BrilliantWithMoney

In the latest of our series of ‘top ten tips’ we look at your considerations when investing in an Individual Savings Account (ISA).

With the ISA allowance increased from £7,200 to £10,200 today for people who are at least 50 by the end of this tax year, many people are thinking about where to best invest their ISA top-up payments.

Use these top tips to start planning your own ISA investment strategy.

1 – Before you invest in an ISA make sure that you have a plan for paying off any debt that you may have particularly short term debt such as credit cards, storecards and overdrafts. These debts are likely to cost you more than the rewards you might receive from investing through an ISA.

2 – It makes sense to have an emergency fund before you start to actively invest for the future. A good rule of thumb is to have say six months worth of bills available in your emergency fund just in case.

3 – You can choose to invest into a cash ISA and an equity ISA, or have a combination of the two. From 6th October 2009 it is possible for those aged over 50 to invest £10,200 per tax year in an ISA. Up to £5,100 of this can be in cash with any remaining balance in an equity ISA. Alternatively you can invest the full £10,200 in an equity ISA. For those aged under 50 these new higher limits don’t start until 6th April 2010. Until then the limit is £7,200 of which up to £3,600 can be in a cash ISA.

4 – There are so many equity ISAs to choose from and probably the best way to buy one is through a fund supermarket. This means that you do not have the whole of your ISA contribution invested through one fund manager but can choose from a suitable range of funds.

5 – You should choose funds that reflect your attitude towards and appetite for risk. With over 3,000 investment funds to choose from you won’t be surprised to learn that there is a great range of risk and reward from these funds. You need to establish how much of your ISA contributions might be invested in cash, fixed interest securities, property and shares.

6 – Choose a range of funds from top performing fund management groups but do not be seduced solely by past performance. Some of last year’s best performing funds may not turn out to be very good this year. Make sure that you read the fund fact sheet that the fund management groups produce for each of the funds. This will tell you what the objective of the fund is and you can then determine whether it is suitable for your investment goals.

7 – Avoid ISA products that have high initial charges as these will eat into your prospective investment returns. Each ISA will have annual management charges depending upon the investment funds that you have selected. For ‘passive’ (sometimes called ‘tracker’) funds the typical annual management charge will be 0.5% or less. For ‘active’ managed funds the annual management charge is more likely to be in the order of 1%-1.5%. You pay more for the prospect of better performance although that is of course not guaranteed.

8 – You should review your ISA investments at least on a yearly basis. It is generally the case that investor’s goals and objectives change over time and if you don’t review you may discover that you are taking more (or indeed less) risk than you have to.

9 – Make sure that you can obtain valuations of your ISA online anytime you want to rather than having to make a phone call for valuations or indeed having to wait until they are issued to you by the ISA provider (typically two statements per year).

10 – If you want to buy your ISA without advice that is easy enough to do but if you do need to take advice make sure that you use the services of a suitably qualified and experienced independent financial adviser.

Martin Bamford is site editor of BrilliantWithMoney and a Chartered Financial Planner at Informed Choice.