The ISA enables you to build up tax-free capital through regular savings. It’s a permanent tax shelter and the ideal place for your long-term money.
The government confirmed this year that Individual Savings Accounts (ISAs) were now tax-free for ever. What does that mean? Well, put the maximum £600 per month in for ten years, leave it to grow for another ten, and you could have a fund worth £150,000 in today’s spending power, capable of providing you with £6,000 a year tax-free for the rest of your life while preserving the capital.
Why don’t more of us do this? Because it’s just too easy to spend rather than save money. Here’s the simplest and best trick I know for making yourself do it. Sign up for a regular savings ISA where the money comes out for your account a couple of days after payday. Then you’ll learn to live for the rest of the month on what’s left.
Most people can live within their incomes
It is a brutal truth that if we have to do it, we can live within our incomes. Do it this way round and chances are after a few months you’ll have adjusted and your plan will roll on easily for years. Sign the direct debit for the end of the month and the chances are you’ll struggle and may cancel the plan because ‘you can’t really afford it’.
For your ISA, use a self-select plan because these cost you nothing. Then choose a combination of investment funds so that from day one you are building a balanced portfolio of investments and spreading your risk. Within a self-select plan, these funds are available at no or low initial charges and the minimum saving is £50 or £100 per month.
Don’t be depressed that the market is low. This is in fact great news. You want to accumulate lots of cheap investments now – the best time for them to be expensive is later, when you’ve built up your stake.
Four funds for regular savings
My model £600 per month ISA savings plan uses four funds, though you could use more. It gives you a balance of UK shares, international shares, commercial property and the more dynamic Asian markets.
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It’s designed for a minimum savings term of ten years and over that period I expect it to produce at least 5% a year on top of whatever the inflation rate turns out to be, so that the value of your money grows in real spending power terms by at least 5% annually.
The £600 per month ISA savings plan
| Type of fund | Name of fund | Amount per month |
| UK: aims for high and rising income | Martin Currie UK Equity Income | £200 |
| Worldwide: focus on small growth companies | Rathbone Global Opportunities | £200 |
| Natural resources | JP Morgan Natural Resources | £100 |
| Worldwide commercial property | SLI Select Property | £100 |
| TOTAL | | £600 |
Why these funds?
These funds are all run by managers with a proven record of success. They not only invest in different areas but have different styles of investing. That means that in most market conditions at least one of them should thrive.
I recommend that all investors have a holding in a UK Equity Income fund because over the long term these have proved excellent investments that have often produced higher returns than more risky growth-oriented funds.
At present, Martin Currie’s UK Equity Income fund has an income yield from dividends of 4.1% net of standard rate tax. It’s very likely that this income will grow by between 5% and 10% a year over a 5-10 year period. If that happens the capital value of the fund is also almost certain to rise.
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Good track record
Scott McKenzie is not as well known as some other UK Equity Income fund managers but has an excellent personal track record with his previous firm Britannia Fund Managers, and in the two years he has been at Martin Currie he has significantly improved this fund’s performance.
Globalisation has made the world a smaller place. That is good news for investment managers of funds like Rathbone Global Opportunities, who can find well-managed fast-growing businesses all over the world.
James Thomson is a globe-trotting manager who focuses on the quality of the business and doesn’t worry much about the geography. Because he invests mainly in smaller companies, his Rathbone Global Opportunities fund will be more volatile than a typical international fund, but is likely to generate higher returns over a period of 3-5 years.
Secular bull market in resources
Energy and resource prices are rising, and according to many analysts could go on rising for up to 20 years. There will be a rollercoaster effect - the price of a fund like JP Morgan Natural Resources will probably rise and fall more steeply than other investments - but this is actually good news for regular savers, who benefit from ‘cost averaging’.
Ian Henderson has run the JP Morgan Natural Resources fund for 15 years with great results. He holds a wide portfolio of shares in mainly medium sized and smaller companies, where he often discovers hidden value. The fund holds energy, precious metal and base metal mining and other natural resource shares.
Global property
Standard Life Investments’ Select Property is one of a handful of funds investing globally in commercial property. Manager Andrew Jackson draws on a huge international team of analysts and managers and this has enabled him to buy into property in Japan, Poland and other markets on attractive terms. This is a volatile fund because many of the holdings are property businesses with stock market listings, but over a 5-year term I believe it will do very well for its investors.
Regular saving is a no-brainer
It is easy to get the timing wrong with lump sum investments. It’s impossible to get it wrong with regular saving if you stick at it for ten years. Somewhere in there you’re bound to have a period of low prices that enables you to accumulate lots of cheap investments. Then, the only issue will be whether and when you cash in some of your gains.
Important risk warning - please read
The value of your investment and the income from it can go down as well as up and you may not get back a significant proportion of your investment. Past performance is not an indication of future performance. If you are in any doubt as to the suitability of an investment, you should seek independent financial advice.
