How to invest tax free

An effective way to make tax efficient savings and investments is with individual savings accounts (ISAs). Cash ISAs are savings products available on the high street in which you can invest up to £5,760 this tax year, and which are currently offering a taxfree interest yield of around 1.75 per cent.

Cash ISAs are easy and have various advantages, but the problem is that the returns they offer will often fall short of inflation, meaning that the real value of money invested in one of these ISAs will decline in value. Money needs to be tied up for five years to stand a chance of getting a return ahead of inflation—but the lack of access to capital and the possibility of interest rate changes will make this very unattractive.

The alternative to a cash ISA is a stocks and shares ISA, a type of product often incorrectly regarded as very high risk. These ISAs are not limited to shares—the holder can put lower risk assets in as well, meaning that these products are as risky as the consumer chooses them to be. In the December autumn statement, George Osborne announced that in 2014/15, the overall ISA allowance will rise from £11,520 to £11,880, of which up to half can be put into a cash ISA.

So what should go into a stocks and shares ISA? The first thing to do is identify the desired outcome: is it to generate income, capital growth or a combination of the two? Furthermore, what is your timescale?

Also crucial is to decide how much risk you want to take on—and the flip side of this, how much can you afford to lose. It is also worth bearing in mind that, under the Financial Services Compensation Scheme, you are insured for up to £50,000 per investment provider.

To keep annual charges low, use funds that meet the Financial Conduct Authority’s requirements under the Retail Distribution Review—these will have no commission or third party payments. The savings can be substantial, typically reducing the ongoing charge figure from 1.55 per cent per year down to 0.8 per cent.

If you find your existing ISA pot is with an expensive provider, you can make a stocks and shares ISA transfer to a new provider with lower charges, without losing the valuable ISA status. But watch out for possible transfer charges from the existing provider. Also some ISA providers have started offering an initial payment on receipt of funds, to help mitigate any transfer charges.

A typical investment approach might be to spread your money over UK shares, overseas shares, fixed interest securities (government or company bonds) and commercial property. When it comes to commercial property, there is a preference for the few genuine bricks and mortar UK commercial property funds. These are substantially different to the other property funds available which often have substantial holdings in real estate investment trusts or exchange traded funds. When investing in a property fund, keep in mind that in bad market conditions it can be hard to sell up.

As for UK shares, equity income funds— which focus on investing in shares with good dividend yields—can yield around 4 per cent per year, so even if there is little growth in the share market, the dividend ensures a return ahead of inflation.

So with all this choice, what should an investor go for? The most popular investment approach is a low-to-medium risk portfolio with up to 50 per cent invested in shares divided between UK and global equity funds. After this, around 35 per cent would be held in bonds; and then around 15 per cent in UK commercial property. The overall annual charge for a portfolio like this is around 0.8 per cent and the typical income around 3.5 per cent.

Finally, if you are planning to make ISA contributions prior to the tax year end of 5th April, remember that this falls on a Saturday this year, so it is best to get everything done ahead of time.