How to get the most from ISA season – Jasmine Birtles
Jasmine Birtles is a TV and newspaper journalist and personal finance expert. In her column she’ll be helping you get the most from your investment and reach your personal goals.
It’s that time of year when you suddenly realise that there are only a few weeks left to make use of the Government’s annual tax giveaways. Well, maybe ‘giveaways’ is a rather strong word, but at least with tax incentives, like pensions and ISAs, there’s the potential to invest some cash each year knowing that it’s yours to keep.
The ISA limit is a pretty generous £20,000 per tax year and if you’re able to max that out the tax savings over the years will add on tens of thousands more. So let’s look at ISAs for this tax year and work out how to make the most of the opportunities that they offer.
The best type of ISA for you
There are a full seven types of ISAs on the market which is quite enough to choose from! The question is which one (or ones) is right for your needs?
Originally ISAs were meant as an addition to your pension – an element of your retirement savings. If you view your ISA in this way (as I do) then you obviously need to go for investments that give high returns. That way they will beat inflation over time and create an impressive pot of cash to live off later on.
For this, Equities or Innovative Finance ISAs make the most sense as, overall, they tend to produce the best returns over time. If you lack confidence in choosing equities to invest in, simply opt for a cheap, straightforward index tracking fund that follows the FTSE100 or the FTSE All Share. Just remember that stocks and shares are a long-term investment so don’t move your money for at least five years, even if the stock market suffers a fearful crash in the meantime.
Innovative Finance ISAs are also more likely to produce higher returns – and outstrip the cost of inflation – over time, so they are worth considering. These IFISAs are also a good way of ‘diversifying your portfolio’ if you already have investments in Equities ISAs and have quite enough of a cash cushion in savings accounts.
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If you are looking to access your cash in the shorter term, then Cash ISAs are the best bet, although the returns are low. Many people have, understandably, stopped taking out Cash ISAs since the tax on the first £1,000 of savings interest was lifted in 2016. They have also been put off by the fact that Cash ISA rates have dropped considerably in recent years and are particularly low this year.
However, Sarah Coles of Hargreaves Lansdown says that people with considerable savings who like cash investments shouldn’t rule them out: “as your savings build, you could save your way into a tax problem” she says. “And because the tax-free savings allowance drops as your earnings increase (£500 for higher rate and £0 for additional rate taxpayers), you could earn your way there too. If rates rise or the savings allowance is cut, you could face tax on your savings far sooner, so an ISA is the only way to protect your savings from tax, for life.”
Personally I have never put money in a Cash ISA because I see my ISA investments as part of my retirement pot and Cash simply doesn’t keep up with inflation over the long-term. But if you have short-term goals, such as saving up for a big holiday, a car or a deposit on a house, then Cash ISAs are a more stable bet.
Speaking of saving up for a deposit, if you’re under 40 then the Lifetime ISA is a no-brainer of an investment. It has a limit of £4,000 per year but, if you have the money, you can invest in another ISA as well to get you up to the total limit of £20,000. With the Government adding another 25% (up to £1,000) per year to your Lifetime ISA investments it’s a great product that allows you either to spend it on a house deposit or keep it for longer as part of your retirement fund.
Don’t forget the kids
The Junior ISA can create a wonderful nest-egg for your children, even if you can’t afford to put the full £4,368 in for them each tax year. Even a tenner a month from you and, maybe, some Christmas and birthday money from relatives, will grow over time to help them with education costs or a deposit on a house.
They can access the money when they’re 18 so if they’re under 13 when you invest for them it’s best to go for an Equities ISA or Innovative Finance ISA as they have time for the money to grow and ride out the ups and downs that both sectors can go through.
If they’re planning on taking the money out on their 18th birthday then move the investments over to Cash three or four years before to lock-in the gains. Talk them through the investments each year, though, so that they learn more about saving and investing and can make informed decisions about what to do with the money once they can control it themselves.
Mind the Budget!
Right now UK adults are allowed to put up to £20,000 per tax year (April 6th to April 5th) into some form of ISA investment, while under-18s can have up to £4,368 in their Junior ISA. These limits are set by the Chancellor of the Exchequer and are announced in the Budget.
It’s unlikely that the limits will be reduced in the Budget on 11th March but you never know. There are loud murmurs that the annual pension tax relief could be reduced. Right now you can put up to £40,000 a year into a pension and receive tax relief, but as of April that could go down.
So might the Chancellor claw back some cash from ISA investors too? Personally I think it’s unlikely. So far with ISA limits the only way has been up. But until it’s announced you can never be sure, so it’s wise to make the most of your ISA limit while it’s there…just in case!
And on to 2021
I say this every year (to myself as well as to readers): start your ISA investing as early as possible in the new tax year. It’s obvious, of course, that the earlier you start, the more your money will grow because it has more time in which to do so. But human nature is such that we tend to wait until the last minute to do important tasks. Think university essays, tax returns and getting that anniversary present to remember how hopeless we tend to be at dealing with looming deadlines!
So, if at all possible, set up a standing order on or just after 6th April from your account to the ISA product you would like to invest in. That way at least some money will already be in a lovely tax-saving product by the time you get to March 2021 and realise there are only a few weeks left to max-out your savings limit!
Get more tips and ideas for making and saving money by following Jasmine on Twitter at @Jasmine and on Instagram at @JasmineBirtles.
Find out how you can earn tax-free returns with the Funding Circle ISA.
The views expressed here belong to the author and do not represent those of Funding Circle. Funding Circle is not authorised to, and does not, provide investment, tax, legal or regulatory advice.
To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, such information contained here.
If you have any questions, please speak to your professional adviser or seek independent specialist advice.
By lending to businesses your capital is at risk. The tax-free entitlement of an ISA depends on your individual circumstances and may change. Funding Circle is not covered by the Financial Services Compensation Scheme.