ISAs explained: your questions answered

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1 For marketing purposes only. ISAs explained: your questions answered The UBS SmartWealth guide to making the most of your allowance and choosing the best ISA for you

2 Welcome Questions 1 What is an ISA? This UBS SmartWealth guide is designed to slice through all the investment jargon and help you make the most of your annual tax-free ISA allowance. We explain what you can and cannot include in your ISA. We also highlight the benefits and the risks of Stocks and Shares ISAs and clarify how much you can invest and when. In short, we provide you with all the information you need to make an informed choice when it comes to investing your funds in a tax-efficient way. 2 How are ISAs tax-free? 3 What type of ISAs are there? 4 Why should I choose a Stocks and Shares ISA? 5 What returns can I expect? 6 What are the risks? 7 Which Stocks and Shares ISA is right for me? 8 What should I think about when choosing where to buy my Stocks and Shares ISA? Nick Middleton Head of UBS SmartWealth UK Neil Cole Financial Planning and Wealth Planning Solutions 9 Can I transfer ISAs from one provider to another? 10 Is it possible to consolidate my ISAs? 11 Can I withdraw money when I need it? 12 Can ISAs be transferred on death? 13 Should I invest a lump sum or monthly? 14 When is the best time to invest in an ISA? 15 Are Stocks and Shares ISAs only for experienced investors? 16 What kind of ISA does UBS SmartWealth offer?

3 An ISA is a tax-efficient wrapper that can be put around a wide range of different investment products. 1 20,000 is the maximum you can invest in an ISA in this tax year The amounts tend to change every year. What is an ISA? An Individual Savings Account (ISA) is a tax-efficient savings and investment account that is available to UK residents aged 18 and over (16 and over for Cash ISAs). An ISA is a tax-efficient wrapper that can be put around a wide range of different investment products. For example, unit trusts, investment trusts, corporate bonds and cash are all products that qualify as ISA investments and as long as they are held within an ISA wrapper, there is no further income tax to pay on interest or dividends received. Any capital gains are completely free of tax too. ISAs, therefore, are an excellent savings vehicle because of their tax efficiency. However, there are annual allowances which limit how much you can invest in your ISA. The current annual allowance is 20,000, which means you can invest up to that maximum amount in this tax year (from 6 April to 5 April the following year). ISA limits change periodically in the Chancellor of the Exchequer s Budget, so it is important to keep track of the maximum you can invest each year. 3

4 2 How are ISAs tax-free? Most UK investments are subject to tax for example, capital gains tax or income tax. The tax-free allowance for dividend income in 2017/18 is 5,000 but this is being reduced to 2,000 in 2018/19. The capital gains tax allowance in 2017/18 is 11,300 and for 2018/19 it will be 11,700. Put simply, if you exceed these thresholds then you pay a tax charge. However, ISAs are treated differently and it makes sense to invest what you can (up to the maximum of 20,000 in 2017/18) in a tax-efficient ISA wrapper each year. Overall adult ISA subscription limits The annual subscription limits for Adult ISAs have grown steadily since they were first introduced in And, from 1 July 2014, savers have been able to split the amount they subscribe into an ISA between a Cash ISA and a Stocks and Shares ISA as they choose, up to the new overall limit. 4

5 The Stocks and Shares ISA is a taxefficient account that enables you to put money into a range of investments. 3 What types of ISA are there? ISAs come in different flavours: 11.1m number of ISA subscribers in 2016/17 The Cash ISA is essentially a savings account on which interest is paid tax-free. With non-isa savings accounts you may pay tax for instance, on notice or easy access accounts or fixed rate bonds. The Stocks and Shares ISA is a tax-efficient account that enables you to put money into a range of investments that include unit trusts, open-ended investment companies ( OEICs ), investment trusts, individual shares as well as government and corporate bonds. Any capital gains within a Stocks and Shares ISA are free from capital gains tax. The Innovative Finance (IF) ISA is based on the peer-to-peer lending principle. Individual borrowers or small businesses pay interest on a loan to the IF investor and this is paid tax-free. Unlike a cash ISA, money placed in an IF ISA will not be protected by the Financial Services Compensation Scheme (FSCS). The Lifetime ISA is available to anyone over 18 and under 40 years old. Money can be paid in until the investor reaches 50. The current annual limit is 4,000. The Government then adds a 25% bonus to your savings, up to a maximum of 1,000 per year. You can hold cash or stocks and shares in your Lifetime ISA or a combination of both. However, the Lifetime ISA limit of 4,000 does count towards your annual ISA limit of 20,000. A Junior ISA is available to any child aged under 18 and resident in the UK. The annual limit is lower than for adult ISAs for 2018/19 the maximum investment is 4,260. Junior cash ISAs and junior stock and shares ISAs are available offering the same tax-free benefits as other ISAs. Parents can open a Junior ISA and manage the account but the money belongs to the child. You can t invest in a Junior ISA as well as a Child Trust Fund. Data source: 5

