An ISA is a great way to give your hard-earned money a chance to flourish over the long-term as long as you avoid these 5 common mistakes.
Being too cautious
According to the Financial Conduct Authority (FCA), 37% of UK adults have savings in a Cash ISA compared to only 17% of UK adults who pay into an Investment ISA. This preference for Cash ISAs will be in part down to their relative safety compared to investing. However, being too prudent isn’t always the best way to help your money grow. Whilst Cash ISAs are great for an emergency fund, it might not provide long-term financial growth. In fact, if inflation is outpacing the interest rate your Cash ISA pays you, the value of your savings will actually decrease in real terms.
If your aim is long-term growth an Investment ISA (also known as a Stocks and Shares ISA), invests your money in things like shares, bonds, property, and commodities. Rather than being tied to a fixed interest rate, your returns depend on the performance of your investments. There’s no guaranteed return and you could even get back less than you put in, but there’s also a chance for inflation-beating returns. There’s a few ways to mitigate your risk too. One thing you can do is spread your money across a wide range of assets and regions, so your overall return doesn’t exclusively rely on the performance of one or two investments or markets. Ultimately you must be comfortable with the risk you take. As a guide you could think about how comfortable you’d be seeing your plan drop in value if the markets fell. The less comfortable you are the lower risk you should take.
1: FCA, The financial lives of consumers across the UK, June 2018 - https://www.fca.org.uk/publication/research/financial-lives-consumers-across-uk.pdf
Not using your annual ISA allowance
Currently, you can save or invest up to £20,000 in an ISA, £4,000 of which you can put in a Lifetime ISA, if one is suitable for you. You have until midnight on the 5th April each year to make the most of your annual ISA allowance before the deadline passes, otherwise you’ll lose it forever. Even if you only save or invest small amounts, by not using your ISA allowance you could be missing out on potential growth and gains.
The key to building your wealth over the long-term is to put small sums aside regularly. It’s much more effective to start now with small regular deposits than to ‘save up’ until you have a larger lump sum to invest. There’s lots of evidence to show that the sooner you start investing, the better. Start by reviewing your current financial situation and work out what you could afford to put aside, then set up a monthly direct debit to your ISA and forget about it!
Taking money out of your ISA
Taking money out of your ISA can be a mistake if you have an older ISA as you can lose your tax benefits. Check with your provider and switch if you’d rather the flexibility of withdrawing. As a general rule, if you can take the money from another non-ISA account, it’s better to do so than dip into your ISA The other drawback of taking money out of your ISA is that you’ll be slowing any potential growth and you could be paying a lot in fees if your provider charges you for doing so.
So, unless you really need it, try to keep your money in your ISA and think long-term. If you’re paying into an Investment ISA, holding onto your investments over many years is even more important since it could help smooth out the ups and downs of the market and it would give your money more time to benefit from the power of compounding.
Failing to review your old ISAs
If you have old ISAs you opened years ago, it’s easy to lose track of where they are and how they’re performing. So, make sure you review them regularly and if you’re disappointed with the returns you’re getting, you’re paying too much fees, or simply want to tidy up your finances into one place, it might be a good idea to transfer your old ISAs to a new provider.
Transferring ISAs is easy. You can transfer as many old ISAs as you want to, up to any value and it won’t affect your current ISA allowance at all. One thing to keep in mind though is that there are some ISA transfer rules to be aware of. For instance, you must always use the official ISA transfer form, to retain the tax benefits of your ISA.
Forgetting about your children
ISAs aren’t just for adults! In 2011, the government launched Junior ISAs (JISAs) to get parents to save and invest for their children in a tax-efficient way.
A Junior Cash ISA enables you to save for your little angel and they don’t pay tax on any interest earned. With a Junior Stocks and Shares ISA, your child’s money is invested on the stock market and they don’t pay tax on any income they receive or gains they make. Whatever option you’re going for, your child will get a JISA annual allowance. And when your child turns 18, the Junior ISA will automatically turn into an adult ISA, giving them the possibility to keep building their tax-efficient nest egg.
So, don’t forget about your little one and help them get their adult lives off to a good start with a Junior ISA.
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
