16th June 2022
general
There are several types of ISA on the market, but they share the following main features:
In this guide, we look at the options available to help you decide how an ISA could fit into your financial plan.
Which Type of ISA?
The most suitable ISA will depend on your situation and your financial goals.
A straightforward Cash ISA allows you to contribute your full ISA allowance, in cash, and access the money without tax or penalty. It operates similarly to a regular savings account, except any interest you earn within the ISA will be free from tax.
Alternatively, a Lifetime ISA (LISA) must be used either towards the purchase of a first home or to supplement your retirement income. The government will add a 25% bonus to your savings. There are some limitations:
Help to Buy ISAs are no longer available to new customers, but if you have an existing one, you can still pay into it. You can contribute up to £200 per month (until 30 November 2029) and will receive a government bonus of 25% (capped at £3,000) when you buy your first home.
A cash ISA offers the greatest flexibility as there are no restrictions on when or why you can access the money. However, contributing to a LISA or Help to Buy ISA (or both) as part of your overall allowance could boost your savings and help you onto the property ladder.
Cash or Stocks and Shares?
You can invest your ISA allowance in cash, stocks and shares, or a combination of both.
Cash ISAs offer stability as your fund value won’t fluctuate with the market.
However, over the longer term, the value is unlikely to keep pace with inflation, particularly at current low interest rates.
A stocks and shares ISA offers the greatest chance of long-term returns, which are enhanced by the tax benefits.
However, you should expect the fund value to go up and down, and you may even lose money in the early days.
If you are saving for the short term or building up an emergency fund, a Cash ISA could be the best option. Remember to compare the rates available, as you may find that a non-ISA savings account offers a better deal.
If you are looking to maximise growth over the longer term, a Stocks and Shares ISA is likely to be more suitable.
Remember, if your needs change, you can transfer a Cash ISA to Stocks and Shares (and vice versa).
What Should You Invest In?
You can invest your ISA in a number of different assets, such as shares, funds, or managed portfolios.
The most suitable investment option will depend on:
A diversified portfolio holding a wide range of assets offers the best chance of long-term returns, while keeping risks under control.
How Much to Contribute?
The amount you should contribute will depend on several factors:
If you are still building up your emergency fund and paying off debt, funding your ISA will be a lower priority.
However, providing your other requirements are covered, you should consider contributing as much as possible to your ISA.
How Often Should You Contribute?
ISA contributions are flexible. You can contribute monthly, annually, or ad hoc, providing you remain within the contribution limit.
Investing a lump sum at the start of the tax year allows you to maximise the tax benefits and gives your investment a longer period to grow.
However, this also carries the risk of investing at the top of the market, in which case you may lose a lot of portfolio value early on if share values fall. While this can be disheartening, experienced investors realise that this is a feature of investing. Staying invested for the long-term is the best way to grow your money.
Investing monthly can help to smooth out some of the risk, as 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 nervous about investing a larger amount in one go, monthly contributions could be the answer.
Transferring Existing Investments
Most ISA managers allow you to transfer in ISAs from elsewhere. This means that if you have collected Cash and Stocks and Shares ISAs over the years, you can put them together in one place. As the market has evolved, you may be able to reduce charges or increase your investment options.
You can also transfer other investments, such as shares or funds, into your ISA. This is a disposal for Capital Gains purposes, and can incur tax. Stamp duty may also be payable if you transfer the assets directly into your ISA without selling them first.
What Happens if You Die?
Your ISA is considered to be part of your estate for Inheritance Tax purposes. This is one reason why it can be a good idea to spend ISA funds before pensions.
ISAs can notionally be passed on 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
ISAs should be considered as a source of capital after taxable accounts, but before pensions. Remember, if you take money out of your ISA, you can replace it in the same tax year without using up any of your ISA allowance (providing the ISA manager allows this).
If you need to withdraw capital, you should aim to draw on cash first, as this is unlikely to grow in value and is not particularly tax-efficient.
Prioritising assets in this way can make the best use of the tax benefits and enhance long-term growth.
Please don’t hesitate to contact a member of the team to find out how to make the most of your ISAs for 2022/2023.
