Don’t opt for a ‘no deal’ on your 2018-19 Isa allowance

Avoid investor inertia when it comes to securing valuable tax allowances, says Jason Hollands.

What a week it has been for drama in UK politics with the Brexit Withdrawal Agreement rejected again and Parliament voting to rule out the possibility of leaving the European Union without a deal.

Political uncertainties have undoubtedly had a corrosive effect on investor sentiment, a fact borne out by a very prolonged pattern of net outflows from both UK and European equity funds.

According to Investment Association data, UK equity funds have experienced net outflows from private investors for 21 months on the trot, and Europe funds for the past nine months (data to end of January).

While this is unsurprising given the effect that uncertainty has on investor psychology, holding back from making sound long-term decisions because of the white noise of current events is unlikely to be the right move.

This is especially the case when it comes to securing valuable tax allowances, such as Isas and pensions that form the bedrock of millions of Briton’s long-term savings and investment plans.

Even for those who cannot bring themselves to invest in the current climate, a “no deal” approach to Isas this tax-year end is an option that should be taken off the table.

This is because adult Isa allowances can be secured with cash before midnight on 5 April, and then invested at a later date when an investor feels more comfortable in making a decision about putting it to work in the markets.

Cash held in an adult Isa can be withdrawn at any point, but securing your allowance now at least provides an option to ring-fence assets from the taxman for the long term.

This is something that could become even more important in the event that a future government decides to increase taxation. So, if you have cash sat on the sidelines, securing an Isa now and removing “no deal” as an option for this year’s Isa is a no-brainer.

A regular pattern

Another way to cut through near-term worries is to invest on a regular basis, rather than boldly ploughing into the markets with a lump sum investment.

While investing in stocks and shares funds should always be approached with a medium- to long-term view, no one likes the thought of investing and then seeing the value of their investment drop rapidly.

Nervousness around timing can deter people from acting in times of uncertainty, but such inertia can prove the enemy of long-term gains. In truth, accurately second-guessing the optimal time to invest is impossible, and the more important factor will be the time spent in the market as returns build up.

Investing monthly instead of with a lump sum amount removes the emotional conundrum, and enforces a disciplined approach that helps investors to keep going through the ups and downs.

It is an approach that helps smooth out the short-term gyrations in share prices, and is a process sometimes referred to as “pound cost averaging”. This means picking up shares when sentiment is gloomy but prices are cheap, as well as when markets are riding high on waves of optimism, to get a more average entry point over a year.

Importantly, investing regularly can also help extract investors from the annual, tax-year end rush to make decisions in a hurry.

Jason Hollands is the managing director of business development and communications at Tilney Investment Management Services Ltd.

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