Lump sum or regular saving, investing for children and how to go green: Your Isa guide to making the most of this year’s tax-free allowance
With just under three weeks left until the end of the tax year, savers may still be considering how to use their annual tax-free Isa allowance.
You can use your allowance whether you are looking at setting up a regular savings plan, or investing a lump sum, or even considering putting some cash aside for children or grandchildren.
Lump sum or regular savings
“As we approach the end of the tax year, many investors will be stuffing lump sums into their ISAs to beat the call for last orders on 5 April, but there are compelling reasons why they might set up a monthly ISA investment plan at the same time,” explained Laith Khalaf, head of investment analysis at AJ Bell.
“Returns over the last twenty years suggest that you should get your money into the market sooner rather than later.
“For example a £20,000 lump sum invested in the typical global equity fund 20 years ago would now be worth £118,570.”
“A comparable regular investment plan of the same amount in total, or £83.33 a month, would now be worth £51,360, less than half the value, despite the same outlay in cash terms. “
Khalaf pointed out that these figures do come with “large caveats attached”.
“If you have £20,000 to invest as a lump sum, but decide instead to drip feed it monthly into the market, then you can expect to get interest on it while you wait. This could boost returns significantly over long periods of time.”
“Assuming a four per cent interest rate on standing cash, £20,000 invested in a global equity fund in monthly chunks of £83.33 over the last 20 years would now be worth £70,295.”
“However, that still falls far short of what a lump sum investment would provide, again as a result of the higher compound returns provided by the market.
He added: “The power of compound market returns is a humbling force, which tends to favour lump sum investing over monthly savings, simply because more of your money is in the market for longer. But when it comes to the losses you sustain in market downdrafts, it’s the regular savings plan which wins the day, because less of your capital is exposed, and your monthly contributions continue to buy shares at cheaper prices.
“I invest £400 a month for my future”
Priscilla Mahendran, 31, lives in North London with her husband and two dogs
“I save around £400 a month, which I split between a Plum Isa and an easy access interest account for rainy days and a pension.
“I’ve been saving with Plum since 2019. I was investing for the first time, so before I found it complex and foreign. The app helps pre-select funds and provides the basic information. I also like how the investment platform is linked to the auto-saving function, which makes putting money aside effortless.
“Overall it’s helped me be better with money, but I still feel in control. My long-term ambition is to save for my retirement, and this has been a game-changer when it comes to growing my pot. I’ve even got my husband using it too!”
Can an Isa be child’s play?
Parents and grandparents, or even friends can invest into an Isa on a child’ behalf
Killik & Co said its research found that 71 per cent of parents expected to leave money to their children or grandchildren, but many were not aware they could do so using a junior individual savings account, or JISA.
Tim Bennett, head of education at Killik & Co said: “The good news is our children and grandchildren are likely to live longer than we do, thanks to improvements in health, diet and so on. However, this will come with its challenges in terms of how they will support themselves.”
“For starters, the state is gradually withdrawing the amount of help they can expect, whether reflected in the rising minimum pension age, or cut-backs in the level of help available to cover university and other further education costs.
“Meanwhile, we are all grappling with a cost-of-living crisis and higher inflation, something which is likely to remain a feature of the economic landscape for some years to come. And of course, one of the biggest purchases they will ever make – a property – continues to be hard for first-time buyers.
“Fortunately, however, they do have one thing on their side – time. Combine that with generous parents and grandparents, plus a way to save tax-effectively, and there are several ways they can be helped.
What is a JISA?
- A JISA is a tax shelter which protects whatever is placed within it from income tax and capital gains tax
- The underlying assets can be everything from cash to funds and shares
- Anyone can contribute up to an annual limit of £9,000, once the account has been set up by a parent
- This allowance is “use it or lose it” – there is no carry forward rule
- Once a child turns 16, they get some control over the account plus the ability to open an adult cash ISA, and from 18 they have the right to fully decide how the JISA is used as they take over legal ownership
- Existing Child Trust Funds can be rolled into a JISA without affecting the annual allowance in the year it is done
- You can switch JISA provider at any point
- Although a child does take control over the account aged 18, the funds do not have to be withdrawn and spent. Instead, they have the option to simply continue the tax benefits accrued so far via rollover into a standard adult ISA
ISA or pension?
With the end of the tax year less than three weeks away some savers will be looking at investing their annual pensions allowance, which has been raised to £60,000, the Isa allowance remains at £320,000
Claire Trott, divisional director for retirement and holistic planning at St. James’s Place, said savers should consider whether they will need to access the funds again in the short term. “Pensions are a long-term savings product, and you won’t be able to undo the contribution or take income until you are at least 55 (increasing to 57 in 2028). ISAs are generally available should you need the money, but you would still need to consider if investing for a short term makes sense.
“Both types of savings vehicles have limits on the amount you can save in any one tax year. The Isa is a simple £20,000 that will be lost if not used. Pensions, however, have more complex rules with up front tax savings by paying into them. If you are already maximising one over the other, it may be worth considering utilising both partially to get the best benefits for your situation.
