need to find a broker who offers this for ETFs.

Yes, as these are stock trades you will incur a dealing fee and therefore a tracker fund might work out a better route – unless you are actively trading ETFs, there’s no big advantage for an ETF over a fund. Many tracker funds now have costs that are competitive v ETFs because thankfully there has been a price war over the last couple of years.

The next question is on Peer-to-peer

Can I hold a peer-to-peer loan in my isa?

Not yet, the government are consulting on this at the moment. We do expect it to be possible soon and we may hear more in the budget on 18th March.

Not directly at this point in time. The Government intend to allow this and have targeted their introduction this April. However, I expect we might hear in the Budget that this has been delayed as technical discussions are on going.

There are some indirect routes though as a couple of investment trusts that deploy into P2P have been launched. The trouble is, they are trading at BIG premiums to NAV.

This question is a popular one – we have lots of people asking about drip feeding

I have £5000 to invest – Is it better to drip feed my money or put in a lump sum?

Research shows the difference between drip feeding or lump sum is not significant. It therefore is a personal decision. Not everyone has £15,000 to invest in one go so drip feeding is a good habit for many savers.

I prefer to phase my money in and actively decide when to invest but do not invest all in one go. This removes the risk of buying at a high point, but also means I can control when I am investing and take advantage of weak markets or investment opportunities that arise.

Unless you have a crystal ball no one really knows for sure where markets will move in the short term but with some market indices at record levels and various uncertainties – UK election, Ukraine, Greek stand-off with the EU – drip feeding might make sense as it’ll smooth out some of the short term ups and downs.

And then onto charges

I am looking to start investing in equities through my Isa, but am loathe to shell out fixed dealing costs that will be will relative to my transactions. For a small active investor, what is the cheapest way of investing in individual stocks?

To buy an individual share and hold it it will cost you around £10 per trade plus 0.5% stamp duty. Prices vary between brokers but there are fixed costs involved.

The alternative option could to form an investment club with a few friends to pool your money, you would also have to agree on what to buy and when to sell.

Actually, fixed dealing fees for online trades can be very low these days. We charge £7:50 per trade – and of course you have stamp duty tax on UK share purchases (though not on AIM listed shares).

And now bonds. We are covering lots of ground today.

I like the idea of fixed-income from bonds, but the returns look depressing. What other fixed-income alternatives could I consider for my Isa?

Despite the “squeeze” on incomes, average annual Isa subscriptions have been on the rise, according to official figures

In 2013-14, Isa savers squirreled away an average of more than £4,000

We are seeing an increasing number of multi asset income funds such as the Architas Global Diversified Income fund which targets a specific income and has access to a wide range of asset types such as airline leasing to help diversify the income streams and reduce the volatility of that income. These funds invest in shares, bonds, property and infrastructure amongst other assets.

Be careful with bonds at the moment. Any up tick in interest rates could hit prices. If you are going to invest I would suggest picking funds with very flexible mandates to adapt to changing markets – such as the Twenty Four Dynamic Bond fund.

Infrastructure companies offer great yields but prices are trading at MASSIVE premiums. For an alternative, take a look at Bluefield Solar Income. This is a listed investment company that owns solar panel fields. Much of the revenues are underpinned by very long term contracts, effectively guaranteed by government subsidies and these revenues adjust for inflation. It is yielding 6.9%. It is also trading at a slight discount to Net Asset Value.

Moving on to alternative investments. The next reader question:

I want to put more of my money in alternative investments, such as commodities funds, as a way of diversifying my portfolio. But can I do this within an Isa wrapper? Which alternative investments are open to me and which are excluded?

You can buy funds, investment trusts and exchange traded commodities which could all be held in an ISA. You can even buy many AIM shares such as individual mining or oil stocks and these can also go into an ISA. There is a huge amount of choice available to you which are Isable.

Funds and ETFs that do not have ‘UK reporting status’ also cannot be included in Isas. Therefore, investors should ensure that funds are “UK friendly” before making a purchase.

Yes, you can – though personally I wouldn’t invest in commodities at the moment. China is slowing and has excess inventories, so the outlook for raw materials isn’t great. If you are determined to invested, I’d go for Investec Enhanced Natural Resources on the basis it can take short positions (bet on price falls) as well as long positions.

There are numerous alternative asset classes available either through funds or investment companies, including private equity, commercial property, hedge funds and investment companies owning operational infrastructure projects such as roads, prisons.

Thanks

Readers – Don’t forget – if you have an Isa question for Adrian and Jason then you can post in the live reader comments field on the right hand side

We’re half way through the web chat so let’s move onto saving for children and the controversial topic of Child Trust Funds.

Our next question

Because of the age difference between my children I have ended up with a child trust fund for one child but a Jisa for the other. Can I switch the CTF into a Jisa and if so, when? How do I do it?

