Investing in an ISA every year is a great way to benefit from tax-free growth. You can use your ISA to save for future goals, or even to boost your retirement pot.
You can contribute up to £20,000 per year to an ISA and all growth and income are free of tax.
In this guide, we look at the types of ISA available and how you can make the most of the tax benefits.
Types of ISA
You can choose Cash or Stocks and Shares for your ISA, or even a combination of both.
If you select a Cash ISA, you don’t have to worry about the value of your fund fluctuating. However, longer-term growth will be limited and may not keep pace with the cost of living. Interest rates have improved significantly since last year, but are still below inflation.
A Cash ISA could be the ideal option if you are saving for a short-term goal or looking to build up an emergency fund. It’s a good idea to compare interest for ISA and non-ISA cash accounts, as the tax-free option won’t always pay the best rates. Remember, most investors will have savings allowances that they can use to offset tax on cash interest.
A Stocks and Shares ISA allows you to invest in shares, funds, and many other investment types. As the money is invested in the market, it could go up or down. Depending on the investment, a Stocks and Shares ISA can offer the best chance of long-term growth, but there is also a chance that you could lose money.
ISAs are transferrable, so if your requirements change, you can move your Cash ISA to a Stocks and Shares ISA, or vice-versa, if you wish.
A Lifetime ISA (LISA) can be invested in Cash or Stocks and Shares, and could be the ideal option if you are saving for a first home.
You may also want to consider a Junior ISA for your children.
Investment Options
If you choose a Stocks and Shares ISA, you have thousands of investment options to choose from, including shares, bonds, funds, investment trusts, and managed portfolios.
You can choose to invest in actively managed funds or in passive trackers that aim to follow the market. You can make your own day-to-day investment decisions, or select a fund (or portfolio) where this is done for you.
When considering your investment options, you will first need to think about how much risk you can take. This should take into account:
- The level of return you need to achieve your goals.
- Your investment timescale.
- Your personal risk tolerance.
- How much volatility (and potential loss) you can sustain without financial hardship.
Once you have worked out the risk level, this can help you decide on asset allocation, i.e. how much to invest in each asset class. For example, at higher risk levels, you would probably invest more in equities, while a more cautious investor might hold more in bonds and cash.
A diversified portfolio holding a wide range of assets offers the best chance of long-term returns, while smoothing some of the volatility.
It sounds complex, but most investment companies have tools on their website to help you navigate risk and asset allocation. Alternatively, a financial adviser can help you make sense of the options.
How Much to Contribute?
The amount you should contribute will depend on a number of factors.
In general, you should aim to build your emergency fund, clear expensive debt, and fund any protection policies needed before you consider investing.
ISAs and pensions would be the next priority, as both offer significant tax relief. Pensions are more tax-efficient, but also more restrictive.
You should also consider what you need the money for. It may be a good idea to use an investment calculator if you are saving for a particular goal.
In general, you should contribute as much as you can (up to the £20,000 contribution limit), depending on affordability and other priorities.
How Often Should You Contribute?
You can contribute to your ISA regularly or on an ad-hoc basis.
If you invest a lump sum at the start of every tax year, your investment will have longer to grow and benefit from tax relief.
But if you invest monthly, you can benefit from pound cost averaging. This means you buy into the market at both high and low points. If you don’t have a lump sum to invest, or if you are unsure about investing your money in one go, monthly contributions could be the answer.
Transferring Existing Investments
You can transfer your ISA between providers, or even consolidate multiple ISAs on a single platform. This can help to make your finances more efficient, allow you to access more investment options, and possibly even reduce charges.
You can also transfer other investments, such as shares or funds, into your ISA. This can incur Capital Gains Tax if the investments realise a gain.
What Happens if You Die?
ISAs are included in your estate and may incur Inheritance Tax (IHT) if your estate is over the nil rate band.
There are ways to mitigate this, for example, investing in Alternative Investment Market (AIM) shares. This can be high risk and may not be suitable for everyone.
ISAs can be passed to a spouse on death without losing any of the tax benefits. This works by granting an Additional Permitted Subscription, effectively increasing the survivor’s ISA allowance by the value of any ISAs held by their spouse at their date of death.
Taking Money Out
You can take money out of your ISA without paying tax. Most ISAs do not have any restrictions or penalties for making withdrawals.
You can replace money withdrawn without using up any of your ISA allowance, providing this is done in the same tax year and the provider allows this flexibility – not all do.
Please don’t hesitate to contact a member of the team to find out how to make the most of your ISA for 2023/2024.
The content in this article was correct on 24/03/2023.
The value of an investment can go down as well as up and you may get back less than the amount invested.
You should not rely on this article to make important financial decisions. Teachers Financial Planning offers independent financial advice on savings, pensions, investments, mortgages and mortgages for teachers and non-teachers. Please use the contact form below to arrange an informal chat with an adviser and see how we can help you.