Behavioural biases, Biden and Brexit are dominating our conversations with users this month as both investment risks and opportunities are carefully weighed up.
Many people are putting up with poor ISA performance and having their investments in these tax wrappers managed ineffectively explains Wendy Spires.
While election season may be upon us, investors need to remember that it is also ISA season too. Ensuring that you (and perhaps other members of your family) use up your Individual Savings Account allowance each year could make all the difference to your wealth – particularly since the annual limit was raised significantly last year. Yet while ISAs remain a perennially popular investment route, it seems that far too many people just aren’t getting enough out of these highly-attractive tax-wrappers.
New research from the Financial Conduct Authority reveals that a massive £12bn is being held by UK investors in easy-access cash ISAs which pay frankly derisory rates of less than 0.5%. Some people are even letting their money languish while earning just 0.10% from the sickliest High Street cash ISA offerings.
As the end of the tax year approaches, we can hope that banks and building societies start unveiling some more competitive ISA rates. Yet there is a lot more that savvy savers can do with these accounts than wait for High Street banks to offer a better than rock-bottom rate. With the help of a wealth manager, you may even find that your ISA savings become foundational to your financial plans.
Individual Savings Accounts been have been popular ever since they replaced TESSAs (Tax-Exempt Special Savings Accounts) back in 1999. Since then, there have been several amendments made to the rules for ISAs. On 1 July last year the annual investment limit was raised to £15,000, up from a previous annual limit of £5,940 for cash ISAs or £11,880 for stocks and shares accounts. With all gains being free of tax, this move was a real boost to savers, although with shockingly low rates so prevalent many investors really aren’t making the most of their ISA allowance. In short, they need to explore ways to make that allowance work hard from the moment it is invested, and then continue to make sure it is delivering the maximum returns as the years go by.
There is always a scramble for people to use up their ISA allowances as the end of the tax year approaches, so if you have not used your allowance yet then that may well be a priority. But that should not mean plumping in panic for a poor retail offering. Taking a more considered approach to how you use ISAs, and engaging a wealth manager to help you get the most out of these tax-wrappers could be an incredibly shrewd move.
While many people diligently ensure that all ISA allowances are being used every year, an all-too-common scenario is for these to almost get forgotten about and so a significant chunk of money can build up which is not being properly managed to deliver optimal returns at all. Back in the days when ISA rates where touching 5% such a laissez-faire approach may have been enough to get you to where you want to be financially. This is clearly no longer the case and more proactivity is required to get the best results. Make no mistake, the results can be staggering: investors could become an “ISA millionaire” in just thirty years – if, that is, they are strategic and disciplined about investing the maximum amount each year and reinvesting gains.
If the situation described above – of having several “dormant” and perhaps under-performing ISAs – sounds familiar, then you should definitely consider talking things over with a professional.
A good wealth manager will help you get a full overview of all your investments and how they are performing so they can be optimised going forward. An adviser may recommend consolidating your ISAs into one actively-managed portfolio in a bid to deliver better returns, for example.
Furthermore, they will look at your ISA investments in light of your entire financial circumstances, making sure that all your investments are properly diversified and risk is appropriately managed. Leaving cash to languish at near-zero rates is highly unlikely to be the optimal strategy for your wealth.
Managing ISAs is an area where wealth managers are very active today – for a number of reasons. They are an increasingly popular way to save for retirement, not least because pension contribution limits have been progressively lowered to now stand at £40,000 annually and £1.25m over a lifetime. The fact that, ahead of the General Election, several parties are said to be eyeing reductions in pension reliefs in a bid to reduce the deficit may well make ISAs even more attractive. It is easy to see why a recent MetLife survey of financial advisers revealed that 42% believe ISAs are going to be the most important retirement planning product of all post-April.
But ISAs aren’t just about retirement savings, although they are an increasingly popular route. Don’t forget either that all members of the family have an ISA savings allowance which may be deployed too, regardless of whether they pay tax or not; all too often, spouses’ allowances are forgotten. Those with children should also note that the annual limit for Junior ISAs was also raised last year to £4,000 (although that money is only accessible when the account holder turns 18 and gains full control of the funds).
Unlike in the past, ISA investors can now use cash and stocks and shares in their ISAs in any combination they wish; they may also hold junior market AIM shares within these accounts. In a further boon, the Autumn Statement saw a change to the rules which will make it possible for ISA pots to be bequeathed to surviving spouses tax-free. With so many benefits on offer, it is little wonder that billions of pounds flood the ISA market each year. Make sure yours reaches the right destination to ensure your wealth is working as hard as it can.
To start the process of finding a wealth manager to help you get the most out of your ISA savings, simply try our smart online tool. Or, if you would like to discuss your situation with our straight-talking team, please do get in touch here.