Making the most of the annual ISA allowance is an important, tax-efficient method of potentially maximising returns and making your money work harder.
However, it can sometimes be confusing when deciding when - and how - to use the generous, tax-free allowance.
This is particularly the case in the current climate, as the Coronavirus pandemic has affected the investment landscape, leaving some investors unclear about where the best place is for their capital.
And as the UK’s debt exceeded the size of the economy (£2 trillion) in October, while a second lockdown and an extension of the furlough scheme was also announced, some financial experts are predicting where the money to fill the fiscal hole left by COVID-19 will come from.
In July, Rishi Sunak, Chancellor of the Exchequer, asked the Office of Tax Simplification to review capital gains tax, opening the door to higher taxes on the wealthy.
The review, published on November 11, 2020, urges a major overhaul of the tax, recommending cutting the annual allowance and aligning rates more closely with income tax - a move that could raise up to £14 billion.
These proposals would have negative effects on the likes of wealthy individuals who hold second homes or assets outside of a tax wrapper, such as the ISA.
It’s not yet known precisely what steps the Government will take, but cuts to the tax breaks we often take for granted - including the ISA allowance - are possible.
So, now could be a great time to take advantage of the £20,000 (as of 2020/21) allowance. But what do you need to know before you do, and which ISA is the best option for you?
The annual ISA allowance has been on a steady increase, but this could change
Since 2017/18, when it increased from £15,240 the previous year, the annual ISA allowance has been a generous £20,000.
This allowance can be split between the four main ISA accounts - Cash ISA, Stocks and Shares ISA, IFISA and Lifetime ISA - and refreshes each year on April 6.
It’s important to note that any unused ISA allowance can not be carried from one year over to the next - use it or lose it.
For investors able to use some or all of their allowance, it’s a tax-efficient way of potentially growing your capital, as the ISA shields all returns from income tax and capital gains tax.
However, though the allowance has been increasing at a steady rate since the introduction of the ISA in 1999, this could change as the Government looks for ways to aid the UK’s economic recovery in the wake of the Coronavirus crisis.
How to make the most of your ISA allowance
So, although the ISA market looks somewhat confusing at the minute, the threat of a possible decreased allowance - and the ability to maximise potential returns through the tax-free accounts at a time when it’s needed most - means that now could be the best time to make the most of your ISA allowance.
How you use the allowance is key, and there are several core considerations:
If you are able to, utilise your full tax-free ISA allowance each year to maximise returns - remember, you cannot carry any unused allowance over into the new tax year.
Providing your risk tolerance permits, and you have received independent financial advice, you could consider diversifying your ISA portfolio by spreading your allowance across different types of ISA - both savings (such as a Cash ISA) and investment accounts (such as the CARLTON Bonds IFISA).
If you are looking to grow the value of your capital, you may need to consider taking more risks with an IFISA or Stocks and Shares ISA, as Cash ISA rates are at rock-bottom lows.
Stay on the look-out for more competitive rates - particularly with a Cash ISA - and consider transferring your ISA if you find a better deal.
Choosing the best ISA in 2020
When it comes to choosing the best ISA, there is no one-size-fits-all. You must decide based on your personal circumstances and investment goals, and it’s advisable to seek advice from an independent financial adviser before making a decision.
As a cautious investor, the Cash ISA - which is a savings product - is an obvious choice. However, returns with a Cash ISA are looking bleak, with the best easy-access account on the market currently sitting at just 0.6%.
For those willing to take more risk in search of higher returns, a Stocks and Shares ISA or IFISA may be a good consideration.
A Stocks and Shares ISA offers potential returns in excess of 4% over the long-term, but bear in mind that stock market fluctuations are common, and they have been particularly volatile during COVID-19.
Then there’s the IFISA, which is uncorrelated to both the fluctuations of the stock market, and the Bank of England (BoE) base rate, which is currently at a record low of 0.1%.
Potential returns from an IFISA range between 4% and 8%, and through the account, you can invest into the likes of property - a sector that has proven itself to be relatively resilient through the pandemic.
This means that, through investments such as the CARLTON Bonds IFISA, you could earn high potential returns while supporting regional house builders in delivering much-needed housing, creating jobs and, in turn, helping to drive economic growth.
The CARLTON Bonds product is available exclusively to experienced investors who are classified as either sophisticated investors, high-net-worth individuals or professional investors and have the knowledge and experience to make their own investment decisions. Investments are high risk and illiquid, your capital is at risk and returns are not guaranteed. Bonds are not protected by the Financial Services Compensation Scheme (FSCS).