Money in the bank: An Isa is easy to set up and even easier to use
It’s difficult to think of investing when the world we know and love teeters on the edge of seismic geopolitical change.
It’s also hard to get your head around putting your money into the stock market when share prices are sliding – and household bills are beginning to pile sky high. Scary times.
My mum, who’s 80…ish, rang me last week with a stark question: ‘Jeffrey, how am I going to pay my energy bill?’
At the moment, I’m not sure I know the answer, although my colleague Rachel Rickard Straus has given me food for thought (I’m seeing Mum today).
Saving isn’t on Mum’s agenda other than the fact that her existing savings are a reservoir from which she can draw when outgoings exceed income (a regular occurrence these days).
The bottom of the reservoir can’t be seen yet, but it won’t take too many more withdrawals before it shows.
Yet, in among all the indiscriminate bombs falling on Ukraine and the squeeze being put on our household finances, we mustn’t lose sight of the fact that most of us need to put a little aside for the future – for a time when maybe we no longer want to work fulltime or work at all.
To put our feet up occasionally and enjoy our gentle drift into retirement.
Yes, some of you will have got there already. Like my mum, it’s then a question of managing your savings and investments in a way that will ensure they last your lifetime.
There is no one winning way to save for the long term. Most of us rely upon a company pension – or increasingly these days a number of them – to see us through retirement.
It’s a tax-efficient way to save and employers will top up contributions, some more generously than others.
Others choose to use their home, releasing equity from it as the family moves out and retirement beckons. By downsizing, they are able to use the equity released as part of a retirement pot.
Buy-to-let is also employed by many to provide an income into retirement and beyond – as well as an investment to encash at an opportune time.
But at the heart of every finely-tuned savings plan should be the Individual Savings Account, a tax wrapper that allows people of all ages to save or invest for the future without fear of their pot being denuded by HM Revenue & Customs .
HOW THE TAX PERK WORKS
- You can save up to £20,000 into Isas each tax year.
- If you don’t use this year’s allowance by Tuesday, April 5, you will lose it. Your new allowance kicks in the following day.
- You can save into one of each type of Isa each tax year. This means you can pay into a cash Isa, stocks and shares Isa, innovative finance Isa – and a Lifetime Isa if you are eligible for one. However, the total must not exceed £20,000 and you cannot save into more than one of each type of Isa.
- You do not have to pay tax on interest, capital gains, or dividends earned in an Isa – even if the value of your Isa breaches £1million.
- An Isa is not free from inheritance tax, unless transferred to a spouse or civil partner.
- Children also have an Isa allowance, which is currently £9,000 a year. When they turn 18, their Junior Isa is transferred into an adult Isa and they can access it for the first time.
- All UK residents aged 16 and over can have a cash Isa, but must be 18 before opening a stocks and shares Isa.
- Some – but not all – Isas are flexible, which means you can withdraw money and replace it within the same tax year without it counting towards your allowance.
- You can’t share Isa accounts – even married couples and civil partners. The ‘I’ in ‘Isa’ stands for individual, after all.
- There are about 8.6 million people in the UK with more than £10,000 held as cash which they could invest, according to money regulator the Financial Conduct Authority.
- The Isa limit has been held at £20,000 since 2017. Had it risen with inflation, it would now be worth over £22,500.
Anything held within it builds in a tax-free environment. All withdrawals are tax-free. Income tax is not an issue when you take money out – unlike a pension. A damned smart savings vehicle.
I’m a big fan of Isas. No complicated rules. Easy to set up and even easier to use. It’s like an online piggy bank into which you drip money – which, hopefully, will grow in time.
Flexibility lies at the heart of an Isa. Unlike a pension, it can be accessed at any time, unless you are locked into a fixed rate savings bond as part of a cash Isa, where there can be penalties for early withdrawals.
And it can be topped up whenever, subject to a generous annual contribution limit of £20,000 (April 6 to April 5). It can be cash or investment based – there are other options, but they’re too esoteric for most readers.
Most Isa money is held in cash, through an Isa with a bank or building society. The name of the game is to bag as high an interest rate as you can.
Those opting for a stocks and shares Isa should consider an online wealth platform
If you’re investing, the best route is through an online wealth platform run by the likes of Fidelity, Hargreaves Lansdown and Interactive Investor. These give you plenty of choice over what to put inside your Isa – shares, investment funds, or stock market-listed investment trusts.
Other platforms such as Nutmeg and Wealthify are more nuanced, offering you a range of funds tailored to your attitude to investment risk.
> Read This is Money’s guide to finding the best stocks and shares Isa
Separate Isas – Junior Isas – can be set up for children. A splendid way of providing loved ones with a pot of money at age 18 to help them negotiate the challenges that lie ahead: be it meeting the cost of further education, or scrambling to find a deposit for a home.
There’s even a special Isa – the lifetime Isa – that gives you a Government contribution boost (£1,000 a year on a maximum annual saving of £4,000).
It’s designed specifically for those who want to accumulate a home deposit, or use the plan as a pension. The £4,000 counts towards the £20,000 annual limit.
The focus on Isas comes at this time of year because the Isa contribution limit is a ‘use or lose it’ allowance.
The £20,000 limit for the current year expires on April 5. Any unused allowance is lost forever, although a new one begins on April 6.
So view our special report as a reminder to keep Isas in your thoughts as April 5 (the end of the tax year) approaches and then beyond.
There will be people out there with enough financial clout to utilise this and next year’s Isa allowance. Fine, utilise away – and you will find plenty of advice in this excellent Wealth Isa special to help you make some shrewd investments.
Our brilliant shares guru Joanne Hart provides six super Midas recommendations that would sit nicely inside any Isa portfolio.
Some of the country’s leading investment experts also tell us how they will be investing in the coming months, while Rachel Rickard Straus provides some splendid fund selections. We even give the best funds to put inside an Isa set-up for your children.
But some readers may well not have enough spare cash to put any more money into an Isa – or if they have any, only a small monthly contribution can be made. To them, I say: ‘Don’t worry.’
If you can afford to invest a small amount every month into an Isa, do it. Wealth platforms – online investment platforms through which you can invest into an Isa – will welcome you with open arms.
If you can’t contribute any more for the time being, or you don’t feel comfortable doing so (it’s no crime to feel that way), wait a while. After all, a new annual Isa allowance commences on April 6.
Maybe now is a good time to look at your existing Isa to see whether it remains fit for purpose.
Is it sufficiently diversified across assets? Is it diversified across enough investment funds? Are you comfortable for it to slide in value if stock markets keep falling?
Are there funds or shares that have generated some splendid gains over the years – and that maybe you could part sell down and reinvest some of the cash generated elsewhere inside the Isa wrapper?
By doing this, you keep diversifying. Spreading both your investment risk and your opportunities to make gains on your investments.
Or do you want your Isa to be built of rock, never falling in value. If so, cash is the only answer although your rock won’t defend you against inflation that now is rapidly heading towards ten per cent.
Isas are full of opportunities. This comprehensive guide should help you explore some of them.
THIS IS MONEY’S FIVE OF THE BEST CASH ISA DEALS
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