One question never gets asked during the Isa season: is the tax break really worth it? The investm...
One question never gets asked during the Isa season: is the tax break really worth it?
The investment houses will tell you yes and even in 2003 there are a number which are preparing to take Isa applications right up to midnight on 5 April, among them Invesco Perpetual, Legal & General and M&G.
It might be in the optimistic belief that there will be a last minute rush, it might be a sign of desperation, that even a few extra cheques for £7,000 could make a difference to what has been a poor Isa season.
In the short term the tax break is probably not worth a lot. In falling markets there seems little point in a perk that helps investors to shelter losses. But markets will go up one day and at that point the tax breaks could well be a big plus point.
This is despite the fact that in April 2004 the 10% tax credit on equity dividends for Isas and Peps looks as if it will go. The industry still has a year to lobby the chancellor and persuade him to retain it, so all is not lost. Furthermore the change will not affect fixed interest. Even if the tax credit is lost the Isa is tax privileged, if not tax exempt.
Perhaps of most concern is the issue of timing. Investors make a lot more money in a bull market without tax breaks than they do in a falling market with lots of them, dedicated to shielding them from capital gains tax.
The fall in markets since 2000 has now been replaced by a period of volatility, highlighting just how important it is to get timing right.
On 12 March the FTSE fell by 5% reaching a seven-and-a-half-year low. The following day it made a 6% gain, the biggest in 15 years.
It is not the sort of environment that is going to make the average retail investor feel confident.
So is there a way out for investors who want to preserve a tax break for the future but not find that to retain this valuable privilege they need to give it to a manager who turns £7,000 into £3,500, and charges them for it?
The Isa rules are of some help in this case. They put no time limit on how long investors can hold cash in a stocks and share Isa as long as it is being held for the purpose of investment.
Cash is king for now but at some point another asset will take the crown. In the meantime the Isa does offer clients the opportunity to save their tax break and keep out of volatile markets.
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