Stock ISA lump or drip

Supernova

Guys,

I've maxed out cash ISAs for many years but held off this year to go for a maxi stocks ISA for long-term growth (say 13 or so years).

I read that drip-feeding a Tracker (or Managed fund), for instance, was probably the best way of smothing out ups and downs but would it be wise to drip in the full £7K by the end of the tax year or maybe just settle for a mini cash and mini stocks this time as I'm a complete novice investor (shudder)?

Ta

ReportInvestor

Drip feeding has always been my way of investment. A lesson learned in October 1987 .

It's stood me in good stead.

But I'd be tempted to continue to use your mini-cash ISA in 2006/7. These animals could be abolished in 2010 or reduced to a £1K allowance. IMHO they are gold dust. Potentially a one in a lifetime investment.

If you want to invest £7K in the stock market why not go for £4K in an shares ISA and £3K outside?

Unless you are a higher rate taxpayer the shares ISA doesn't usually give you enough tax benefits to compensate for giving up a mini-cash ISA.

There are exceptions - e.g. if you know you are certain to use up your £8.8K CGT allowance on other investments.

But that doesn't apply to most people.

dunstonh

Pros and cons of pound cost averaging.

Pros: you spread your investment over a period and if the market drops in that time, you havent put all your money in at a high point but bought some at lower points.

Cons: You spread your investment over a period and if the market gains that that time, you havent put all your money in at a lower point and missed out on the growth.

Regular contributions can be a good way to feed into funds which are above your risk profile.

Supernova

Thanks guys.

RI - yes, at the moment I'm a higher rate TP. I have other shares (company, FP windfall) but won't be selling anytime soon I don't think to impact CGT.

What implications does that have for me and stock ISAs?

TIA

ReportInvestor

Dividends come with a 10% tax credit deducted whether you are a non-taxpayer / basic rate taxpayer or higher rate taxpayer.

ISAs do not make any difference to this.

But as a higher rate taxpayer you would have to pay 32.5% extra tax on your dividends outside an ISA .

So the trick for a HRT is to invest in income shares within an ISA and growth shares outside an ISA.

Reinvested dividends have been the key to stock market investment. ISAs enable you to take advantage of this.

Supernova

OK thanks. I'll make a note of that.

jem16

ReportInvestor wrote:

But as a higher rate taxpayer you would have to pay 32.5% extra tax on your dividends outside an ISA .

Presumably you mean 22.5% extra tax on dividends? It's 32.5% altogether for higher rate taxpayers, 10% of which is already paid.

Supernova

ReportInvestor wrote:

So the trick for a HRT is to invest in income shares within an ISA and growth shares outside an ISA.

Right I'm confused about whether I as an HRT need to bother using my shares ISA allowance at all.

Are you saying that I could be paid the dividends on income stocks rather than reinvesting them back into the ISA?

Otherwise, is it not worth using my annual allowance for growth stock ISAs at all? Ever?

dunstonh

Right I'm confused about whether I as an HRT need to bother using my shares ISA allowance at all.

No higher rate tax to pay on income and no CGT to worry about. Higher rate tax payers benefit the most from ISAs.

Are you saying that I could be paid the dividends on income stocks rather than reinvesting them back into the ISA?

No. The funds/shares with the highest income should use up your ISA allowance and the no/low yield funds should be outside of the ISA if you fully use the allowance and want more to invest.

Supernova

Thanks dunstonh, I understand.

I'll start looking at Motley Fool's HYP strategy for some initial ideas.

Thanks for all the advice you give on these boards and have a good Xmas!

si1503

ReportInvestor wrote:

But I'd be tempted to continue to use your mini-cash ISA in 2006/7. These animals could be abolished in 2010 or reduced to a £1K allowance. IMHO they are gold dust. Potentially a one in a lifetime investment.

If you want to invest £7K in the stock market why not go for £4K in an shares ISA and £3K outside?

Unless you are a higher rate taxpayer the shares ISA doesn't usually give you enough tax benefits to compensate for giving up a mini-cash ISA.

I don't really understand what you are getting at here.

Are stocks and shares ISAs not tax free?

You advise to use up the 3k mini cash ISA, but potential returns from stocks and shares are far far greater. I recently emptied out 3k from this years cash ISA to put into stocks and shares (I'm a non-taxpaying student at the moment anyway), in the anticipation of better returns. Over 3 months i had earnt just over £50 in interest in cash from 3k, the same value investment in unit trusts has earned me £117 in less that 2 weeks. Okay so that growth is highly unlikely to continue at such a rapid rate and 2 of those funds are very high risk, but the point is that once you know what you are doing in regards to investing into the stock market you can nearly double your returns over cash, certainly in the long run, so why still bother using a cash ISA?