Anyone planning to take advantage of this year’s Isa allowance has just two weeks to meet the 2011/2012 tax year deadline, which falls on Thursday, 5 April.
However, as it is now over three years since the UK base interest rate was changed to its all-time lowest level of 0.5 per cent, the question is how can people use their Isa tax allowance effectively.
A snapshot of current investor sentiment around Isa investment provides some interesting insights. Despite a difficult environment for investors, early findings show that stocks and shares Isas have grown in popularity among UK investors, with 77 per cent of respondents saying that they had invested in this type of Isa in the last year compared to 53 per cent who have invested in a cash Isa.
This positive sentiment to stocks and shares Isas will have been helped by the decision to index Isa limits each year against inflation. Initially this was in line with the retail price index but from 6 April 2012 onwards the limit will be linked to the consumer price index. In September 2011, the CPI figures rose to their highest levels since 2008 and as a result, the Isa allowance for the 2012/2013 tax year will be increased by £600 to £11,280.
For now the current Isa limit is £10,680 and investors have the option of investing £5340 into a cash Isa and utilising the remaining limit in a stocks and shares Isa. Alternatively, they can choose to invest the entire £10,680 in a stocks and shares Isa.
The rates being offered on cash Isas across the market currently range from between 1.75 per cent up to around 3 per cent while on the other side of the coin, the volatility continuing to plague financial markets combined with the ongoing eurozone crisis provide both opportunities and risks for people considering stocks and shares Isas.
Investing in a cash Isa could be deemed the safer option compared with a stocks and shares Isa, as any form of stockmarket-based investment carries a degree of risk. That said, there is a wide range of investment opportunities available for a stocks and shares Isa – including both UK and international equities, unit trusts, Oeics, Reits and exchange traded funds – so investors can balance this risk with the help of a diversified portfolio.
On reviewing the equity and fund portfolios a snapshot of customers are currently holding in their Isas, they certainly appear to be taking a diverse approach to their Isa investments, deciding to mix risk with income across a variety of markets.
The most popular fund holding is Blackrock’s ‘gold and general account’. In fact, this has been a popular fund among Isa customers for a number of years now. In addition to the positive movements we have seen in gold prices over recent years - with the increase in the price of gold reaching over 10 per cent to $1566/ounce for 2011 – it is generally viewed as safer haven from the eurozone sovereign debt crisis and concerns over possible future inflation.
Looking at the other most popular funds, it is interesting to see that overall, portfolios possess a varied mix of asset allocation and country specification. For example, emerging markets appear to be favourable with ‘Aberdeen emerging markets’ currently the second most popular and First State Investment’s ‘greater China growth’, ‘Asia Pacific leaders’ and ‘Indian subcontient’ fifth, seventh and tenth most popular holdings among our Isa customers respectively.
Meanwhile, on reviewing popular equities, we are seeing a cross-section of shares across a variety of sectors with oil and gas, communications, utilities, pharmaceuticals, retail and financial all represented in our customer’s current top 10 Isa equity holdings.
BP is currently one of the most popular stocks that customers have in their stocks and shares Isas. Almost a year ago, the oil and gas giant’s share price reached its 2011 low of 335p. However, during the course of the past year it has managed to recover by over 45 per cent, reaching 487.40p by 15 February, 2012. The rise in BP’s share price comes as the company remains in talks to strike an agreement with the many people and businesses affected by the 2010 Gulf of Mexico oil spill and delays to the trial to that will ultimately decide who will pay for the spill.
Another popular stock is Lloyds Banking Group. The banking giant, which reported a £3.5bn loss for 2011 on 24 February, 2012 was also one of the most popular buy and sell trade among our trading customers during 2011. The bank has continued to be the subject of heavy trading by customers into 2012 and its share price has gained over a quarter, to a 33.93p closing price on 15 February, 2012, since the beginning of the year.
Another popular choice of stocks are Vodafone Group, followed by GlaxoSmithKline and fifth placed Tesco.
In January, Tesco announced that it had suffered its worst Christmas in decades and also issued a warning that UK profits could fall in the coming year. It is interesting to note that since the close of trading on the day after its 12 January, 2012 profit warning, the supermarket behemoth had made just a 1p gain to 317.88p by the close of markets on 15 February, 2012.
The indices have been growing steadily since the end of last year - the FTSE 100 began 2012 at around 5500 points and is now hovering just below the 6000 mark despite the economic backdrop remaining turbulent. It is encouraging to see from that there is still faith in stocks and shares Isas and the variety of equities and funds we are seeing customers invest into their Isa demonstrates a willingness to diversify portfolios to mitigate risk across a variety of markets and sectors. In the face of low interest rates, stocks and shares Isas certainly appear to remain an attractive option for those looking to utilise their full Isa allowance for 2011/2012.
Stuart Welch is chief executive of TD Direct Investing
