The new financial year is here and it’s coming with brand-new allowances for ISAs and pensions. So, it could be time to start making the most of your tax-efficient savings pots for 2020/2021. Here are some nifty tips to help you do just that.
Consider using your 2020/2021 ISA allowance as soon as you can
Every 6th April, your ISA allowance resets, and you get another year where you can save or invest up to £20,000 without paying UK tax on any of your profits. You can either put it all in the ISA of your choice, or you could split your allowance between a number of ISAs. Remember that there are four types of ISA (Cash, Stocks and Shares, Innovative Finance, and Lifetime) and you can only pay into one of each per tax year. Also, it’s worth noting that you can only put up to £4,000 in a Lifetime ISA.
You have until midnight on the 5th April 2021 to use your annual ISA allowance. And while that may sound like a long way away, if you do the maths, it’s only 12 paydays until your 2020/2021 ISA allowance runs out again. So, it could be a good idea to start planning ahead to make sure you’re taking full advantage of your allowance before the end of the tax year. Work out how much you can put aside each month and consider setting up a Direct Debit to your ISA accounts, so your tax-efficient pots get fed on a regular basis without you even realising it. And the sooner you start putting money aside in an ISA, the longer it will be exposed to interest rates or potential market growth. If you delay your ISA adventure, even by a couple of months, you could be missing out on potential gains.
Also, this tax year could be a great time to start thinking about the long-term, if you haven’t started to already. Whilst it’s a sensible thing to have a Cash ISA to cover emergencies, holding a tax-free savings account may not be the most suitable option to fund your long-term goals. However, paying into a Stocks and Shares ISA could help! Since your returns depend on how much your investments are worth when you sell them, there’s a risk you could end up with less than you initially invested. However, since your gains aren’t tied to fixed interest rates, there’s a chance you could get higher returns in the long run. In fact, the longer you hold onto your investments, the more likely you’ll be to see positive returns. For instance, people who invested in the FTSE 100 and remained invested for any 10-year period, between 1986 and 2019, have had an 89% chance of making a gain1.
Investing in a Stocks and Shares ISA can sound daunting, but thanks to digital investing platforms, like Wealthify, getting started has never been easier. All you need to do is choose the risk level that suits you and the amount you’d like to invest – you can start with as little or as much as you want. We’ll do the rest, from picking your investments to managing your Plan on an ongoing basis.
Why not open a personal pension?
In addition to looking into ISAs, you could start the next tax year by checking out personal pensions and using your new pension annual allowance. Retirement may be far far away for you, so planning for later life may not be a priority at the moment. But, thinking about it now could pay off at the end. If you want a comfortable retirement, you’ll need at least £260,000 saved in your pension pot2 – needless to say this is a big amount and this doesn’t take inflation into account, so you may need even more to fully enjoy your later life. And let’s be honest, the state pension may not be enough to reach such target. So, make sure you’re enrolled in your workplace pension and consider opening a personal pension if you can afford it.
With a personal pension, also known as Self-Invested Personal Pensions (SIPPs), you can make your own pension contributions, and your money will typically be invested in a range of investments, including shares and bonds. Just like Stocks and Shares ISAs, you don’t need to pay tax on your gains with a personal pension. And that’s not all! You also get a little treat in the form of tax relief. Simply put, and because the maths is a bit complicated, for every £100 investment you make, you’ll only need to contribute £80 in your pot and the government will add the remaining £20. If you do the calculation, that’s a 25% top up on every contribution you make! If you’re a higher or additional rate taxpayer, you could receive a higher boost, but you’ll need to contact the HMRC to get your bonus. Whilst you can put as much as you want in your pension, this tax year, you’ll only get the top up on £40,000, tax relief included (or the totality of your earnings, whichever is lower) – this pension allowance includes contributions made by you and the government.
If you fancy opening a personal pension, online investing platforms can help. Getting started with Wealthify is easy! Simply choose how much you want to put in your pension (you can start with just £50) and select the risk level you’re the most comfortable with. Once you’re all set up, we’ll do the hard work for you, including building and managing your Plan. Also, we’ll automatically add the government’s top up to your pot and invest it for you.
Think about the kids too!
If you have kids, the start of the tax year could be great time to start investing in their future. And a good way to help shape the financial future of your little ones could be to open a Junior Stocks and Shares ISA to let your kid save or invest in a tax-friendly way. This new tax year, you’ll be able to put up to £9,000 in their Junior ISA, so try to make the most of their allowance. It doesn’t have to be big lump sums, making small contributions on a regular basis could also help you build a decent nest egg for their future. Everything you put in a Junior ISA is locked away and nobody can dip into your child’s savings, not even you. Your kid will gain full control of their money on their 18th birthday and at this point, their child’s ISA will turn into an adult ISA, giving them the opportunity to keep up with good savings habits.
1: Data from Bloomberg
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.