ISAs are a vital part of most people’s financial planning because they provide a simple way to make saving or investing more rewarding by making it tax efficient. There is no tax to pay on the interest savings earned in a Cash ISA, no capital gains tax on growth in a Stock and Share ISA, and no income tax on any ISA or the profit it has earned when you eventually come to cash them in.
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If you have cash to invest, for most people ISAs are the first choice thanks to their tax-efficient status. They help your money grow faster by protecting it from the taxman.
The tax-efficient status of ISAs means that they are so attractive, the government puts limits on the amounts you can invest each year, currently £20,000. Savers and investors can plan how to use their new 2021/22 allowance now the new tax year is upon us.
Sadly, there is no way to call on any unused allowances from previous years. The allowance vanishes with the departing tax year. If you are going to make full use of your ISA entitlements, you need to do so before the tax year end.
So how should you use your entitlement?
There are of course many different ISAs to consider, depending on whether you want to be a saver or an investor.
Savers can opt for a Cash ISA, which will offer security for their money. A Cash ISA is in practice very much like a term savings account. Most high street banks offer them with fixed returns, and the protection of the Financial Services Compensation Scheme (FSCS), ensures that capital up to £85,000 is safe.
However, although you will be able to depend on the returns, you will have to accept that they will be low. Rates on Cash ISAs are at historic lows, reflecting the low bank rate. In fact rates on even the best Cash ISA are not much more than 0.5% (for a 1 year fixed rate) making them unlikely to beat inflation now – and almost certain to lose value in real terms if inflation heads up past 4% if prices rise as the economy comes back to life.
Investors can choose a Stocks and Shares ISA, which come with no performance guarantee, but have the potential of far higher returns.
Some people watched the markets fall this time last year as Covid began to bite. Global stock markets crashed 15% in the first quarter of 2020. Many declared that they would never touch stocks and shares again. However, they would have missed out on strong returns. The MSCI World index – a barometer for global stocks – is up 36% since this time last year. There could be more growth to come over the next few years as the economy itself regains its strength.
As Covid has shown predicting the future is never wise, but on average, over the long-term stock markets have returned 5% above inflation each year, or around 7% per year in total assuming 2% price rises, according to data from the Barclays Equity Gilt study.
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Regular or lump sum investment?
When you have decided on the type of ISA that is right for your needs you need to look at the way you want to invest in it.
You don’t have to pay in a lump sum. Some providers let you pay in monthly – making ISA investing as easy as conventional savings products.
You need professional help from Continuum to make the most of your ISA investments before the end of the tax year. Call us now.
The Financial Conduct Authority does not regulate deposit accounts & taxation advice.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
The value of investments can fall as well as rise and you may get back less than you invested.
Equity investments do not afford the same capital security as deposit accounts.
