Nothing in the world of saving and investing, backed by government support, comes with strings attached.
Despite the increase in pensions in Chancellor Jeremy Hunt’s budget last week, there are still myriad rules about how much we are allowed to contribute without losing the tax relief boost.
Yet in all the ways the government begrudgingly encourages us to become financially self-sufficient, I think the beauty of the parade is the individual savings account.
Warning: nothing in the world of saving and investing comes with strings attached.
It’s a nice little number. A financial asset. I implore you to embrace it and use it to create long-term wealth.
The tax-friendly Isa is a financial fortress, with bulletproof walls that protect what’s inside from the clutches of the taxman.
Behind its strong walls hide tax freedom rules, so the more you invest, the more your fortress can help you achieve long-term financial goals: a top-up to a pension, or a vehicle used to pay for some of the extra good stuff. later in life, like a cruise around the world or an unforgettable vacation.
Delicious choice to make. Isas can be so empowering. Over the years I’ve watched them closely – and yes, I use them to help prepare me for life when work is over and slippers, rather than Chelsea boots, are the norm. Along the way, I spoke to hundreds of readers who fell in love with Isas.
Indeed, eight days ago, I was minding my business at a football match when I was approached by a retired gentleman who liked to tell me that he and his wife Isa were millionaires. Not individually, I hasten to add, but jointly. Marvellous. He was proud as a punch – and rightly so. Their collective caution paid off, providing them with a super financial cushion for the rest of their lives.
So how can you use your Isa to build a financial fortress? Here are some golden rules I learned along the way. Most are based on common sense and I’m sure many of you are already applying some of them to your own Isa suite.
Get the best rate for your Cash Isa
We all need financial support in case things go wrong in our lives – small things like a washing machine packing up or bigger issues like the car deciding it’s had enough or ( God forbid) who is fired from your job.
Some people hold this reserve of money in a bank account – and use their tax-free personal savings allowance (£1,000 a year for basic rate taxpayers, £500 for higher rate taxpayers) to protect the most tax interests.
But the majority of savers have clung to the fact that holding money in an Isa makes more sense.
This is because non-taxable interest is guaranteed, whereas a basic rate taxpayer with around £29,000 in a non-Isa easy access savings account will currently earn interest in excess of his annual personal savings allowance of £1,000. A Cash Isa means you don’t have to worry about tax – and you can usually access some of your money when needed.
As my colleague Rachel Rickard Straus once said, Cash Isas are by far the most popular Isas in the country. They are reassuring from a capital point of view (essential for many savers, especially the oldest) and constitute financial ballast for households.
If you’re part of the Cash Isa gang, all my advice is to make sure you’re earning a good interest rate. Otherwise, switch to a supplier who will give you a better deal. Rate comparison websites such as moneyfacts.co.uk and savingchampion.co.uk provide information to help you make this change.
Readers often ask if Cash Isa is groovy enough – and wonder if they shouldn’t instead use their financial fortress to invest in stocks and mutual funds in hopes of better overall returns. There is no standard answer. If you like certainty in your financial affairs, cash is king and you should stick to it.
But if you have long-term investment horizons, then perhaps a more nuanced approach may be preferable – build a portfolio that includes both cash and Isas stocks and shares.
That’s what I do – use my Cash Isa to deal with occasional financial emergencies like paying a tax bill and letting my Investment Isa ride the waves of the stock market.
Save every month to grow this pot
For those who like to use some (or all) of their £20,000 annual Isa allowance to invest, I prefer a conservative strategy to a more enthusiastic one.
Although some investors like to use their allocation as soon as a new tax year arrives (the next one begins April 6) or wait until the current tax year is about to end (taking a use or lose), I prefer a different method.
I think monthly investing is the best way to go for most Isa investors.
This means that you don’t invest all your money in the stock market before a sharp correction – which is relevant now, given the market turbulence caused by the collapse of Silicon Valley Bank in the United States.
It also allows those of us who don’t have access to large wads of cash to participate in Isas.
All investment platforms – the best providers of Isas d’Investissement – allow you to set up a monthly direct debit from your bank account.
It then invests your money according to your specific instructions.
Indeed, all platforms will allow you to recharge your Isa as and when you are able. Major platforms include AJ Bell, Hargreaves Lansdown and Interactive Investor.
Hard lesson to learn…but boring is the best
I’ve learned the hard way over the years that chasing investment fads — for example, tech stocks — is often a fool’s game. Better to be bored.
I prefer mutual funds to individual stocks for reasons of diversification. And when it comes to funds, I like those that are committed to providing a combination of income and capital growth.
This tends to draw me to equity income funds – UK or global – and in particular equity income investment trusts, listed on the London Stock Exchange.
Investment trusts have characteristics that set them apart from the crowd of frenzied investors – and make them particularly Isa-friendly.
A big advantage is their ability to generate growing income through thick and thin – through the ability to manage the dividends they receive from their holdings so that the income payments they pay out to shareholders slowly increase.
I hold these trusts in my Isa. The income they generate doesn’t just stay in my account, but is immediately used to buy more trust shares. Reinvesting dividend income is as close to investment nirvana as it gets.
For those who want to know more, take a look at the “Income Finder” section on the Association of Investment Companies website (theaic.co.uk).
Don’t forget the little ones in the family
As a rookie grandpa (twice), Junior Isas is on my radar. I can’t think of a better financial gift for a newborn than a Jisa.
Although under the rules my sons Matthew and Mark must open Jisas for Archie and Arthur respectively, I can contribute provided the overall payments remain within the £9,000 annual allowance.
Indeed, anyone can. Like regular Isas, Jisas can be cash-based or investment-based. But with a potential time horizon of 18 years before they are accessible, investing is better.
Happy hunting Isa. Obtain the construction of this fortress.
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