I have always been a saver. I remember as a youngster frequently crossing the road from our home above my father’s surgery to the post office, to buy savings stamps with my pocket money. My ambition was to fill the book.
By the time I was a teenager, I bought my first shares — with mixed fortunes. Thus when Peps, the precursor to Isas, were introduced in 1987 I had already been an investor of 30 years standing.
I immediately recognised that the ability to invest a certain amount each year, free of income tax and capital gains tax, was an opportunity not to be missed. However, I had difficulty in finding a plan manager who would allow me to invest in shares of my choosing rather than having to select from a limited list.
Finally, I alighted on Midland Bank Executor and Trustee and through them made my first purchase — £2,400 in Manchester-based electrical manufacturer and wholesaler Pifco, a family-controlled PLC, carefully stewarded and cash rich. In subsequent years I bought more shares in Pifco — they were finally taken over some years later by Salton of the US and the protected tax status of my investment meant the profit was mine to reinvest.
This experience set the pattern for my subsequent years of tax-free investing. I sought out established, profitable, small-cap stocks whose business activities I could understand, which would hopefully pay increasing dividends and were conservatively financed — ideally carrying cash on the balance sheet or a low level of debt. Above all, I wanted to own companies where the people running the business had a meaningful shareholding themselves.
FT Money Isa Guide 2020
For the next 16 years, until 2003, I invested the maximum annual allowance each year until my Isa portfolio reached £1m in value. To achieve this, I had reinvested every dividend I received, taking nothing out, and had paid in a total of £126,000 by way of annual contributions. I was judged to be the first Isa millionaire — I don’t know whether I was or not, but nobody surfaced to challenge me.
As Claer Barrett, FT Money editor, summarised when commissioning me to write this article: “Your strategy is well-known . . . buy and hold small companies, with big dividends which are reinvested, then wait for the takeovers to roll in.”
Thankfully, many takeovers have rolled in over the years — and I have reinvested the proceeds. In 2019, these included insurance services company Charles Taylor and exhibitions organiser Tarsus. More recently, industrial property group Hansteen and now property owner Daejan, which has just announced that the controlling family plan to take it private.
So now, as I look back over 33 years as an Isa investor, what conclusions have I drawn and what are my plans for the future?
Today, Isas are even more attractive than when I started in 1987. Not only are withdrawals still free of income tax and CGT, but qualifying Aim shares are free of inheritance tax if held for more than two years. Furthermore, the tax sheltering benefits of an Isa can be transferred between spouses and civil partners on death. Additionally, the maximum annual contribution has been steadily raised, now standing at a fulsome £20,000 each for husband and wife. In short, a UK Isa is arguably the best investment “wrapper” in the Western world. Friends abroad are green with envy, having nothing like it themselves.
Now, of course, most people will not be able to afford saving anything like that sum each year. Many may prefer to invest through funds or ETFs rather than individual stocks like I do. Regardless of your investing style, the most important thing for all investors is to take out an Isa and try at least to put in something each year, hopefully building up a fund over the years, brick-by-brick as I have done.
Every investor makes mistakes — we all do — but the important thing is to recognise and face up to them, take the loss and move on. I try to avoid losses by not investing in risky prospects such as biotech or oil exploration stocks, contracting businesses or start-ups. These are best left to specialist investors or funds.
A couple of years ago I needed to raise a significant sum to help with a family house purchase. The choice was — do I realise the cash from my non-Isa portfolio and incur a sizeable CGT bill — or take it “tax free” from my Isa?
Well, I bit the bullet on CGT and preserved my Isa intact, judging that its taxation advantages are just too great. I hoped that I could make up the dent from the CGT bill in tax-free growth within my Isa portfolio over future years.
This had been happening with major holdings such as Treatt and Concurrent Technologies trading at close to all-time highs, until the recent coronavirus-induced correction that has affected stock markets around the world.
I have been through this type of severe correction several times in my years as a private investor. The important thing is not to panic — taking the longer view, these can present excellent buying opportunities.
In the 2008 financial crisis I bought a number of shares on double-digit yields which delivered great appreciation when markets recovered.
The problem is that no bell rings at the bottom — nor at the top for that matter.
Nevertheless, annual dividend income within my Isa has grown significantly over the years. Before too long, I see children’s housing upgrades, grandchildren’s school fees, and perhaps in the longer term social care costs taking their toll. So far, thankfully, I have managed to keep my Isa intact and growing. And I do hope that the words written here inspire investors out there to do the same.
Lord Lee of Trafford is an active private investor and author of “Yummi Yoghurt — A First Taste of Stock Market Investment”. He is a shareholder in all the companies indicated.
My stocks and shares Isa: David Stredder, director of ShareSoc
My main strategy for years with my stocks and shares Isa has been to include well run medium-sized listed family businesses such as James Latham, the timber merchants, and FW Thorpe, the lighting specialist.
Why? These are the sort of companies that like to look after the interests of shareholders, and many are family members who want to occasionally cash in a few shares. They also pay good, regular dividends and generally preserve the rest of the cash for a rainy day so feel relatively safe to hold.
I also like companies where the founders have a significant stake and are in niche products and markets. I backed Judges Scientific about 12 years ago as the founder and chief executive had an excellent strategy of buying up small niche scientific instrumentation manufacturers. Since then, it has gone up 20 fold and pays a dividend too.
I try to limit the speculative type of investments if considering them for my Isa, but younger investors may see technology changing faster than me and want to target more exciting sectors. I find I can relax more with companies where the board or founders are totally locked into the future of the investment alongside me.
My stocks and shares Isa strategy: Charlotte Ransom, founder of Netwealth
With four children, Isas and Junior Isas are one of the best ways to generate tax free savings across the whole family — and they really add up.
My husband and I look on our Isas as long-term investments. We intend to enjoy the tax benefits for as long as possible and not to draw from this pot until we are in retirement. As a result, we invest in a diversified equity portfolio and resist monitoring the associated volatility given the long-term holding period.
For our children, we began contributing to Jisas as early as we could. Now some of them have celebrated their 18th birthdays, we have started converting the Jisas to Isas and these have grown into good-sized tax-free investment pots. While we put all their holdings into global equities during their childhoods, they are now considering whether they will use the money for a deposit on a flat. If so, they may change to a more balanced exposure given the shorter investing timeframes.
We do all our Isa investing once a year, but that’s at the start of the tax year rather than doing it in a mad rush at the end. Too many people lose out on a full year of tax-free returns by leaving it until the last minute — move your discussion forward by 364 days and, if you don’t have sufficient liquidity to fund the family’s Isa and Jisas in full, then set up a monthly payment schedule. Either way, make sure you do it!
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