This article is from our new guide The ABCs of ISAs – a Good Guide, which is available to download for free here.
ISAs are a simple way to protect your savings and investments from tax. Everyone can save up to £20,000 each year into an ISA; this can be cash, stocks & shares, the Lifetime ISA, the Innovative Finance ISA or a mixture of them all.
If you are saving and/or investing on a regular basis, it usually makes sense to use your ISA allowance. But where does an ISA fit into your long-term financial plan? Here are nine points to consider.
1 Pay off debt first
Before saving or investing into an ISA, it’s important to deal with any high interest debt and build up a decent cash savings buffer. The interest rate on your credit card is likely to be significantly higher than anything you would earn from cash savings or investments.
Building up a cash reserve for unexpected expenses protects you and your family. Ideally, you will have three to six months’ salary held in an easy-access account.
2 Set clear goals
To use your ISA allowance wisely, you first need to define your goals. Your age, income, appetite for risk and attitudes towards impact on the planet and society should all be taken into consideration. Once you have a savings buffer, using your ISA for investments is usually the best option.
More than ever, we are seeing investors who want to align their ISA investments with their personal values. Spend some time thinking about the type of investments you may wish to avoid, the impact you may wish to have, the type of companies you would like to support and find investments that align with this. Part of our job as financial planners is enabling clients to use their wealth to really make a difference, not just for themselves and their families, but also for people and planet.
3 Develop a healthy investing habit early (or now!)
Get investing as early as you can, so your money has longer to grow. Whatever age or stage you’re at, just get started now! The power of compounding (where you earn interest on interest) means that £1 saved today should be worth much more in the long term.
4 Use your ISA allowance
If you don’t use your ISA allowance each year, you’ll lose it. Invest at the beginning of each tax year (6 April) to get the maximum benefit. You can continue to add to your ISA each year, using your new ISA allowance.
If you already own shares or other investments standing at a profit then you can use your annual capital gains allowance to sell these, and then buy the same investments back through your ISA to protect any future gains from tax.
5 Aged 18-39? Consider a Lifetime ISA
If you’re aged between 18 and 39 and saving for your first home, you can benefit from saving into a Lifetime ISA (LISA). The government will top up your savings (up to £4,000 a year) by a generous 25 per cent – so for every £4,000 you save, you will get a £1,000 bonus.
The money you put into a LISA will count towards your annual £20,000 ISA allowance.
6 Don’t sideline your pension
Making a pension contribution is the most tax efficient way you can save for the future. For every £1 you pay into a pension, the government contributes at least an extra 25p. Once your money is invested, it can grow free of capital gains and income tax.
Maximising your pension contributions now could make a huge difference to your income in retirement. Bear this in mind when calculating how much of your income you want to allocate to an ISA.
7. Take a risk (that you’re comfortable with)
Market fluctuations are an essential part of investing. Although profits are never guaranteed, when you invest for a long period (say over 10 years), any short-term dips in the market are usually ironed out over time.
What we DO know is that keeping money in cash is a sure-fire way to lose money – inflation (currently standing at over 10 per cent) will erode the value of your savings.
Always consider what your personal time-frame is. If you have decades of investing ahead of you, a very cautious portfolio could result in significantly lower returns. The opposite is also true. If you are approaching retirement, you won’t want to be taking a lot of risk with your investments.
8 Consider alternative investments – the Innovative IFISA
If you have some additional money to invest and are comfortable with higher risk investments (with the potential for higher returns), you could look at the Innovative Finance ISA or IFISA.
IFISA eligible lenders use investor money to make loans in the form of bonds, typically to start-ups, which pay an annual rate of return. The risk levels within IFISA investments vary, so it is important to check the opportunity you are interested in carefully.
9 Get some help
Managing money takes time, experience and specialist tools. You don’t have to do it yourself. For help with ISAs and your overall financial plan, consider using a wealth manager.
EQ Investors can create and manage your portfolio of investments for you as part of a financial plan that’s tailored to your circumstances and goals. Your initial consultation is free of charge.