8 Tips for Making the Most of Your ISA
As the tax year heads for its close, it’s time to think about how to make the most out of your ISA and its annual tax-free allowance.
Use the Full Allowance
If you can, always make the most of your annual ISA allowance, which is currently £20,000 per year.
If you don’t put the full amount in this year, you won’t be able to make up the difference in future, so if you can, put in the full £20,000.
That way, you’re building up the maximum amount of tax-free savings.
Try Different Types of ISAs
There are a wide range of different ISAs, with different advantages and disadvantages.
Cash ISAs are the easiest to use and manage, a low-risk way of set-aside money for the future.
Stocks and shares ISAs provide a low-effort way to invest your money in the markets while avoiding tax on what you earn.
They’re riskier than cash ISAs but can provide a better rate of return.
If you’re between 18 and 39 years old, you could also buy a lifetime ISA. These can’t take your whole allowance and have to be used to save for a home or for retirement.
They offer financial benefits over some other ISAs.
Innovative ISAs let you get involved in peer-to-peer lending to people and businesses.
Work out which ISA best suits your needs and go for that or spread your allowance across several to balance the different costs and benefits.
Consider Transfers
If you withdraw money from an ISA, putting it into another one will count towards your allowance for the year.
But this doesn’t mean that you’re stuck with your current ISA.
You can transfer funds directly from one to another without it counting towards your annual allowance.
Take a look around at the different ISAs available, what fees they charge and what interest they pay.
Then consider moving to a more profitable one.
Make Regular Payments
The easiest way to make sure you make the most of your ISA is to make regular payments. Setting up a regular transfer into your account will guarantee that you’re saving a steady amount over the course of the year.
Pick an amount that you can afford to see set aside in this way and that will get you as close to your allowance as you can.
Consider Lump Sums
You may find yourself with a lump of cash available, whether from a bonus, an unexpected windfall, or low expenses.
If your regular payments aren’t already using up your whole allowance, then your ISA could be the perfect place to put that lump sum.
If you stick it straight into the account, you save yourself from the temptation to spend it and let yourself start earning interest straight away.
Start Early
The advice to start your ISA saving early works on two levels.
Firstly, the earlier in life you start using an ISA, the more you’ll get out of it.
You’ll get years of tax-free savings and the compounded interest that comes with them. A similar principle applies on an annual basis.
The earlier you put money in up to your allowance, the sooner it starts working for you.
As well as making the most of interest or investment payments, this will mean that you can be sure you’ve done your ISA saving, and don’t have to worry about it near the end of the year.
Know Your Investment Horizon
When deciding which ISAs to invest in, make sure that you know your investment horizon – how far ahead that money can be left in savings.
If you’re going to need it for the down payment on a house in the next couple of years, then a stocks and shares ISA may not be the best bet, as stock market investments do best over a longer term, when you can ride out dips in the market.
On the other hand, if you’re saving for retirement then that stocks and shares ISA may be perfect for you, or even a lifetime ISA, as you know that the money can be locked away for a long time.
Watch Out for Terms and Conditions
Though they’re a relatively straightforward way to save and invest, ISAs still come with terms and conditions and it’s worth looking at the fine print.
For example, there may be fees for transferring an ISA that reduce the benefits of the move. High-interest rates may only apply for the first year as a way of luring you in.
As with all financial matters, know what you’re after, check the details, and read the terms.
That way, you’re far more able to make a sound investment.
Paul Connolly
Paul Connolly has been a journalist for more than 20 years, as a reporter and editor for Argus Media, Reuters, The Times, Associated Newspapers and The Guardian. He has covered Islamic Finance for Reuters in the 1990s. Paul has since helped launch three newspapers, as well as reported from Tokyo, Los Angeles and Stockholm.
