How to fine-tune your ISA for regular income - J.P. Morgan Asset Management

How to fine-tune your ISA for regular income

Contributor J.P. Morgan Investment Trust Team


Using investment trusts for ISA income

The end of the tax year – and the start of a new one – is the ideal time to review and adjust your ISA investments.

The deadline can be a useful prompt to make the most of these tax-efficient wrappers. Each tax year, individuals can put up to £20,000 into an ISA, which protects their savings from capital gains tax and higher-income tax charges.

Remember, this is a use-it-or-lose-it allowance. If you don’t invest in an ISA this year, you can’t put £40,000 in the next year.

But while you’re considering how to invest this year’s allowance, it makes sense to review existing ISA holdings.

Many investors add to their ISA portfolio in a piecemeal fashion each year, without considering existing investments and holdings.

This can lead to some portfolios being skewed towards one sector or style of investment. Such concentration may mean investors adding unnecessary risks to their portfolio.

It can also mean they miss out on potential future gains, if they haven’t invested in certain parts of the market.

Holding investment trusts in an ISA

It is possible to hold investment trusts in an ISA. Those looking to boost their income investments may want to consider their benefits within a diversified portfolio.

Most allow investors to set up a regular savings scheme, or they can be opened with a one-off lump-sum deposit.

Investment trusts are structured as companies and listed on the stock exchange. They’re designed to generate profits for shareholders by investing in other companies.

Investors buy shares in such a trust, rather than units in a fund. Because there are only a fixed number of shares, they’re also known as closed-end investments. Shares can trade at a premium, or a discount, to the underlying value of the trust’s investments.

However, this structure can give the trust’s managers more flexibility and costs are typically lower than other pooled investment funds . 1

Many trusts invest in income-producing assets and pay out regular dividends to investors.

Ways to use investment trusts.

Remember, income-generating investment trusts aren’t just for older investors. If you don’t need this income today, the dividends can be reinvested. This can be a powerful way to compound returns over the longer term.

What’s more, many investment trusts have long track records of paying rising dividends to investors year in, year out – although future performance cannot be guaranteed.

Emily Whiting, Client Portfolio Manager, JPMorgan Global Emerging Markets Income Trust plc says: “ISA investors shouldn’t overlook investment trusts. These are pooled investments where an experienced manager invests in a broad spread of equities, bonds or other assets. Many investment trusts have a global remit, which can be an effective way to further diversify your holdings.”

What sort of investment trusts suit ISAs?

There is a range of investment trust options for ISA investors to choose from; these include UK-focused equity income trusts, fixed-income trusts as well as global and multi-asset options.

Deciding which is right for you will depend on your attitude to risk and what investments you currently hold. Some will pay a higher yield; others will be more focused on delivering a yield plus capital growth.

Many investment trusts - such as JPMorgan Global Growth & Income – have an income and growth remit. In other words, the managers are looking to invest in companies that pay above average yields (in this case 4 per cent), but also have the potential for future growth.

This twin-track approach can help deliver sustainable income streams over the longer term.

Jeroen Huysinga of JPMorgan Global Growth & Income plc says: “By their very nature, investment trusts are long-term vehicles that are looking to generate wealth over decades, not just years.

“This means that many may be suitable for those looking to build their own long-term savings in a tax-efficient manner.”


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