6 By diversifying your investments you reduce risk. Over-exposure to one region or sector, even if they are flying high, is a precarious and often bruising strategy. 6

7 4 Why should I choose a Stocks and Shares ISA? While a Cash ISA might appeal to risk-averse investors, for many others a welldiversified exposure to the stock market is a logical step. In a low interest-rate environment, returns on cash are not hugely attractive. Even if interest rates on cash rise, historically stock market investments outperform cash over the longer term 1. The chart below shows how stocks and shares have performed against cash and also bonds over the past five years. Equity investments outperform bonds and cash in the past five years Total returns on the FTSE 100, UK money market 0-12 months, and 10-year Gilts for the past five years Feb-13 Feb-14 Feb-15 Feb-16 Feb-17 Cash Equities 10 year Gilts Please note that the risks of investing is different to the risks of holding cash and the price and value of investments and income derived from them can go down as well as up. So you may not get back the amount originally invested. Stocks and Shares ISA allows you to benefit from exposure to global stock markets. As well as geographical diversification there is the opportunity to invest in companies of all sizes in a broad range of sectors from technology and healthcare to energy and banks. In addition to individual shares and collective equity funds, you may also want exposure to corporate and government bonds in your ISA portfolio. By diversifying your investments in this way, you reduce risk. Over-exposure to one region or sector, even if they are flying high, is a precarious and often bruising strategy. Data source: Chief Investment Office Wealth Management, Bloomberg 7

8 It is so important to establish the level of risk you are comfortable with. 5 What returns can I expect? It is reasonable to expect higher returns if you are taking greater risk. However, the trade-off is that you are also more likely to lose money. Every investor has their own attitude to risk, and it is important to understand how risk and return could work for you. With stock market investments there are no guarantees as your returns depend on the performance of company shares or bonds, the value of which can rise or fall. In a good year, the returns might be in double digits. For example, for the year from 30 November 2016 to 30 November 2017, the average fund in the UK All Companies sector returned 15.2% 1, a decent return compared to cash right now. By comparison if you look at the same sector post-financial crisis, the average UK All-Companies fund lost 35% in It is clearly not always going to be plain sailing which is why balanced and diversified investing makes such good sense. Recent returns have been good for stocks and shares. According to data compiled following Freedom of Information requests submitted to HMRC by UBS SmartWealth, we have calculated that if an individual had invested their maximum ISA allowance (split equally between cash and equities) during the past five years, for the cash half of their investments: they would have 72,662.69, having put in 68,280. A return of 4, For the stocks and shares half of the portfolio: they would have 85,705.57, having put in 68,280. A return of 17, However, please bear in mind that the price and value of investments and income derived from them can go down as well as up. You may not get back the amount originally invested. For the calculations, UBS SmartWealth made the assumption that the cash investments are consolidated every year into the top-paying product and are based on the top Cash ISA offering from each of the past five years, as identified by Moneyfacts and moneysupermarket.com, reported in the Financial Times (see next page) for

9 Year Top Cash ISAs Account %AER 2016 Al Rayan Bank Notice Cash ISA 2.02% 2015 Coventry Building Society Cash ISA 2.25% 2014 Britannia Select Access Cash ISA 1.75% 2013 Cheshire Building Society Cash ISA 2.5% 2012 Santander Super Direct ISA 4% For the stocks and shares investments, we have assumed the investments track the MSCI World Index (see below). These calculations do not incorporate fees, which would reduce the returns you receive on your investments. Annual performance of the MSCI World Index Year Percentage % % % % % Please note, however, that this trend coincides with one of the lowest-returning periods for cash with low interest rates. It s important therefore that your decisions should always be based on rational analysis rather than wishful thinking. If technology funds have a stellar year and soar in value, piling all your money into tech in anticipation of a repeat performance may not be a sensible strategy. The risk warning past performance is no guarantee of future returns is there for a reason. Taking professional recommendation means that you don t have to shoulder all of that responsibility yourself. 6 What are the risks? The biggest risk is that you could be investing money that you cannot afford to lose. Since the value of your investment can go down as well as up, it is important you understand this at the outset. Stock markets are by their very nature volatile. Investors must accept the fact that the value of their shares may fluctuate wildly at times. Some sectors are typically riskier than others for instance, mining shares are usually more volatile than bank shares. The level of risk in your Stocks and Shares ISA will depend on the investments you choose to put into it. That is why it is so important to establish the level of risk you are comfortable with at the time you invest. This risk level may change over time. For instance, your risk profile as a 30-year-old with a large disposable income will be different to when you are aged 60, approaching retirement and looking for your ISA to generate income. Reappraising your risk appetite as the years progress is essential. This is also why we re-test our clients objectives and attitude to risk at least every 12 months, so that we can be sure our investment strategies always meet our clients requirements. 9

