You only have until midnight on 5 April to use your ISA allowance, but there is still plenty of time to ensure your savings are working as hard as they possibly can. Here are our 10 top tips for maximising your ISA
March is one of the busiest times of the year for wealth managers as savers scramble to use up their ISA allowances before the 5 April deadline. Sheltering all gains from tax, ISAs represent a fantastic wealth-building tool, yet many people are not making the most of them.
Sheltering all gains from tax, ISAs represent a fantastic wealth-building tool, yet many people are not making the most of them
There have been several changes to the ISA regime recently – including exciting innovations – so whether you are new to ISAs or a seasoned saver, read on to make sure you are using yours to the maximum.
An ISA (Individual Savings Account) is effectively a tax-wrapper for which the government sets an annual contribution allowance. For the 2018/19 tax year the allowance is £20,000 and this will remain unchanged for 2019/20 too.
You can deploy your £20,000 allowance in cash or stocks and shares (or a mixture) and any gains made on the money, whether from interest or investment returns, are tax free for life. ISAs therefore represent a very generous tax break that everyone should take advantage of every single year.
Missing just one year’s ISA deadline is missing a golden opportunity to shelter a significant proportion of your savings from tax, but nor is just “parking” your allowance in just any account enough
Your ISA should be the foundation of your wealth-building strategy and — as will be explained — that of the wider family too. You have to be smart, however. Missing just one year’s ISA deadline is missing a golden opportunity to shelter a significant proportion of your savings from tax, but nor is just “parking” your allowance in just any account enough. You have to proactively make that wealth work!
It is not uncommon to accumulate “forgotten” ISAs over the years and many old ones could now be paying very little interest, so consolidating any previous cash accounts into a higher-interest one now would be a great easy win. While rates may not have climbed back to their previous highs, there are several providers paying around 1.5% for easy-access accounts.
Make sure your new provider allows transfers in, however, as the best paying accounts often don’t.
You can pay into one cash, one stocks and shares ISA and one IFISA each year and transfer between these products each year as suits your needs. This means you can diversify your ISA investments so that they align well with your financial plan.
Your ISA investments shouldn’t be viewed in isolation, but rather as part of an overall asset allocation strategy.
If you are not likely to need your ISA cash quickly, you might consider locking your money up for a fixed period in order to access better interest rates. Fixed-term accounts (often marketed as bonds) vary from less than a year to as much as five years, with interest rates reflecting the duration of the tie-up.
If you are not likely to need your ISA cash quickly, you might consider locking your money up for a fixed period in order to access better interest rates
Here again however, be very aware of penalties and restrictions on moving your money.
Some providers now enable investors to withdraw and then replace their ISA savings within one tax year without losing tax benefits. You can also do this with some stocks and shares ISAs when using a cash trading account.
The ability to mix and match between cash, stocks and shares and IFISAs, and to withdraw funds as required, may mean you can put even more money to work.
Examine the investment track record of any potential provider over several periods. Or, if you have doubts about your current provider compare their results to those of competing firms.
Interest rates are improving, but you would still be hard pressed to find a cash ISA account offering over 2.5% — even with a long lock-in of several years. If you are looking for stronger returns, then a stocks and shares ISA is likely to be your best bet. Direct equities, funds and investment trusts are all “wrappable” in an ISA and in addition to tax-free returns, any gains are also free of Capital Gains Tax.
It is possible to invest ISA funds on a DIY basis, but you are likely to get far better returns – and risk management – by using a professional wealth manager. This means DIY investing is not always the cheapest option, particularly in light of the fact that institutions can access cheaper share classes than individuals.
IFISAs are a new addition that allow ISA funds to be invested via peer-to-peer lending platforms, whereby companies or individuals seek to loan money for various periods and in exchange pay lenders higher rates of interest than the mainstream institutions.
This kind of activity might powerfully amp up your ISA gains, but remember that higher returns are of course a payoff for taking on higher risk and that your funds will fall outside the Financial Services Compensation Scheme. We would always advise taking professional advice before venturing into alternative investments like P2P lending.
Lifetime ISAs were introduced in 2015 to provide 18 to 39-year olds with a means of saving for their first property or retirement, with the government adding a 25% bonus to the maximum of £4,000 that can be saved each year.
The potential to gain £1,000 each tax year is clearly hugely attractive, but bear in mind that the 25% bonus is clawed back if money is withdrawn before you reach 60 or isn’t used for a property purchase.
The lifetime allowance (the amount of money you can put tax-efficiently into your pension pot) has been progressively lowered to currently stand at £1.03m – exposing funds over that amount to punitive 55% tax penalties. ISAs are therefore increasingly being used as retirement savings pots by High Net Worth Individuals.
ISAs may offer greater accessibility and flexibility than Self-Invested Personal Pensions, but the tax benefits of pensions generally mean they should be “maxed out” first. Arriving at the right blend of investments and tax-wrappers will make all the difference to your wealth, but is a careful balancing act which really calls for professional advice.
Junior ISAs allow for £4,260 (£4,368 in 2019/20) to be put aside for under-18s in cash or stocks and shares, making these a great savings option for children (although bear in mind they become legal owner at 18). Adult children can then use a Help to Buy ISA to save for their first home and receive a 25% bonus from the government when they make a purchase (up to a maximum of £3,000).
Finally, remember that ISAs can be passed onto a surviving spouse by them receiving a one-off additional allowance in the year of their partner’s death, meaning that they are still a good option in inheritance terms.
Their many benefits make ISAs a prime weapon in the wealth management armoury, and there are a great many ways to make these tax-wrappers work for your circumstances. They are only the start of what savvy investors can do to maximise the health of their wealth, however.
Their many benefits make ISAs a prime weapon in the wealth management armoury, and there are a great many ways to make these tax-wrappers work for your circumstances
A professional adviser will not only help you invest in the right assets, but also to hold them in the right way to minimise tax – something that is just as important as investment gains.
If you would like to see what a wealth manager could do for your ISA savings, or to help you get closer to your financial goals more broadly, then start your 3-minute search now.