News and Analysis | David Macdonald | March 22, 2022
Becoming a better investor with an ISA
We take a look at why an ISA is a great investment – if done correctly!
People have always wanted good investments. But now more than ever, they want their investments not just to be good but to do good too.
That’s where we can come in. Here at Path, we are passionate about helping our customers align their Individual Savings Account (ISA) and pension investments with their high ethical standards and values. We call this “impact investment”.
By encouraging choice, we give the consumer a louder voice, helping them to shape the future they want to see.
An ethical and positive impact ISA
In terms of carbon alone, the reduction in CO2 between directing just one year’s ISA input to a low carbon portfolio – compared to a traditional investment – could be as much as 6 tonnes. That is much more than the emissions of an average car over a year.
There are other benefits to an ethical and positive impact ISA – circular economy, water and waste recycling, and helping people out of poverty.
We go way beyond traditional ‘ethical investment’ which tends to merely screen out major controversies such as tobacco, weapons and alcohol. Instead, we positively seek out investments which are providing solutions for people and planet. That is to say, investments that are contributing to the achievement of the UN’s Sustainable Development Goals.
We achieve this by looking at the big picture – the investments universe – and blend together the highest performing, greenest solutions.
When most people think about ISAs, they think about tax-free bank accounts: so-called ‘cash ISAs’. With interest rates as low as they are at the moment, this does not make for the most compelling or exciting drive to action!
You would need to have a large ISA investment in a cash ISA even to be reaching the tax threshold for returns from an interest bearing deposit account. As a result, many people don’t even bother to use their ISA allowance at all – they don’t see the point if returns are low and the tax-savings are minimal.
But, an ISA doesn’t have to be in cash – it could be in a ‘stocks and shares’ ISA. A well-designed and diversified portfolio can give better investment returns over the long-term. It can also be a good way to beat inflation and be more green.
With a stocks and shares investment, there are usually two elements to the investment return: capital growth (i.e. share prices going up) and dividend income (the share of profits paid to investors for holding the shares).
Some other things to bear in mind:
- ISAs are exempt from Capital Gains Tax. This is important – as the portfolio gets bigger, it means that there is no tax whatsoever on the growth.
- ISAs can give you a tax-free income from the dividends that they receive on shares held in the funds in your portfolio. Dividends tend to be far, far higher than the interest rates available from banks and are usually very stable regardless of share prices. So, ISAs are a great way to supplement pensions with a tax-free income.
- Investments into stocks and shares tend to be a good way to protect against the ravages of inflation. If the price of things is going up by, say 5% a year, and you are only getting a 1% interest rate, then you are impacted in real terms with a -4% interest rate. So, the purchasing power of your money is falling. With stocks and shares investment, over time, the returns tend to be above inflation.
- With a possible input of £20,000 per annum or £40,000 for a couple, it is possible to quickly amass a large pot. It is vital that ISA allowances are used every year that you can afford to, since the allowances are “use-it-or-lose-it” in each tax year. With a regular maximum contribution for 10 years or so and some decent growth, a fund could easily have grown to £250K for an individual, or £500K for a couple.
Your future: and the future for people and planet
We would be delighted to talk with you about how to align your investments with your own values and attitudes to investment risk.
We can show you how an ISA fits in with a strategic financial plan to ensure you and your loved ones get ultimate financial security. We can also talk about a higher purpose – where you do well, by going good.