Nothing in the savings and investment world, underpinned by support from the Government, comes without strings attached.
Despite the pensions boost in Chancellor Jeremy Hunt’s Budget last week, there are still myriad rules surrounding how much we are allowed to contribute without losing the booster rocket of tax relief.
Yet, of all the ways the Government grudgingly encourages us to become financially self-sufficient, I think the beauty in the parade is the Individual Savings Account.
Watch out: Nothing in the savings and investment world comes without strings attached
It’s a friendly little number. A financial stand-out. I implore you to embrace it and use it to build long-term wealth.
The tax-friendly Isa is a financial fortress, with bullet-proof walls that protect what is inside from the taxman’s clutches.
Behind its sturdy walls are tax-freedom rules, so the more you put in, the more your fortress can help you achieve long-term financial goals: a complement to a pension, or a vehicle used to pay for some of the good things in later life such as a world cruise or holiday of a lifetime.
Delicious choices to make. Isas can be so empowering. Over the years, I’ve observed them from close quarters – and yes, I do use them to help me prepare for life when work is no more and slippers, rather than Chelsea boots, are the norm. Along the way, I’ve spoken to hundreds of readers who have fallen in love with Isas.
Indeed, eight days ago, I was minding my own business at a football match when I was approached by a retired gentleman who delighted in telling me that he and his wife were Isa millionaires. Not individually, I hasten to add, but jointly. How wonderful. He was proud as punch – and rightly so. Their collective prudence has 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 a few golden rules I have picked up along the way. Most are based on common sense and I am sure many of you are already applying some of them to your own Isa suite.
Get the best rate for your Cash Isa
All of us need a buttress of cash in case things go wrong in our lives – little things such as a washing machine packing up or bigger issues like the car deciding it has had enough or (God forbid) being made redundant from your job.
Some people hold this stash of cash 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 most of the interest from the taxman.
But a majority of savers have latched on to the fact that holding cash in an Isa makes better sense.
This is because tax-free interest is guaranteed, whereas a basic rate taxpayer with around £29,000 in a non-Isa easy access savings account will currently be earning interest above their £1,000 annual personal savings allowance. 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 has already said, Cash Isas are by far the country’s most popular Isas. They’re safe from a capital point of view (an essential for many savers, especially those in their later years) and provide households with financial ballast.
If you’re part of the Cash Isa gang, all I urge is to ensure you’re earning a good rate of interest. If not, transfer to a provider that will give you a better deal. Rate comparison websites such as moneyfacts.co.uk and savingschampion.co.uk provide information to help you make this switch.
> Stuck on whether you should opt for a Cash or Stocks and Shares Isa? Read our guide
Readers often ask whether Cash Isas are groovy enough – and wonder whether they should instead be using their financial fortress to invest in shares and investment funds in the hope of better overall returns. There is no standard answer. If you like certainty in your financial matters, cash is king and you should stick with it.
But if you have long-term investment horizons, then maybe a more nuanced approach may be better – building a portfolio comprising both Cash and Stocks and Shares Isas.
It’s what I do – using my Cash Isa to meet occasional financial emergencies such as paying a tax bill and leaving my Investment Isa to ride the waves of the stock market.
> Best easy-access cash Isa rates in our savings tables
Save every month to grow that pot
For those who like to use a chunk (or all) of their £20,000 annual Isa allowance to invest, I prefer a conservative to a more gung-ho strategy.
Although some investors like to utilise their allowance as soon as a new tax year arrives (the next one starts on April 6) or wait until the current tax year is about to end (adopting a use it or lose it approach), I prefer a different method.
I think monthly investing is the best way forward for most Isa investors.
It means you aren’t putting all of your money into stock markets ahead of a stiff correction – pertinent now, given the market turmoil caused by the collapse of Silicon Valley Bank in the United States.
It also enables those of us who don’t have access to big wads of spare cash to participate in Isas.
All investment platforms – the best providers of Investment Isas – 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 top up your Isa as and when you can. Leading platforms include AJ Bell, Hargreaves Lansdown and Interactive Investor.
Hard lesson to learn …but boring is best
I’ve learnt to my cost over the years that chasing investment fashions – for example, technology shares – is often a fool’s game. Boring is better.
I prefer investment funds over individual shares on diversification grounds. And when it comes to funds, I like those that are committed to delivering a mix of income and capital growth.
This tends to draw me to equity income funds – UK or global focused – and in particular equity income investment trusts, listed on the London Stock Exchange.
Investment trusts have features that stand them apart from the madding investment crowd – and make them particularly Isa-friendly.
One big plus is their ability to deliver a growing income through thick and thin – a result of being able to manage the dividends they receive from their holdings so that the income payments they make to shareholders rise gently.
I hold these trusts in my Isa. The income they throw off does not just sit inside my account, but is immediately employed to buy more trust shares. The reinvestment of dividend income is as close to investment nirvana as you can get.
For those who want to find out more, have a peek at the ‘income finder’ section on the website of the Association of Investment Companies (theaic.co.uk).
> Experts explain how many funds Isa investors should hold in their stocks and shares Isa
Don’t forget the little ones in the family
As a newbie grandfather (twice over), Junior Isas are on my radar. I can’t think of a better financial present for a newborn than a Jisa.
Although, under rules, my sons Matthew and Mark must open Jisas for Archie and Arthur respectively, I can contribute subject to overall payments staying within the annual allowance of £9,000.
Indeed, anyone can. Like ordinary Isas, Jisas can be cash or investment-based. But with potentially an 18-year time horizon before they can be accessed, investing is best.
Happy Isa hunting. Get building that fortress.