10 Questions you need to ask include: is your objective capital growth or regular income? And what level of risk are you prepared to take? 7 Which Stocks and Shares ISA is right for me? Any investment house can offer an ISA. The key is to pick one that invests your money well and in line with your objectives. Questions you need to ask include: is your objective capital growth or regular income? And what level of risk are you prepared to take? Your investment timeline plays an important role here. A general rule of thumb is that all stocks and shares investors should be prepared to invest their money for at least two years for a lower-risk strategy and five years plus for a higherrisk approach. Of course, younger investors may be in a position to invest for 30 years or more. This being the case, their ability to withstand short-term volatility is likely to be higher than a 75-year-old investor who may not be able to wait five years or more for any stock market losses to be recouped. In terms of portfolio construction, exposure to higher-risk investments will typically reduce over the years. Essentially, what is right for you at age 25 is unlikely to be fit for purpose when you are 75. This is why regular ISA portfolio reviews are essential. 10

11 8 What should I think about when choosing where to buy my Stocks and Shares ISA? As with any choice of where to spend your money, cost is an obvious consideration. While it is important to compare administration fees and dealing charges, they are not the only factors to take into account. Level of service and account security are other crucial features. How user-friendly is the platform and how good are any portfolio building tools they offer? Also, what benefits do you get in terms of how investments are managed? 11

12 9 Can I transfer ISAs from one provider to another? 10 ISA transfers are flexible, so, for example, you can transfer your savings from a Cash ISA into a Stocks and Shares ISA or vice versa at any time. You also have the option to transfer all or part of the money invested in previous years. However, if you want to transfer money that has been invested in an ISA during the current tax year, you must transfer all of it. If you have already used your ISA allowance, you can still transfer existing Stocks and Shares or Cash ISAs without losing any tax-free benefits. And if you haven t used your allowance, you can transfer an existing ISA and your annual allowance will still be available. You can also transfer cash from an IF ISA to another provider but you may not be able to transfer other investments from it. Ask your provider to tell you about any restrictions that apply 1. Is it possible to consolidate my ISAs? Yes, you can bring all your ISAs under one roof and there are benefits in doing so. It is far easier to review all your ISA investments in one place than with a number of different ISA providers. In addition to having more control over buying, selling and switching investments, monitoring your overall asset allocation will be simpler and quicker if they are held in one place. Consolidating your ISA should also help lower charges and fees with fewer providers to deal with. 12

13 The most important thing to remember, regardless of whether you invest a lump sum or make regular monthly payments, is to make the most of your annual allowance. 13

14 11 Only Flexible ISAs allow you to make withdrawals from your ISA and then put money back into the same account in the same tax year without affecting your allowance. Can I withdraw money when I need it? Yes, and many investors do. However, the main disadvantage in taking your money out of an ISA is that you may lose some of your tax benefits for that year. Let s assume you have invested the maximum amount into an ISA for the current tax year. A few months later, you decide to withdraw 12,000 to pay for a new car. You subsequently inherit a large sum from a family relative and decide you want to replace the 12,000 taken out of your ISA. Unfortunately, you won t be able to do this as you have already contributed the full annual amount into your ISA for the current tax year. Only Flexible ISAs allow you to make withdrawals from your ISA and then put money back into the same account in the same tax year without affecting your allowance. However, this only applies to the cash element, not stocks and shares. 12 Can ISAs be transferred on death? New rules introduced in 2015 allow spouses to inherit ISA investments from their deceased partner. On death, the ISA can be transferred to the surviving spouse, and can continue to be held in the ISA wrapper for the rest of the surviving spouse s lifetime. This means they will be able to receive interest or investment returns tax-free. This rule applies to married couples and those in civil partnerships. 14

15 13 Should I invest a lump sum or monthly? It s a case of what suits you best there are benefits to both approaches. If you don t have sufficient spare capital as a lump sum to invest, regular monthly payments into an ISA are a practical alternative. Regular investing allows you to drip-feed money into the stock market. This is potentially more attractive to cautious investors as the value of the investment will not change as dramatically 1. If the market falls, your regular payment will buy more shares as stocks are cheaper and when the market rises, you will buy fewer shares but the shares you bought in previous months will be worth more. This is often referred to as pound-cost averaging. The counter argument is that if you drip-feed your investment only a small proportion of your money earns returns in the early months. If the stock market soars in value over this time, the returns would be much lower than if you had invested a lump sum. The benefit of opting for a lump sum is that your investment is immediately exposed to the market and has the greatest potential for growth. However, it also has the greatest potential for loss should the market dip sharply

