The past few years have not seemed kind to investors looking to invest tax-efficiently. The pensions lifetime allowance, at one point as high as £1.8m, has fallen to £1m. The pensions annual allowance has been scaled back to £40,000, and for some higher earners is as low as £10,000. And recent investment rule changes for tax-advantaged funds such as venture capital trusts (VCTs) and the Enterprise Investment Scheme (EIS) have reduced the available capacity in these as they get to grips with the new regime.
But there is a brighter side: over the past decade the annual individual savings account (Isa) allowance has steadily ticked up to its current level of £15,240, and from 6 April it leaps up again to £20,000. If you are part of a couple and you have used up your annual Isa allowance, make sure you transfer some assets to your spouse or civil partner so they can make use of their allowance - between you that will be £40,000 of tax-efficient investing.
As with pensions, investments held within an Isa do not incur capital gains tax (CGT) when sold, and no further tax is payable on any income or interest they yield. This means investments within an Isa can grow more than if held outside.
And this tax wrapper has a number of other advantages.
Isa vs pension
|Annual limit||£15,240 (£20,000 from 6 April)||£10,000-£40,000|
|Minimum age you can access||18*||55|
|Tax benefits||No CGT or further tax on income||No CGT or further tax on income|
|Tax on withdrawls||No||Yes|
|Tax relief on contributions||No||Yes|
*Except Lifetime Isa if using for retirement saving
For one, there is no lifetime limit - you can build your Isa for as long as you choose. And although you do not get tax relief on investments you put into an Isa, you do not pay tax as you take out your money, making it a great vehicle from which to draw retirement income. Not that you necessarily have to wait until age 55 to access your money with most types of Isa - unlike with pensions.
VCTs and EISs mainly invest in high-risk unquoted companies, meaning they are only suitable for investors with very high risk appetites and long-term time horizons. But Isas are suitable for pretty much everyone. This means that, as well as being a good place in which to build a sum to supplement your pension, Isas are also a great savings vehicle for goals such as a house deposit, wedding costs or education fees.
Even if you have a very low risk appetite and/or short time horizon, you could hold cash in an Isa tax-efficiently, although you will probably get a much better long-term return if you invest in higher-risk investments such as funds or shares. So if you have money to invest and have not used up this year's Isa allowance, check out the following pages for 40 investment suggestions spanning investment trusts, funds, shares and passive funds.
But before you plunge in here are 10 general recommendations well worth heeding:
1 There are several different types of Isa - make sure you use the right ones for your purposes. Check out the Money section in the main magazine or the Investors Chronicle website for our guide to the various different Isas and how to use them.
2 Make sure you pick the most cost-efficient Isa for your purposes: charges and trading costs eat into returns, especially over the long term. See the Money section for our round-up of broker Isa charges.
3 Use our investment ideas wisely: these are suggestions to cater for a wide range of different investors, not an injunction to buy all 40! Some of the suggestions may be unsuitable for your personal investment profile, timescale or goals. So...
4 Know your investment objective. What is the sum you are building for and what is your time horizon? When you have established these, set your asset allocation - the percentage of your portfolio you hold in different types of asset classes - accordingly.
5 Only include some of our suggestions, or other investments, if they work with your other holdings to achieve your investment goal - however good they seem.
"Take some time to read up about the different types of asset classes and different types of investment styles," suggests Adrian Lowcock, investment director at Architas. "Consider what you want from your investments, and how each asset class and fund style fits in with your objectives."
Individual investments may be good in their own right, but your portfolio is a collection of all your investments, so what ultimately counts is the sum of the parts. Consider any new investment in the context of your entire assets - not just your other Isa holdings. Which means you should...
6 Review your Isa portfolio at least once a year to make sure your holdings are still right for your goals as these may have changed, and your timescale may have altered. "Age, lifestyle and surroundings can all contribute," explains Mr Lowcock. "The amount of risk you should be taking also depends on why you are investing and for how long. A simple measure is you shouldn't be having sleepless nights over concerns of an investment falling in value."
Also check up on the individual investments: even if they suit your asset allocation, are they doing what they should? How have they performed, what level of income are they paying out and have there been any major changes that could affect performance going forward? For example, has a fund changed its investment objective or has its manager left?
7 If you intend to put your money into our suggestions or other risk assets be prepared to take a long-term view, in most cases at least five years, and preferably longer. Riskier investments can be volatile and make losses over the short term, but this is not a problem if you can wait for them to recover their value, and more volatile ones can deliver stronger returns over the long term.
If you cannot wait at least five years then our wealth preservation fund and investment trust suggestions may be more suitable, or a cash Isa, so check out our guide to these in the Money section in the main magazine or online.
8 But also remember that you now benefit from the personal savings allowance, meaning that higher-rate taxpayers now earn their first £500 in interest from cash tax-free, and basic-rate taxpayers earn the first £1,000 of interest tax-free. So prioritise the Isa for higher-income investments if you invest in these as well as cash.
9 Be flexible with your contribution - investment into an Isa doesn't need to be a lump sum, especially if it is the beginning of a new tax year. With what is known as pound-cost averaging, if you invest the same amount every month, when markets are high and things are expensive you will buy less, and when they are down and things are cheap your set amount will buy more.
"Market volatility can help provide the perfect backdrop for setting up a regular monthly contribution; benefiting from the various ups and downs, and purchasing more for your money on those down days," explains Andy Parsons, head of investments at The Share Centre.
10 You can't carry forward your annual Isa allowance into the next tax year, so even if you only opt for cash use it by 5 April - or lose it.
If you don't have new money to invest but have assets held outside an Isa then consider a 'bed and Isa' strategy - gradually migrating your existing investments into the wrapper. This has to be done carefully, though: if your investments have made a gain since you bought them they will incur CGT, so make sure you don't sell more at profit than is covered by your annual CGT allowance, currently £11,100.
And remember that selling investments and buying them again within an Isa is likely to incur trading charges - another good reason to check this week's Money section to help you work out which Isa is most cost-effective for you.
Read all 50 of our Isa ideas for 2017 in our special guides:
For more on choosing your Isa for 2017: