Happy New Tax Year! Not only is it the beginning of a new financial year, the 6th April also marks the start of a fresh ISA allowance for everyone living in the UK. Here are some nifty tips to help you make the most of your tax-efficient savings pot for 2019/20.
Use your 2019/20 allowance as early as possible
You have until midnight on the 5th April 2020 to use your brand-new £20,000 allowance. It may sound like a long way away now, but it’s only 12 paydays left until your allowance runs out again, so planning how you’re going to maximise your allowance now, could pay off. Start by working out realistically how much of your monthly salary you could put away, then set up a Direct Debit so it’s done!
The sooner you start using your annual allowance, the longer it will be exposed to interest rates or potential market growth. And delaying your ISA adventure could make a significant difference in terms of potential earnings. Let’s say you open a Stocks & Shares ISA on the first day of the tax year and invest £100 per month. After 5 years, you could get around £3,770*. However, if you wait until October, you would miss out on 6 months of being invested..
* These are projected values for an investment plan with a Confident Style (Medium Risk Plan) and they are correct as 19/03/19. Figures used are only forecasts and are not reliable indicators of future results.
If markets are performing worse, you could get about £3,410. Alternatively, if markets are performing better, you could end up with approximately £4,134.
Consider paying into a Stocks & Shares ISA
There are 4 adult ISAs: the main ones are Cash ISAs and Stocks & Shares ISAs, and the two others are Innovative Finance ISAs, and Lifetime ISAs. The thing is that you can only pay into one each of these each tax year. This means that you can decide to put your £20,000 in one ISA or split your allowance between a number of ISAs. Interestingly, Brits are more likely to put their money in Cash ISAs1. Whilst it’s sensible to have a rainy-day fund to cover unexpected expenses, holding a Cash ISA isn’t always suitable if you’re pursuing long-term financial growth. Indeed, if inflation hovers above your cash saving rate, achieving real growth in a Cash ISA could be a tough task.
So, if you have long-term goals you aspire to achieve, consider paying into a Stocks & Shares ISA as it could provide you with inflation-beating returns. Indeed, with investing, returns aren’t tied to a fixed interest rate and are rather dependent on how much your investments are worth when you sell them. In other words, you could either get back less than you originally put in, or you could enjoy higher returns in the long-run.
Do your bit for the future
Investing in the stock markets doesn’t mean you have to compromise on your values. It’s not always well-known, but it’s now possible to invest in an ethical investment ISA - here your money is invested in carefully-selected companies that meet the highest standards in their environmental, social and governance and are committed, through their activities, to having a positive impact on the environment and society. And the good news is that ethical investments tend to perform as well as other investment types. So by choosing an ethical ISA, you won’t necessarily have to compromise on performance.
Transfer your ISAs
When it comes to choosing an ISA, it’s important to compare what different providers are offering, including interest rates if you’re opting for a Cash ISA or fees and charges if you’re going for a Stocks & Shares ISA. If you open an ISA today and then later, find a provider offering higher interest rates or cheaper costs later this year, don’t panic, you can easily transfer your current ISA to the new provider at any time. Here are the steps to follow:
- Transfer the full balance
- Complete the official ISA transfer form to retain the tax-efficient benefits of your account.
Don’t forget your children
ISAs aren’t just for adults! Since 2011, Junior ISAs have been around to help you boost your child’s financial future by giving you an extra bit of tax-efficient saving allowance especially for them. And just like you, your child has an annual allowance that gets renewed every tax year. From the year 2019/20, your child can have up to £4,368 saved or invested in a Junior ISA. You can either choose to pay into a Junior Cash ISA, or a Junior Stocks & Shares, or both, as long as you don’t exceed your child’s annual allowance. Your child can only have one each of these throughout their childhood and anything put in their account belongs to them and no one else. When your child turns 18, they’ll be able to access their money and their Junior ISA will automatically turn into an adult ISA, giving them the opportunity to keep building up their savings in a tax-efficient way.
The tax treatment depends on your individual circumstances and maybe 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.
Investing is for everyone.
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The comments and opinions expressed in this article are the author's own and should not be taken as financial advice from Wealthify.