Personal finance: Isa season is here

There should be no such thing as an Isa season. If we all invested regularly—every month by direct debit—or if we didn’t all leave things to the last minute, there would be no need for it. But we don’t. So for the last few months of every tax year the big money management companies devote themselves to persuading us of the urgency of the situation. If we don’t invest before 5th April, we are told, we will be much poorer than everyone who does.

Usually if you listen to the promises of riches that come from parts of the financial industry, it often isn’t long before you find you have an expensive premium bank account packed with benefits that are of no benefit to you; critical illness insurance you will never be allowed to claim against; or an interest rate swap that is all but guaranteed to bankrupt your business. But here’s the odd thing. On this one rare occasion the financial services industry is entirely correct. If you have money you want to invest and you have not yet used up your Isa allowance, you must do so before the tax year is up or your chance is gone.

The first thing to be absolutely clear on is that an Isa is not a thing in itself. It is simply a wrapper into which you may put investments to the value of £11,280 (or cash up to £5,640). Once you have put them into this wrapper they are free of the clutches of the taxman. There is no further tax to pay on any dividend income and no capital gains tax to pay. That makes an Isa, in my view at least, considerably better than a pension as a savings wrapper. You might get tax relief on the way into a pension but then, not only does the government dictate when you may take your money out, but it taxes you as you do so.

Possibly even better still, there is no tax related admin to do once you have your money in an Isa: the income and capital gains from any investments held inside it do not ever have to be declared on your self assessment forms. If you have recently finished doing your taxes you will know just what a blessing that is. The very fact that an Isa is something of a haven from tax makes it a haven from paperwork too.

But just because an Isa is a good thing does not mean that you buy any old investment to put inside it. We live in an era of low returns (the Bank of England base rate is at its lowest since 1694), something that makes the amount you pay for your investments vital. If you are only going to make 4 per cent a year tops you can’t afford to pay 2 per cent of that away in fees. That means you have to buy your Isa wrapper in the right place.

What’s that? Conveniently new market entrant www.rplan.co.uk has created a nice table comparing the costs of most of the UK’s better online investing platforms. Play around on that for a while and you’ll get a good idea of the scale of the difference in charges across the providers. Choose a cheap broker and open an Isa account with them.

Next up, what do you put into it this year? We don’t just live in an era of low returns, we live in one of intensely volatile returns. The global economy is a mess; markets are heavily influenced by politics and central banks rather than by their fundamental health; and there is still a strong chance of a serious crisis in the eurozone this year. That means that despite the outbreak of optimism across the markets, long-term investors (which should include all Isa investors!) need to be cautious. So buy a good defensive investment trust such as Personal Assets Trust, the Troy Income and Growth Trust or Scottish Mortgage Investment Trust and be done with it. Don’t look at it too often. Don’t trade in and out of it too much. Top it up regularly. And you might find that for once the industry is right—you will end up richer than you would have otherwise.