Protecting your well-earned cash from the tax man using an Individual Savings Account (ISA) is a sure-fire way of enabling your savings to grow more quickly over time. ISAs make good financial sense for the majority of people – not only is the income you invest protected from the tax man but so is any interest that is generated.
Currently, you can deposit up to £20,000 into an ISA annually but, while making use of this allowance makes good financial sense, by applying some simple strategy to the investment you can take maximum advantage of the benefits.
The phrase ‘time is money’ is particularly prudent when it comes to ISA investments because, the longer your savings pot has to grow, the larger the potential for your investment. Therefore, the first strategic piece of advice when it comes to ISA investments is to invest early.
If you invest your full allowance at the beginning of each tax year, rather than at the end, your money will have an additional 12 months to grow, tax-free. Even if you cannot afford to put the whole allowance in at the beginning of the tax year, the more you can put in, the better.
Over time this investment will continue to grow and earn compound interest, i.e. it will pay a return not just on the money you invest each year but also on all the money you previously invested and on the money that, in turn, you made on those earlier investments. And all tax free, as long as you remain within the £20,000 annual allowance.
Unfortunately, the potential for cash savings to compound in this way is not what it used to be and interest rates on easy access cash savings accounts and ISAs continue to fall. Therefore, the second piece of strategic advice is, for long-term savings, to look at a stocks and shares ISA because the potential return is far greater.
Holding your wealth in cash is fine if you’re planning on needing the money in the short-term (within the next five years) but if you’re looking at your long-term financial future then keep your savings in cash can put your savings in danger of not keeping up with inflation, which will reduce your spending power in the future.
While an investment in a Stocks and Shares ISA will not provide the same security of capital associated with a cash ISA, if you employ the notion of it being about time spent ‘in’ the market (rather than ‘timing’ the market), a stocks and shares ISA will generally make for a better long-term investment.
A good financial adviser can help you understand how to make the most of your valuable ISA allowances in this and previous tax years. So, if you haven’t already made use of your full ISA allowance for 2021/2022 then look to do so now and when the new tax year comes around, be sure to make the most of your tax-free allowance as soon as possible – those extra 12 months could make a big difference to your long-term wealth.
SeventySeven Wealth Management Limited is an Appointed Representative of and represents only St. James's Place Wealth Management plc which is authorised and regulated by the Financial Conduct Authority.