Where's the smart ISA money going?

By Jennifer Hill, Personal Finance Correspondent

LONDON (Reuters) - Volatile stock markets might have turned this year's individual savings account (ISA) season into a damp squib, but those who fail to use their allowance by the end of the tax year will lose the tax break.

Latest sales figures for unit trusts and open-ended investment companies paint a bleak picture: retail assets under management fell by 7 percent in January as stock market turbulence led to a near halving in the amount of buying by private investors.

Net retail sales stood at 550 million pounds in January, according to the Investment Management Association (IMA), down from 912 million pounds a year ago.

Equities bore the brunt of the outflows as investors took a flight to safety; bonds were the most popular asset class, enjoying 184 million pounds of inflows.

A total 68 million pounds flowed out of ISAs -- a far cry from inflows of 17 million pounds the previous month and 30 million pounds in January 2007.

Up to 7,000 pounds can be squirreled away into these tax-efficient savings accounts every year, 3,000 pounds of which can be held in cash, but allowances cannot be carried over.

Unbiased.co.uk, which promotes independent financial advice, calculates that Britons are wasting 382 million pounds in tax by not putting their money into the tax-efficient vehicles, double the amount last year.

Almost quarter of a million pounds is being paid unnecessarily in tax due to cash being held outside ISAs and 133 million pounds due to equities not being held in the wrappers.