“Isas do not have an overall lifetime limit, but they don’t have upfront tax relief. However, they can be accessed at any time without being subject to income tax.
Going greener with your ISA allowance
Isabelle Pinson, chief commercial officer at Moneyfarm, said ESG investing had become a major focus over the past years as investors looked to address critical challenges such as climate change, social inequality, and discrimination.
“Both our male and female clients are allocating towards our ESG ISA range, but the preference for ESG Isas amongst women, and the fact that they allocate significantly more to them with their first investment, suggests a greater focus not just on the returns an ISA can bring, but also the good it can do.
“By investing in an ESG ISA, savers nts can invest sustainably with the knowledge that they’re helping to address the social and environmental challenges of the day, but are not having to compromise on their own long-term financial security. Allocating money towards funds and companies who invest sustainably is an effective way of driving change at an individual level.”
Pinson explained that portfolios are designed using funds invested in some of the most forward-thinking and impactful companies in the world. “Funds are selected and monitored using a standard set of MSCI metrics including: companies’ voting policies, carbon emissions, involvement in social controversies, and future exposure to ESG-related risks.”
Cash or shares ISA?
Alice Guy, head of pensions and savings at interactive investor, said savers were right to be wary of stocks and shares Isas.
“After a series of FTSE 100 record highs this year to date, the earth is feeling shaky again. Stock markets are responding to areas of distress as higher interest rates kick in. But shaky as the ground might be, investors can still tuck into a very generous ISA allowance carrot of £20,000.
“Despite volatile markets, more people will be grateful for their generous Isa allowance than ever. With punitively shrinking dividend and capital gains tax allowances, the race is on to move money into a tax efficient wrapper. In February alone, Bed and ISA applications were up 206 per cent year on year on our platform, and we have seen steep increases since November.
“Nervous investors should consider regular investing, which can help smooth out some of the highs and lows in the price of shares.
“In order to really take advantage of stock market volatility, we need to have piles of cash sitting around waiting to invest. That might be fine if you’re super-rich but it’s unachievable for most of us.
“And if you did find yourself with pots of money to invest, and ready to go with a £20,000 annual ISA contribution each year, it would take you 25 years to become an Isa millionaire assuming your pot grew by 5 per cent a year, and 31 years assuming 3 per cent annual growth. Whether regular investing or lump sum investing, discipline is what it takes.
“The current market volatility doesn’t make patience and discipline easy. But at least the generous and preserved ISA allowance gives you the tools to dream.”
Ed Monk, associate director for Personal Investing at Fidelity International, shares his tips on investing in an Isa during times of uncertainty and explains why the current economic backdrop should not deter you from meeting that 5 April deadline.
Take stock of your ISA investments
“As the tax year comes to a close, and you’re checking that you’ve made the most of all your tax-free annual allowances, it’s a perfect time to review your portfolio. Our investment goals and attitude to risk can change over time, so ask yourself if your current portfolio still aligns to your investment objectives and appetite to risk. Rebalancing your portfolio can also have its benefits during times of uncertainty. The way to do it is by adjusting the ratios of your assets taking account of last year’s gains or losses. The effect is that the investor sells assets that have done proportionately better and buys those that have fallen the most. Of course, those investing via funds get this process done for them – although rebalancing between your funds may still be necessary if you hold several of them. Getting into the habit of reviewing and rebalancing your portfolio on a yearly basis is a healthy investment practice that could have a positive impact on your returns.
Diversification is key
“The investments you choose to hold in your portfolio will depend on your goals, attitude to risk, and how long you plan to invest. But it’s important to ensure your portfolio is properly diversified to ensure that you are spreading your risk as the likelihood that all assets will crash at the same time is slim. Having a mix of assets, including shares and bonds, and potentially also alternatives such as commodities and property, across different sectors and geographies is a good way to build some protection from volatility into your portfolio. It’s also equally important to build yourself a cash buffer particularly as some investment accounts, including Isas, will pay interest on your cash holdings.” 1
Drip-feed your portfolio
“Following on from the diversification point, an effective way to put this into action and mitigate some uncertainty is to remain committed to investing a set amount on a regular basis across a spread of investments. Don’t be put off by the size of the ISA allowance and remember that you can invest as little as £25 a month. An Isa is a great way to drip-feed small sums into your savings pot and whether you choose to invest £1,000, £5,000, or the whole £20,000 annual allowance, it’s still one of the most tax-efficient ways to save. We’re all feeling the pinch, so don’t feel like you must maximise your allowance but do remember that if you don’t use it, you’ll lose it.”
Avoid knee-jerk reactions
“Regardless of how experienced an investor you are, it is almost impossible to predict how the market is going to behave. It may sound counterintuitive but staying invested through uncertain times can often be the best approach. Try not to get distracted by the daily performance of individual investments as even the experts find it impossible to time the markets. Tinkering with your investments could also leave you at risk of missing unexpected opportunities that might arise from market corrections, while also posing the impossible question of when is best to buy back in. If you’re still struggling, you might like to talk to a financial adviser who can help you with this.