ISAs are a sensible way to save tax-effectively for the future. As we celebrate 25 years of ISAs, Tim Bennett, Head of Education at Killik & Co shares his tips on how to make the most of them as we approach the end of another tax year.
Be careful about cash
As we get closer to April 5th, some people may be tempted to load up their ISAs with cash so that they don’t lose the annual allowance, and then wait a while to invest it. This is a reasonable strategy and better than the alternative, which is to risk missing out on this “use it or lose it” allowance altogether. However, be careful. Every day that money sits in cash, it is being eroded by inflation. Interest rates rarely keep up with inflation, even when allowing for the tax protection afforded by an ISA, so if your intention is to invest these funds into shares, don’t delay for too long.
Use up the allowance
As noted above, there is no way of carrying over unused ISA allowances from one tax year to the next. This is in contrast to pensions, where up to three years’ worth of allowances may be carried forward to then be used up. As such, check now whether you have any unused allowance remaining and also the deadline for getting the cash transfer done. Don’t forget that it can take a few days to clear the relevant funds from a bank account so try and avoid leaving this right until the last minute.
- Are young traders paying too much Capital Gains Tax?
- The UK’s autumn budget: how does it affect traders?
- Investors scramble for tax free options before potential CGT hike
Don’t keep checking in
Many people sensibly fill up their ISA via an app. After all, they are a simple, portable way to save and invest. However, the downside is that they regularly update the overall balance and it can therefore fluctuate daily according to what is happening across markets. The secret to successful long-term investing is not to be drawn into tinkering with an ISA – it is not a cash point machine, and any balance should be left alone to grow.
Avoid withdrawals
Linked to the previous point, only make withdrawals from an ISA over short-term periods, if at all. That is because if you pull money out and then reinvest it again within the same tax year, the associated tax benefits are preserved. However, anyone who misses the end of tax year deadline to reinvest, loses ISA protection on those funds forever.
The exception to this principle is in the drawdown phase of life. Because an ISA forms part of a death estate for inheritance purposes (whereas a pension does not), it can make sense to make permanent withdrawals from an ISA in certain circumstances. However, this is worth discussing with an adviser first.
You can find out more about Stocks and Shares ISAs here. Our Stocks and Shares ISA platform comparison features 24 regulated providers to help you make an informed decision on where to open an account.
