Tuesday, March 13, 2007

Seasonal Financial Advice

Given that it's ISA season, the tax year ends on 5th April, and it's a time when people spring clean not just their house, but their financial affairs, in the spirit of open-sourceness, I thought I'd share my (limited) knowledge. All under the caveat that I am not registered with the FSA to give financial advice. I'm kinda like a friend who has a small clue, caveat emptor etc.

  • First, the ISA deal. The government gives you a free "tax wrapper" of an ISA with a £7,000 limit each year, where you don't have to pay tax. To not use this is silly and wasteful, given how much tax you pay on everything else. This £7k limit can be used in three ways; all in a stocks and shares/investment ISA, £3k in a cash ISA and £4k in a separate stocks and shares, or just £3k in a cash ISA. A cash ISA is often known as a mini-ISA, because a maxi ISA has all the £7k in it. Complex and annoying, rules set to change next April so they are all interminglable, and you can transfer your old cash ISAs into stocks and shares then if you wish. Lesson over. Good intro from MoneySavingExpert here.

  • Next, decide what you plan to do. If you're not up for investments, you'll be doing the mini Cash ISA. First thing, if you haven't opened a cash ISA this year (since April 2006) and if you have any savings at all you should open your 2006/7 cash ISA today.

  • New ISAs for this year (2007/8). If you don't have a lump sum and are planning to save regularly (ie monthly), and don't need access to the money (limit of one withdrawal a year) best deal is Scarborough Building Society at 6.3% (variable). If you're doing a £3k lump sum, or a mixture of £1k minimum followed by regular savings, then the NS&I Direct ISA at 5.8% (variable) is good. The ING Direct Cash ISA at 6% includes a 6 month bonus, but it's 6% AER (average over the year), so it starts at 6.55% and then changes. The best clean, get your money when you need it deal is First Direct Mini Cash e-ISA at 5.75%

  • Transfer old ISAs. If you have previous year ISAs sitting around at 3% or something, you're losing money. The highest rate for transfer-in ISAs is First Direct Mini Cash e-ISA. Remember to fill out the transfer forms - if you close and re-open you lose your tax-free status.

  • Stocks and shares ISAs, or investment ISAs. You can do these through an IFA, but they charge commission, which is largely how they make money. Although they do give you advice, but their advice is sometimes as good as reading the business pages of the Sunday papers. You're best off going to a funds supermarket - I use both Fidelity and Hargreaves Lansdown; HL has massive discounts on the buying fees (often 4 - 5% down to 0%) and reductions on annual management charges (typically 1.5%).

    In your stocks and shares ISAs you can buy into collective retail funds (unit trusts, or OIECS), or with some suppliers, individual shares within your ISA.

    It's outrageous how much funds charge for management, it's been creeping up when returns/service is not always that great, and lots of people prefer to invest in index tracker funds, Fidelity's being among the cheapest, or ETFs, exchange-traded funds, which are like trackers but you buy them as shares. Here's a piece from the Sunday Times.

  • Other savings. If you've got money sitting around in old 3% accounts, banks are (a) laughing at you, and (b) making money out of you. Inflation is currently 2.7%, so if you've got money in a 4% account, and you're a 40% taxpayer, then it's getting 2.4%, ie less than inflation. The best clean rate is Icesave at 5.7%, although I read they had some customer service delays setting up new accounts. Beware of high advertised rates that say you don't get paid interest in the month you withdraw cash - that's just to get them to the top of the comparison tables, and don't touch them unless you really don't need your money for a while.

  • Regular savings - a bunch of banks offering regular savings accounts that pay 7% or 8% before tax - check the tables here (choose regular saver). HSBC and Lloyds look like they need you to have a current account with them - great if you do, but probably not worth moving for - it's a maximum of £3000, and after tax and hassle, if you're happy with your bank, I wouldn't bother.

    There's a lot more to say, but this is a start. And if this has been helpful to you, then do please comment. Thanks.
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