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Putting away a portion of your salary into an individual savings account (ISA) has numerous benefits- and saving on a regular basis each month may provide additional advantages.
1. Tax advantages
By choosing to save regularly into an ISA you are keeping your hard-earned cash away from the taxman’s grasp – which is the main advantage of building up a fund in one of these wrappers. Your investment will accumulate value without being liable to income or capital gains tax (CGT) – unlike other savings accounts.
As stocks and shares investments rise in value, the tax-free status of ISA wrappers becomes more beneficial as the amount of CGT you might be liable for increases if you were to encash the fund.
Saving into a cash ISA means avoiding tax on any interest earned – making them particularly useful for higher-rate taxpayers. Using ISAs also reduces your paperwork when the time comes to filing your tax return as you don’t need to declare these accounts on this.
2. The discipline of monthly saving
Many of the best buy cash and stocks and shares ISAs offer a regular savings option as an alternative to one-off payments into your investment – which can ease pressure on your purse-strings. This means you can save a sum of your choice straight from your salary, so without thinking you will be making regular savings by simply setting up a direct debit. Then, if you have additional lump sums to hand at any stage, you can top up your ISA when the time suits.
It’s straightforward to set up a regular direct debit into your ISA account, and provided you stay within the annual ISA limit of £10,680 (rising to £11,280 for 2012-13) you can plough as much as you like into it. Depending on your investment needs, this might be put towards, say, an emergency instant access fund, or form part of long-term retirement planning. The eligibility to invest in an ISA will depend on your individual circumstances, and all tax rules may change in the future.
3. Pound cost averaging
Ever considered that regular savings can smooth the rollercoaster stock market ride? This is called pound cost averaging, and enables investors to smooth the highs and lows of stock market investing and therefore reduce any fear that market volatility will wipe out gains.
How it works is simple. If share prices are rising one month, your contributions buy fewer fund units, but then you may also have one month when you buy at the bottom of the market, when share prices are cheap – so those same contributions buy masses of units.
Pound cost averaging works most effectively in volatile markets, when you’re getting regular opportunities to buy relatively cheaply – and over time this brings your average purchase cost down significantly, which in turn, give your investment a boost. As ever, please remember, the value of investments can go down as well as up and you may get back less than you invested.
4. Banish fears over timing
Guessing where the market is going next is a fool’s game – particularly when economic times are uncertain, and investors don’t know what’s around the corner. By making regular monthly savings into a stocks and shares ISA you no longer have to fear which way the stock market will move next. After all, the biggest fear for lump sum ISA investors is that they make their annual investment at the top of the market.
Regular savers may find their investment timing over the long-term has more chance of setting a strong foundation. Hopefully, while some units in a stocks and shares ISA will be bought when the market is at a high, there will also be times when savers buy additional cheap units.
5. A sum you can afford
Regular savings schemes do have minimum monthly contribution requirements, but often these can be set at an amount that you’re comfortable with.
If you have an instant access cash ISA, then you should be able to put in as much or as little as you wish each month – from as little, say, as £10 a month.
Before opening an account, check your provider’s terms and conditions and work out a budget to consider how much you can afford to squirrel away. Of course, the more you can put away, the better, but you don’t have to squeeze your purse-strings too tightly. Over the long-term, even a small amount will make a difference – particularly given the tax breaks of an ISA account which will boost your returns.
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