Get wiser with ISAs

A bigger and more flexible ISA allowance is great news. Reaping maximum benefit from it is another matter. If you want to stop throwing away unnecessary tax, then follow the seven pillars of ISA wisdom.

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Today’s fun statistic: if we all could use all our ISA allowances this year, then as a nation we’d save an extra £1.3 billion in tax. That’s according to research by unbiased.co.uk and Prudential, based on the extent to which people are currently saving into ISAs, and how much the rules allow us to.

In the current tax year you can save up to £15,000 into ISAs, in any combination of cash and stocks & shares, and this limit is rising again in 2015/16, to £15,240. Of course, many people don’t have sufficient spare funds to make full use of their ISA allowance – but it’s also fair to say that many of us aren’t using ISAs anywhere near as much as we could be.

If you’ve struggled to make the most of your annual allowance, here are seven pillars of ISA wisdom.

  1. Remind yourself that you could more than double the money you make. Consider: the average household in 2014 managed to save 7 per cent of their pre-tax income. Based on the average salary and the average instant-access savings account, in one year that makes £5.92 interest after tax. The same amount invested in an average cash ISA makes a tax-free £14.17. Of course, if you can save more than that, the difference in interest will be even greater.
  1. Turn saving into a household expense. Arrange an automatic payment into your ISA at the start of the month, not the end when you may be running low on funds. It might not work for you if your budget is genuinely tight, but the psychology of treating your ISA as just another bill to pay can help you keep other spending under control. The best part is, you’re paying this bill to yourself.
  1. If you’re unlikely to use your full ISA allowance otherwise, then save the money you know you’ll spend anyway. Some annual expenditure is predictable, like your holiday, or Christmas, or the car’s annual service. You can work out what you’re likely to spend on each of these, add them all up and divide the total by twelve. Now set up a standing order for this sum into your cash ISA. Many cash ISAs allow instant or very quick access to your money, so you can get at the money when you need it – but in the meantime, it’s been earning interest in a tax-free environment.
  1. Focus on a goal. If the thought of merely saving is too dull for you, give your ISA a dedicated purpose. Thinking of it as your ‘New Car Account’ or ‘Daughter’s Wedding Fund’ (or whatever your life priorities may be) can make you feel a lot more positive about that regular payment going in. It also helps to picture that ISA snowballing with every passing year, as compound interest makes it grow faster and faster – so long as you keep the money invested.
  1. Really hunt around for the best interest rates. Even a tenth of a percentage point becomes significant as the years and the pounds accumulate. This is Money recently listed the 30 worst ISA rates in the UK – yet the ISA at number 30 still had an interest rate that was eleven times higher than the worst ISA of all. And both were issued by the same provider. Also review your ISA annually to make sure it’s still got a competitive rate of interest, and if it hasn’t, then move it to a better one.
  1. Remember that your children pay tax. No really, they do. The interest on a child’s bank account is as vulnerable to tax as anyone else’s. But all UK resident children under 18 are eligible for a Junior ISA (unless they already have a Child Trust Fund). These work in much the same way as adult ISAs, though the annual limit is restricted to £4,000 in any combination of cash and stocks & shares.
  1. If you have a stocks & shares ISA, remember that these are long-term investments. Never cash in a poorly-performing ISA, and never ‘park’ it in a cash ISA during bad times (as some investors are tempted to do). What matters in a stocks & shares ISA is overall growth over time, rather than steady rises every year. But if you’re really unhappy, then consider moving to another stocks & shares ISA with a different fund manager. A stocks & shares ISA is an active investment, so keeps tabs on its performance and talk to your financial adviser about any concerns you may have.

A lot of tax is wasted not because people can’t afford to put money in ISAs, but because they haven’t made saving a part of their daily routine. By following the seven pillars listed above, you can stay on the path of financial wisdom. A good first step is to book a free investment check from an unbiased.co.uk adviser.

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