I have previously written about the benefits of investing in ISAs as opposed to saving. ISAs are definitely for the long term and whilst it might appear that allowances (£10,680 for 2011/2012 and £11, 280 for 2012/2013) are perhaps less than generous, it is not inconceivable that an individual who has maximised their allowances from outset (1987 when the limit was £2,400 via personal equity plans) may have now built up a considerable tax free fund.

The returns from cash are currently extremely low.  The media who always seem to thrive on doom and gloom, will make a great deal of the fact that interest rates are low. Individuals who have relied on their cash resources to provide a satisfactory income stream are being badly affected. Whilst I cannot argue with this sentiment, I do find it extremely frustrating that the obvious alternative is often not publicised.

As financial planners an integral part of our service is to ensure that that there are sufficient liquid assets (cash to you and I) for planned expenditure and emergency funds.  This varies significantly between clients but we refer to it as the “sleep at night” money.  The role of this cash is not to provide returns that keep pace with inflation. It is to provide access to cash in case of an immediate and unexpected need. Once a client has sufficient “emergency” cash in place the following question needs to be asked: what is the preferred home for their remaining wealth?

The answer is the stocks and shares ISA.  The annual limit is £10,680 in 2011/12.  This means that a couple can invest over £21,000 per annum in investments that are free from capital gains tax and income which is also free from income tax.

Having had an ISA strategy for a number of years what is the next step?  At some point it will be necessary to start drawing from the ISA fund – either as regular income or as a single (or regular) capital withdrawals (see What is the point of Money). 

If ISAs are part of retirement income strategy then a major priority will be income in retirement.  Needless to say there are a great many investments that can be held in an investment ISA that are not equities.  Many of them have a return that is significantly above the returns of cash.  Please also remember there is no additional investment return without a corresponding increase in investment risk (see Investment Risk).

Funds that invest in corporate bonds (loans to companies) and gilts (loans to the Government) may  offer yields well in excess of the interest rates available on cash. It is fair to say that changes in capital values should be expected compared to cash.  However for many this is a price worth paying given the substantial increase in tax free income. Short term fluctuations in capital values maybe an acceptable downside in return for a higher income, particularly as an ISA portfolio is most likely to be a long term investment (even in retirement).

For those individuals who have either a portfolio of cash or investment ISAs or a combination of the two and are looking for increased tax free income, it would not be difficult to make an assessment of “where am I now” and “where would I be”.

If you would like to find out how we can make your investments work harder for you please do give us a call on 0845 345 3536.