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How to invest your ISA allowance: Seven tips to get started

Whether you’re saving for a dream holiday or something longer term, individual savings accounts (ISAs) are a great way to do it. The reason is simple: you pay no tax on any interest or income that your savings earn.

In this tax year, (to April 2018) your tax-free ISA allowance is £20,000. You don’t need the full allowance to make use of your ISA, you can use as much, or as little, of the ISA allowance as you’d like.

So what’s the best way to take advantage of this? Here are seven tips to get you started on your ISA savings journey.

1.    Watch the calendar

You can start a new ISA each tax year. Even if it’s close to the end of April you can still use the year’s full allowance. But it’s best to start early if you can, so you can benefit from compound interest, which is when your interest starts earning interest – valuable extra cash.

2.    Choose your provider with care

If an ISA comes with too many fees attached, this could cancel out the tax benefit. So make sure your ISA doesn’t have hidden fees – the list of these can include withdrawal fees, platform fees, and trading fees. When looking for the best ISA for you, these are important considerations to make. Look for a single low management fee so that your tax advantage is protected.

3.    Find the right level of risk

How much could you afford to lose? Setting your risk appetite is a good way to help make sure you choose investments that suit your circumstances and plans. Try Moneyfarm’s free questionnaire to see where you are on the risk spectrum.

4.    Review your ISA investments regularly

If there’s one thing we can all be sure of at the moment, it’s change. Right now, for example, interest rates are so low that cash ISAs offer very little return. With inflation currently running at 1.8%, the best flexible cash ISA rate of just 1.05% is not going to offer much in the way of return.1 So you might consider switching to an investment ISA.

5. Think long-term

History shows that missing just a few of the best days can have a detrimental impact on your investment. If you’d invested $10,000 in the S&P 500 from 1993 to 2013 your investment would be worth $58,322, if you’d missed just 10 of the best days it would be worth $29,111. So if you can, it’s worth planning on keeping your investments going.

6. Aim for diversity

Investing in a range of assets protects you against swings in the market. When stocks and shares fall, for example, government bonds might increase in value. So it’s important to make sure that your portfolio is diverse.

7. Keep your eye on the prize

Any investment journey should start with thinking about your destination. Thinking about your ultimate goal (for example, securing a financially stable retirement) and the time that you want to spend reaching it – will help you decide on the best way to get there.

Cost-effective and flexible, ISAs are an extremely useful part of your savings and investment portfolio. So make sure you consider your options carefully to make the most out of valuable savings vehicle.

1 Top easy access cash ISA offers just 1.05% according to Money Saving Expert.

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