The world of investing can seem daunting to someone who’s just starting out. You know you need to invest for your future, but with so much information out there it can be hard to know whether you’re doing the right thing.
One of the simplest ways to maximise your returns is through an ISA, as it allows you to build up your investments in a tax-efficient manner. You can either keep your savings in a cash ISA or invest through a stocks and shares ISA, and any returns will be tax-free.
2017/18 ISA allowance
From April 2017, the annual ISA allowance has risen to £20,000. This means you can put up to £20,000 in your ISA each year, and any income or growth in value of your investment will be protected from tax.
As it’s a personal allowance, couples can invest up to £40,000 in their ISAs each year for the generous tax benefits.
History of the ISA allowance
The ISA allowance rose to the current £20,000 limit from £15,240 in April 2017, increasing the amount savers and investors can protect from tax by over 30%.
Since its launch in 1999, the ISA allowance has jumped nearly two-fold from £7,000. Although this has been a gradual process, the majority of this momentum has been seen since 2010.
Maximising your ISA allowance
You don’t have to use all of your £20,000 ISA allowance, just what you’re comfortable with. But, as you can’t roll it into the next tax year, it’s worth remembering you either use it or lose it.
The ISA allowance refreshes annually. The 2017/18 financial year runs from 6 April 2017 to 5 April 2018.
Don’t want to keep all your money in cash, or invest all your assets? Don’t worry; you can split your £20,000 allowance between a stocks and shares ISA, cash ISA, Lifetime ISA (LISA), and Innovative Finance ISA. You can only set up one of each ISA products in the tax year.
Many people leave their cash in savings because they believe it’s the safer than investing it in the market. But, with the best cash ISA rates at around 1% and inflation racing higher at 3.1% [latest data from November], your cash savings are likely to lose value in the future.
The financially savvy are instead looking for ways to make their money work harder, with a stocks and shares ISA an attractive option.
At the end of the financial year, ISAs always get a lot of attention. But it’s better to start early on if you want to maximise your returns. The earlier you begin, the more scope you have to benefit from tax-free returns for longer.
The case for a long-term investment strategy is established, and although a year is usually linked to a short-term horizon, it’s a lot longer than just one month.
You don’t need to invest it all at once, either. By investing a little and often, you stand to smooth out fluctuations in asset prices over time, which can help strengthen returns. This is a strategy known as pound-cost averaging, and is a risk-adjusted alternative to trying to time the market.
By increasing the ISA allowance, the government has given the public more financial planning freedom, improving the scope for returns at the same time.
Don’t be put-off by the £20,000 ceiling, even using a small part of your allowance will put you in a better position to achieve your long-term goals.