Top tips for making the most of ISAs
Icon expand 1. Maximise your allowance
There are two main types of ISA: a cash ISA or a stocks-and-shares ISA (sometimes called an investment ISA).
The maximum amount you can save in your ISA is £20,000 in the 2017/18 tax year. You choose how you split your allowance between cash ISAs and stocks-and-shares ISAs , as well as being able to transfer money between the two.
Icon expand 2. Tax savings
You pay no income tax on interest on deposits in cash ISAs and no income tax or CGT on potential returns on investments held in stocks-and-shares ISAs. Any returns do not affect your tax position and your ISA investments don’t need to be declared on your tax form.
As your savings grow, there is no overall limit on the value of the fund you can have within an ISA. The ISA allowance is also separate from the personal savings allowance (PSA), which was launched in April 2016. For basic-rate taxpayers, the PSA enables them to earn £1,000 of savings interest a year without paying tax on it. This allowance is reduced to £500 for higher-rate taxpayers, and for additional-rate taxpayers (earning over £150,000 a year) there is no allowance at all. For this reason, it’s a good idea to use your entire ISA allowance, as there is no tax charged.
Icon expand 3. Take your partner into account
ISA rules also allow a spouse or civil partner to inherit an ISA allowance equal to the amount held within the ISA upon the death of their partner. This is known as additional permitted subscription or APS for short. This isn’t the actual money held in the ISA, as that is subject to the bereavement settlement process, it is an additional allowance equivalent to what was held in the ISA. APS can added to their own ISA without it counting towards the annual ISA allowance.
Icon expand 4. Use them or lose them
If you don’t make the maximum contribution to your ISA account, you can’t top it up in a separate tax year. The 2017/18 allowance expires at the end of the tax year, and there’s no option to carry over unused allowances. If you haven’t contributed to an ISA in the current tax year and don’t want to lose this year’s allowance, you’ll need to make a contribution by 5 April 2018.
Icon expand 5. Make ISAs part of your overall financial strategy
ISAs can be used alongside pensions, savings and other investments to help you save for the medium to long term. You should think about reviewing your investments regularly and checking you are on track to achieve your investment goals. Remember that investments, and the income from them, can go down as well as up and you might not get back the full amount you invest.
For long-term goals you may decide you wish to find a home for your money that offers potential growth and help protect from the effects of inflation. This might mean putting a portion of your savings into stockmarket-based investments as well as holding some in cash.
Icon expand 6. Merits of regular investments
Rather than making a single ISA contribution just before the end of each tax year, it’s worth considering making regular contributions. This helps to create a savings discipline and also means the ups and downs of the stock market are potentially evened out.
Philip Northey, Managing Director, Premier Banking says, “Investing helps people plan for those longer-term goals and provides an opportunity to grow your money. To give yourself the best chance of doing this, choose investments with a level of risk that you are comfortable with, look at whether they offer the flexibility of making monthly contributions, and the tax-efficiency of investing with a Stocks & Shares ISA”.
Icon expand 7. Don’t forget the kids
Junior ISAs are tax-free savings accounts for children under 18. It can be a sensible option to use spare cash to invest for your child.
In the 2017/18 tax year, that means you can deposit £4,128, which can be split between a junior cash ISA and a stocks and shares one. Junior ISAs remain tax-free until the child’s 18th birthday, when they are converted automatically into an adult ISA. The money will be the young person’s to spend as they please, or they may opt to continue saving.
What to do once you’ve used up your allowance
If you have some spare cash available after you’ve made your maximum ISA contribution then you could consider further investments.
Don’t forget that you can use your ISA allowance at the beginning of the tax year, so you can make a further £20,000 as soon as the new tax year begins on 6 April; you don’t have to wait until the end of the tax year.
Spread the risk
When you’re planning to invest outside an ISA, it’s important to think about your investments as a whole. That includes ISAs, pensions, share schemes at work, property you own, savings and other forms of long-term savings.
That way, you can look at your overall financial picture and make sure that you are on track to meet your financial goals..
This might mean investing in different types of assets – for example a mixture of shares (equities), bonds, fixed interest and property. It could also mean looking at whether you need to invest outside the UK, perhaps in the US, Asia, or emerging markets.
You could choose to spread risk by investing in a fund. Your money is combined with other investors and used to buy a range of different assets.
This enables you to have lots of stakes in many different companies or assets, something that would be very expensive to do if you tried to buy them all individually. It also means you can invest in specialist funds, with assets chosen by specialist managers, so you don’t have to do hours of research.
For example, you could consider a fund that invests in larger UK companies, or a general fund that has a mixture of cash, shares, fixed interest products and property, or one that generates regular income.
Or you could use a fund to invest overseas. Buying individual bonds or shares in Europe or Asia would be expensive and time-consuming, whereas a fund manager would research, choose and buy them for you.
It’s good to set investment goals. Investments should ideally be held for five years or more. When you have a clear objective for your money you’ll be able to measure how you are progressing over time.
Philip Northey, Managing Director, Premier Banking says, “Investing helps people plan for those longer-term goals and provides an opportunity to grow your money. To give yourself the best chance of doing this, choose investments with a level of risk that you are comfortable with, look at whether they offer the flexibility of making monthly contributions, and the tax-efficiency of investing with a Stocks & Shares ISA”