9th July 2024
general
You can contribute up to £20,000 per year to an ISA, and all growth and income are free of tax.
This guide looks at the types of ISA available and how you can make the most of the tax benefits.
Types of ISA
Two important types of ISA that you can choose include the Cash ISA and the Stocks and Shares ISA. You can even open and contribute to 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 ideal 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.
There are other types of ISA in addition to these two. 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. There is also a “British ISA” planned for later this year. Further details about this option are expected in summer 2024.
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 invest in actively managed funds or passive trackers that aim to follow the market. You can make your own investment decisions or select a fund (or portfolio) where this is done for you.
When considering your investment options, you must first consider how much risk you can take. This should take into account:
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, you would probably invest more in equities at higher risk levels, while a more cautious investor might hold more in bonds and cash.
A diversified portfolio with a wide range of assets offers the best chance of long-term returns while smoothing some 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 (e.g. imposing age limits on withdrawals).
You should also consider what you need the money for. Using an investment calculator if you are saving for a particular goal may be a good idea.
In general, depending on affordability and other priorities, you should contribute as much as you can (up to the £20,000 contribution limit).
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 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 consolidate multiple ISAs on a single platform. This can help you manage your finances more efficiently, 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, such as investing in Alternative Investment Market (AIM) shares. However, 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 withdraw money from 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 your ISA allowance, provided this is done in the same tax year.
Please don’t hesitate to contact a member of the team to learn how to maximise your ISA for 2024.