16 14 When is the best time to invest in an ISA? Timing is vital. The phrase often used is use it or lose it and this refers to the fact that if you are too late in using your full ISA allowance, then it is lost for good. In short, you can t make up any shortfall in previous years ISA contributions retrospectively. The most important thing to remember, regardless of whether you invest a lump sum or make regular monthly payments, is to make the most of your annual allowance. You should also think about ISAs in relation to your family. Is your spouse or partner making use of their allowance? Are your children eligible for a Junior ISA and can contributions be made there? For a couple with two children, the current total ISA allowance available to the family is 48,256 20,000 for each adult plus 4,128 of Junior ISA allowance per child. 20,000 20,000 4,128 4,128 If you invest the maximum 20,000 into your ISA on 5 April, the deadline day, then the very next day at the start of the new tax year, you can invest another 20,000. This last-minute scramble to maximise the annual ISA allowance happens every year. While it is better to make the deadline than miss it, by investing late you miss out on the opportunity to be invested for the maximum possible period. Data source: 16

17 15 Are Stocks and Shares ISAs only for experienced investors? Stocks and shares ISAs may appear complicated and riskier than Cash ISAs, and the choice of investments can sometimes appear overwhelming. But don t let that put you off. Online investment platforms are designed for people who don t want to worry about making investment decisions themselves, and are therefore a great option for those just starting out. As with any financial decision, you should talk to an advisor or someone you trust to understand more about how you might use a Stocks and Shares ISA. Remember, you don t need to deposit the full ISA allowance in order to open an ISA. You can still reap the benefits with a smaller amount of money. The 20,000 ISA allowance just sets the maximum, which you can save within the tax-free wrapper each financial year. 17

18 We offer a Stocks and Shares ISA and five investment strategies that match your personal needs and are constantly monitored and regularly re-balanced to ensure that it continues to match your needs. 16 What kind of ISA does UBS SmartWealth offer? UBS SmartWealth is a new way to invest that combines digital wealth management with UBS s market leading expert insight. You ll get personalised regulated advice based on UBS investment expertise. At UBS SmartWealth we offer a Stocks and Shares ISA and five investment strategies that match your personal needs and are constantly monitored and regularly re-balanced to ensure that it continues to match your needs. We also offer you the choice between: - actively (the experts will make active instrument decisions, that means selecting individual stocks, bonds, and other products per asset class) - or passively implemented investments (these funds apply asset allocation decisions, using products such as Exchange Traded Funds (ETFs) to gain broad exposure to selected asset classes that are in line with your preferences. While your strategy will invest into a single fund, we recognise that underlying diversification is a critical part of the overall investment strategy and is a key technique in reducing overall investment risk. As such, diversification aims to widen the spread of investments to reduce the volatility of the investment returns. We achieve diversification through the asset allocation of the fund(s) invested within your UBS SmartWealth account. Please note that the minimum initial payment is 15,

19 To find out more about the UBS SmartWealth Stocks and Shares ISA: Call: Website: smartwealth.ubs.com/uk/en

20 Important information Please note that UBS does not provide tax and legal advice. UBS clients must get their own advice based on their own personal circumstances. Your capital is at risk. The price and value of your investments and income derived from them can go down as well as up. You might not get back the amount you originally invested. ISA rules apply. Disclaimer This document is issued by UBS Wealth Management, a division of UBS AG which is authorised and regulated by the Financial Market Supervisory Authority in Switzerland. In the United Kingdom, UBS AG is authorised by the Prudential Regulation Authority and is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. Where products or services are provided from outside the UK, they may not be covered by the UK regulatory regime or the Financial Services Compensation Scheme. UBS AG, Jersey Branch is authorised and regulated by the Jersey Financial Services Commission for the conduct of banking, funds and investment business. Where services are provided from outside Jersey, they may not be covered by the Jersey regulatory regime. UBS AG, Jersey Branch and UBS AG, London Branch (which is registered as a branch in England and Wales Branch No. BR004507) are both branches of UBS AG a public company limited by shares, incorporated in Switzerland whose registered offices are at Aeschenvorstadt 1, CH-4051 Basel and Bahnhofstrasse 45, CH 8001 Zurich. UBS AG, Jersey Branch s principal place business is P.O. Box 350, 24 Union Street, St Helier, Jersey JE4 8UJ. UBS The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved. UBS AG City Branch 5 Broadgate London EC2M 2QS ubs.com February 2018