From the new tax year, 6 April, you should be able to transfer CTFs into JISAs, providing the JISA manager you wish to transfer to is ready to handle this process. You will need to get a transfer form from the JISA manager you wish to move to, complete it and and return it to them. They will handle the process from there.

Currently the change in law is going through the legislative process and waiting for royal ascent. This should be done in time to allow you to transfer from April this year. The process should be relatively simple and would require you complete a transfer application form on behalf of your child.

So will all Jisas accept a transfer in from a CTF?

Not necessarily, it will be down to the providers as to whether they choose to accept a CTF and whether their systems are set up to process the transfer. However I expect the majority should be able to accept CTF transfers, where they already allow Junior Isas.

Each JISA manager is entitled to set their own minimum subscription level at a level they feel is commercially viable. For example, in the case of the Bestinvest JISA it is £100.

FT Money editor Jonathan Eley wrote recently on parents’ confusion over the right choice of savings vehicle

Parents still confused by Jisa/CTF system

One of our readers wants to know if his child can have both a CTF and a Jisa?

No Junior ISAs were only available to any child resident in the UK who wasn’t eligible for a Child Trust Fund (CTF). The following need to apply for your child to be eligible for a CTF:

o born on or after 3 January 2011
o (aged under 18) born on or before 31 August 2002
o born on or between 1 September 2002 and 2 January 2011 who didn’t qualify for a Child Trust Fund.

You cannot have both. And – unlike an adult ISA – you also can’t have accounts with different companies in each, just one account. This is why it make sense to choose a JISA with plenty of investment choices.

This tax year (2014-15) the junior Isa limit is £4,000, rising to £4,080 next year

Our next question is about control of the money -

I want to save money for my son but am concerned that he will spend it all when they turn 18. Can I have any control at all over when/how he gets the money in a junior Isa?

The child becomes legally entitled to the proceeds of the JISA at age 18 and can do what they like with it – spend it down the pub if they wish. If you are concerned about whether they will be responsible enough and want to exercise greater discretion, consider alternative savings such as using your own ISA allowances and then gifting the proceeds later when you are comfortable to do so.

No when the child turn’s 16 they can decide how the money is invested and when they turn 18 the Jisa becomes an adult Isa and they have full ownership and can spend or save it as they wish. This is the one thing I would change about Jisa’s and give parents some control over when their child gets the money.

My advice would be to engage with your child from an early age and use the Junior ISA to educate them on the importance of saving and investing.

Lots of questions coming in about cash Isas for kids so do you have any suggestions for best paying accounts?

Have a look at moneyfacts.co.uk it is a good comparison site for cash products. Do keep an eye out for offers that crop up at this time of year and be quick the good deals go fast.

A cash JISA might be worth considering if the child is aged, say, 15 and likely to need the money within three years, in which case shop around for the most competitive rates as these change.

However JISAs are long term savings schemes, as the proceeds cannot be accessed until a child is 18, so if your child is young, cash really is a dreadful place to park your money for such a time scale, as the real value will be eroded by inflation.

For long term investing you need to take an element of risk just to keep up or ahead of inflation – its a cornerstone of investing that there is a relationship between risk and reward.

There are less volatile options available, such as targeted return funds like Invesco Perpetual Global Targeted Returns or Standard Life Global Absolute Return Strategies which should beat cash but without the level of risk of investing wholly in shares.

In 2013-14, parents invested £578m in junior Isas for their little ones. This is an average of £1,340 per account.

Despite record low interest rates, three-quarters of these savings went into cash

Moving onto investment Jisas? What about charges?

I’m keen to save for my child but don’t want my savings to be eaten up by charges. How do the fees on Jisas compare to each other.

For investment JISAs there are two main charges to consider – the fund or investment charge and the platform charge. Investment charges are typically around 0.75% with platform charges of 0.35% being attractive, the more expensive platforms charge upto 0.45%. Ask about exit fees, these are usually hidden and not declared up front and could prevent you from changing platforms in future.

There are two elements to the costs: the account fees, which are typically 0.3% – 0.5% per annum or in some cases fixed sum such as £30 per year, and then the costs of the underlying investment you choose.

Fixed account fees can end up punitive for smaller accounts.

You could keep fund costs down by investing in a low cost tracker fund but it might be worth investing in a higher performing fund with greater fees.

How do the charges compare between CTFs and Junior Isas?

A very topical point. 80% of Child Trust Funds are invested in Stakeholder Accounts, most of which are invested in UK index trackers charging 1.5% – that is incredibly high for a track and a Junior ISA you could easily get a similar investment for a third of the cost after all the charges. 4.8 million kids might be able to get a better deal by making such a switch

When CTFs were introduced they had a capped management charge of 1.5% In today’s world that looks expensive. Jisas are cheaper with costs falling to around 1% including both platform and investment costs. In addition CTFs have more restricted choice of where they can invest.

One about bare trusts

I have a children’s investment plan structured as a bare trust, rather than a CTF. Can I transfer this into a Jisa? And if so, how do I do it?

