If there is ever a time to get your investments in order, it’s the beginning of the new tax year. With allowances reset, now is the opportunity for investors to evaluate their plans for the coming year, where their money sits, and how they should contribute in order to make the most of their money.
This is also the time for considering not just how much of your £20,000 ISA allowance to use – for a full breakdown of how ISA limits work, read our guide – but also how it is distributed. You can, for example, spread your ISA allowance across a mixture of different ISA types or portfolios. So, read on to find out all you need to know about how to invest your £20,000 allowance.
Use as much as possible
The first point to make here is a straightforward one: utilise as much of your ISA allowance as you can afford. This doesn’t mean that you should strive to put £20,000 into your ISA every year; very few people can do that. What it does mean, however, is that any money you come into could almost always be better utilised through investing.
So long as you’ve paid off any existing, expensive debt and saved enough as a rainy day fund, utilising as much of your allowance as possible is highly recommended. ISA allowances operate on a ‘use it or lose it’ basis, so any unused allowance doesn’t roll over and is lost.
This is also a point about when you should invest. The answer, almost always, is “now”. We’ve written a few times about the pitfalls of trying to time the market or holding off on investing for whatever the reason may be. In almost all cases, it’s more beneficial for savers to invest as early as possible and avoid missing out on the historic ‘boom days’ that can make all the difference to long term returns.
Consider multiple portfolios
One of the restrictions placed on ISAs is that you can only invest in one of each type of ISA in the same tax year. It is very important to understand how ISAs work; for example, you can’t invest in two different stocks and shares ISAs, but you can create multiple portfolios within the same ISA – it’s one ISA, but achieved across multiple portfolios.
There are a few reasons you might want to do this but the most common is as a means to drip feed cash into the markets. Say, for instance, you have a medium-high risk portfolio for long term investing – you might want to move the rest of your money out of cash but are reluctant to allocate it all into that portfolio at once. You could, then, open a lower risk portfolio within the same ISA and hold your cash there.
This makes it easy to move your money between risk levels, have a clear picture of how much of your £20,000 allowance you’ve used, and plan ahead with your investment consultant. With cash not representing the long term opportunity it once did, holding these savings in a lower risk portfolio could give them a better chance of holding and growing their value over time. By having your savings held within your ISA portfolio, you can take advantage of the tax benefits of your £20,000 allowance without committing all your money to a higher risk portfolio.
Opening a second portfolio within the same ISA is simple. With a Moneyfarm account, all you need to do is follow the online portfolio creation process again, or simply get in touch with a member of our investment consultancy team to get one set up.
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Remember the basics
The final thing to remember when using your ISA allowance is to not lose sight of the basics. The run-up to the end of the tax year is a big time for financial providers, who will often offer promotions and discounts to encourage people to invest. These are well worth considering, but it’s important to not divert from these fundamentals:
Think long term. Even in times of relative uncertainty, a long term investment strategy is still valid. Disinvesting, moving money between risk levels or trying to time the market can be tempting, but sticking with the plan is the way to reach your long term goals. Markets will rise and fall in the short term, but over a long enough timeline, the trajectory looks a lot smoother.
Diversification. When deciding how to use your allowance, try to avoid being swayed by news of certain stocks or markets going through the roof. Betting on the success of a limited pool of assets is inherently risky, so investors should remember to keep diversification as a central pillar of their strategies. At Moneyfarm, we invest across asset types and geographies, using carefully curated ETFs to provide all the protection in diversity that our clients need.
Get advice. The run-up to the end of the tax year also represents an ideal opportunity to seek advice from your investment consultant. If your ISA provider, like Moneyfarm, offers consultancy at no extra cost, it’s worth checking in to see how your investments are doing and discussing your options going forward. Semi-regular checkups like these mean that you’re always in the loop.
What are the different types of ISA?
When we talk about investing in an ISA, we generally mean a stocks and shares ISA. However, there are multiple types for investors to be aware of and some come with different rules. The most common other types of ISA are Cash ISAs, Junior ISAs and Lifetime ISAs.
The Cash ISA allowance is the same as a stocks and shares ISA; £20,000 per year. The only real difference with a Cash ISA is the assets you’re investing in. The Junior ISA allowance, or JISA allowance, is £9,000 per tax year for 2021/22, which is unchanged from the year before. A JISA can be made up of either cash or stocks and shares and can only be accessed once the child turns 18 (though they can manage the account from 16 onwards).
The Lifetime ISA allowance is a little more complicated. You can only put in £4,000 per year and you must contribute at least once before you turn 40. You can also only contribute to the ISA until you’re 50 years old. With these conditions being met, the government will add a 25% bonus to your pot, up to £1,000 per year.
For most people, the stocks and shares ISA will be the best option. If you want to use your whole ISA allowance per year or even just part of it, we recommend doing some thorough research and assessing exactly what you’re saving for before you get started.