Amy Knight
As the end of the tax year approaches, banks, building societies and investment platforms are firing urgent messages at consumers about opening a new ISA account, or topping up their existing one before this tax year’s ISA allowance expires.
While new research from specialist bank Shawbrook has found that two fifths of Brits don’t understand their personal savings allowance, and consequently may be missing out on the tax protection that ISAs offer.
Each tax year you’ll get a £20,000 Individual Savings Allowance (ISA) you can use to protect a chunk of your money so that you don’t pay tax on any interest it earns. But if you don’t use your annual allowance, you lose it.
However, just because there is a countdown to midnight on the 5 April, doesn’t mean you need to panic.
There is still time to consider your options, according to experts. Read on to discover what questions you need to be asking.
1. Could you benefit from having several ISAs?
Some savers may choose to spread their tax-free allowance across different types of ISA accounts, balancing the risks and benefiting from different features offered. You currently cannot save into more than one of a particular type of ISA in a tax year.
However, if you’re working towards both medium- and long-term savings goals, it may suit you to hold a Cash ISA (typically easier to access sooner) or a Stocks and Shares ISA (generally best left for a minimum of five years). And if you are under 40 and want to save towards a first home or retirement, you may want to deposit up to £4,000 of your ISA allowance into a Lifetime ISA (which you can access when you buy your first home or turn 60).
Parents can also consider opening a Junior ISA for their children, providing an extra £9,000 of tax-free savings on top of their allowance. But take note: the money you save into a Junior ISA belongs to your child, not you. Until your child turns 18, that money cannot be withdrawn, and when that day comes, it’s up to the young person what they do with it.
2. How long should you leave your money in an ISA?
How you plan to use the money matters. You may have several financial goals, ranging from a few months to several decades. The length of time you’re able to leave your savings to grow is sometimes called your ‘investment horizon’, and it is one factor to consider when choosing between the different types of ISA, such as a Lifetime ISA, Cash ISA or Stocks and Shares ISA.
“If you’re willing to commit the money for at least five years, then you can look down the investment route,” says Matt Beck, an independent financial adviser at Chase de Vere. ISAs have both cash and stocks and shares options, so if your time horizon is less than five years, cash may be the most sensible option, he explains.
3. How much risk are you comfortable with?
Another consideration is your risk profile – how much you can potentially afford to lose by investing in stocks and shares which can go down and up.
Stocks and Shares ISAs can deliver higher returns. But be warned: It isn’t guaranteed and the value of your investment could decrease. Risk profiles and investment horizons are often linked: Those with a longer investment horizon may be willing to take more risks, as they have more years to wait for their savings to recover if the market value dips.
4. Do you need to seek advice?
If you’re prepared to do some research, you may feel confident to choose an ISA without consulting a finance professional. A Cash ISA, for instance, is a tax-free savings account that is easy to open and get to grips with.
However, if your personal circumstances or your tax situation is complicated, you may benefit from expert advice.
Beck thinks ISAs are simpler than many people realise. “There’s a lot of hype [that] comes around the end of the tax year, a lot of noise. But actually, a little bit of education can go a long way,” he said.
“Getting independent financial advice is a great option if you’re not confident, and actually there’s still time to take advice before the end of the tax year,” Beck adds. He encourages anyone nervous about opening an ISA to “try and give it a go” because of the “use it or lose it” nature of the annual tax-free allowance.
Once you’ve opened your ISA accounts, you can keep paying into them in that tax year, either in small amounts regularly or in occasional lump sumps, until you have used up your annual ISA allowance of £20,000.
Remember that it is possible to transfer savings – for example, from a Cash ISA into a Stocks and Shares ISA, or vice versa. You’ll need to request a transfer through the ISA provider you want to switch to. If you withdraw the money yourself, your money will no longer be part of your tax-free ISA allowance. But as long as you follow the rules, once you’ve decided to wrap up your money away from the tax man, you don’t have to leave it in the same ISA forever.
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