This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
The end of tax year is fast approaching (April 5th 2021) and marks an important moment when various tax allowances refresh. Failing to make the most of them could represent hundreds – if not thousands – of lost pounds, so it’s worth taking stock of your own case.
In particular, are you making the most of your ISAs (individual savings accounts)? In 2020-21, this is still one of the most powerful saving and investment vehicles available to people in the UK. In this article, our financial planners at Elmfield here in Padiham, Burnley and Lancashire share some thoughts on how to do this. We hope you find this content useful. If you’d like to speak to an independent financial adviser then you can reach us via:
T: 01282 772938
A brief reminder of ISA benefits
For those looking to build wealth over time, two immediate routes spring to mind – pensions and ISAs. A pension is a powerful way to build a retirement fund, especially since the government will “top up” your contributions via tax relief at your Income Tax band (e.g. 40% for those on the Higher Rate). However, one of the drawbacks of a pension is that you cannot access any of the saved capital until aged 55 (or 57 in the future). For those looking for a tax-efficient way to save and invest – particularly for a shorter term financial goal such as a house deposit – an ISA could be a great option.
In 2020-21, the UK’s tax rules allow you to save up to £20,000 into your ISA(s) per tax year. The money you put in is exempt from tax on any interest, dividends or capital gains, and you are not barred from accessing the money until later in the future. This offers the potential for someone to build a sizable, tax-free portfolio over time. Imagine, for instance, that you saved £20,000 each year over a decade with a 6% average return, after fees and inflation. The final investment value could represent nearly £300,000 – with no tax on any dividends or capital gains.
A time-limited window
One key feature of ISAs to remember, however, is that your £20,000 for the tax year disappears once April 6th arrives. If, say, you put £10,000 into your ISAs in 2020-21 and could have put an extra £10,000 (e.g. from a regular savings account), but do not do so, then the unused £10,000 allowance is lost. You cannot “carry it over” into the next tax year, for example, where you might otherwise have a £30,000 ISA allowance.
This is why it is so important to make the most of your ISA allowance before the April deadline. If you do not have capital to invest, of course, then it makes little difference. However, if you are able to utilise the full £20,000 allowance, then it is wise to plan ahead of the 5th April. This gives you more time to make arrangements and consider the implications for your wider financial plan.
Options for your ISA
There is not just one type of ISA, of course. There are multiple options when deciding on how to use your full allowance for the tax year. Here, it can help to consult a financial planner/adviser, since your choice will be influenced by your distinct financial goals, investment horizon and your attitude to investment risk. Below, we’ve summarised the main ISA types on offer in 2020-21 and how they might apply to different savings and investment situations:
- Cash ISA. For those looking to keep cash whilst mitigating tax on the interest it makes, this can be an appealing option. It allows easy-access to emergency savings, but the interest rates may not be strong as those offered by regular savings accounts.
- Stocks & Shares ISA. This type of ISA can be a good option for those looking to grow an investment portfolio through stocks and bonds, whilst mitigating taxes on dividends and capital gains. Bear in mind, however, that this type of ISA usually comes with a platform fee and may not be the best option for very short-goal financial goals.
- Lifetime ISA. Looking to buy your first home? The Lifetime ISA (sometimes called LISA) offers some compelling benefits. In particular, the government will add 25% to anything you save up to £4,000 in a given tax year (i.e. a £1,000 “top up”). Just bear in mind that you’ll likely get a penalty if you take the money out for any other purpose other than for retirement or towards a property purchase.
- Innovative ISA. If you’re interested in investing in startups and early-stage companies, then this type of ISA can allow you to do so in a tax-efficient way. The returns here can be much higher, but also comes with greater investment risk. If you’re interested in this option, therefore, be careful to discuss this with your financial adviser or planner.
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938