I would suggest you double checking the plan and ensure there are no tax liabilities before doing so and also look at what the tax advantages are of putting the investment into an JISA before doing so. It may be there is little or no benefit to be had. But in principle you could do a bed and Jisa – sell the bare trust investment and repurchase it inside a Jisa. Capital gains would apply on any disposal but this would go against the child’s personal capital gains tax allowance of £11,000 in 2014/2015.

In reality there might not be a big advantage to doing so as most children aren’t going exceed their annual tax free allowances anyway

What about a stocks and shares Jisa? Which funds would you recommend for the long term?

Equity Income is widely believed to be one of the best long-term investments around. It is a simple philosophy of get rich slowly by investing in companies which have strong cash flow and can grow their businesses, profits and dividends. For those who don’t need the income now reinvesting dividends has a huge impact on the long-term total returns. To illustrate, according to Barclays Equity Gilt Study 2014 a £100 invested in UK equities in 1899 would be worth £14,915 on a capital return basis, rising to £2.2m if the dividends had been reinvested.

I would suggest, Schroder UK Alpha Income, Manager Matt Hudson believes that different stocks perform depending where we are in the economic cycle. He thinks the UK is in the later stage of economic expansion and is therefore investing in defensive companies such as Pharmaceuticals as well as financials which tend to perform at this stage in the economic cycle.

I would say invest globally rather than restrict your choice to the UK – the UK is, after all, just 10% of world equity markets. One choice I like is the Scottish Mortgage Investment Trust – which, confusingly neither invests in Scotland nor mortgages.

It is in fact a stellar performing investment trusts with a gung-ho approach of targeting high growth companies across the globe from China (Baidu, Alibaba) to the USA (Amazon), but with really low costs as well at 0.5% pa.

The approach is riskier but that might be appropriate for a really long term investment.

There’s just five minutes left to go – let’s move onto cash Isas for adults

Which Isas are paying the highest rates of interest?

Currently Nationwide is paying 3.25%.

The State Bank of India offers a five year fixed cash bond at 2.5% or a 1,000 day bond for 2.3%. Whilst Aldermore offers a 2 year fixed cash bond at 1.85%.

Interest rates could rise as we approach the end of Isa season but there are no guarantees. Attractive rates tend to appear at this time of year and then get snapped up quickly.

It’s definitely not mine – 1.05%

You need Scottish Mortgage in your life

You need to switch Adam! Perhaps the next Q&A should be on current account switching….

I’ve done that, thank you Lucy!!

Great – onto the last few questions

What are the pros and cons of putting additional cash into a stock and share Isa instead of a 4 per cent cash Isa?

Cash savers will not need telling that returns from cash Isas have fallen significantly over the past five or so years.

With inflation at 0.3% (CPI) and Bank of England base rates at 0.5% for six years the interest of cash deposits inside or outside an ISA are unlikely to offer 4%. However if you don’t want to take risk and you can find that rate of interest it is worth considering.

Alternatively, Stocks and Shares ISA can provide the opportunity for a greater return, but there is a bigger risk that you could get less back than you invested. Investing in stocks and shares offers the potential for a higher income and one which could grow over time potentially ahead of inflation. In addition you could get the benefit of capital growth. Over the longer term shares have Returned more than cash on average.

It comes down to how long you are investing for, what sort of risks you are happy to take and how much return you need on your investment or saving – if 4% meets your needs then you don’t need to take more risk.

We only have time for one last question

What is the likelihood a cap on ISA savings will be introduced, similar to the cap on pension savings?

This was being bounced around a year ago in one of those policy kite flying exercises but it looks like it has been seen off, at least for the remainder of this Government. It would be an unpopular move to spring on the public in a pre-election Budget.

However, we could see a change of Government in May and Labour are enthusiastic about wealth taxes, most recently confirming their intention to introduce a major reduction in the pensions cap.

This is a reminder that today’s generous allowances are not set in stone for ever and should be utilised while you can. The UK still has much to do to clear the deficit and more and more of us are being drawn into the net of higher rate tax, so ring fence what you can from the tax man via legitimate allowances.

I don’t think we are close to this at the moment but there is always a possibility something like this could happen. But with the Isa allowance having grown so rapidly we could see more stories of Isa millionaires and then it could become as politically sensitive as Pensions. I am keen that ISAs remain free from politics as much as possible and therefore give everybody the confidence to use them.

If you are unsure of where to invest or are nervous about market levels – don’t forgo your ISA allowance. Open it with cash to secure it and invest later.

A final figure to leave you all with – the estimated cost of Isa tax relief to the Exchequer was £2.85bn in 2013-14. So if you’re not using your allowance…

That’s all we have time for. Many thanks to everyone who submitted questions in today’s Q&A, and to Jason and Adrian for answering them.

If you are interested in reading more on Isas please visit:
www.ft.com/money

Also listen to our weekly FT Money Show podcast at
www.ft.com/moneyshow which is also available on iTunes.