For all savers and investors, the ISA and its current £20,000 annual allowance offers unrivalled tax-efficient benefits.
But for experienced investors in particular – those classified as either sophisticated investors, professional investors or high-net-worth individuals – who understand features such as ISA transfers and the importance of making the most of the annual ISA allowance, the ability to maximise potential returns is an obvious one.
So how do experienced investors use their annual ISA allowance in such a way to maximise target earnings?
They spread the ISA allowance across a range of ISA products to build a diversified portfolio
Most often, experienced investors are willing and able to take more risks in the search for higher returns. This means they are not limited to contributing their entire ISA allowance to a Cash ISA, avoiding the savings product’s all-time-low, capital-eroding interest rates.
Instead, an experienced investor could choose to add an Innovative Finance ISA (IFISA) or a Stocks and Shares ISA – or both, because it is possible to open and contribute to more than one ISA per year – to their ISA portfolio.
For experienced investors with the appropriate appetite for risk, these investment ISAs offer potential returns in excess of 4% as well as opportunities to build a diversified portfolio, utilising different ISA products to target different investment goals and requirements.
An example of this is using an IFISA instead of or alongside a Stocks and Shares ISA as the former is uncorrelated to the fluctuations of the stock market and has asset-backed options, providing an additional layer of security. Whilst both require a level of risk to be incorporated into the portfolio, the IFISA could help to balance out the volatility often experienced with Stocks and Shares ISAs.
As well as this, while it is recommended that investments in a Stocks and Shares ISA are held for a minimum of five years in order to allow time for falls in value to recover, most IFISAs will have a fixed term of between two and four years. So, experienced investors with both medium-term and long-term investment goals could benefit from holding both products in their ISA portfolio.
Important note: although the IFISA can be less volatile than a Stocks and Shares ISA, it is still an investment product whereby capital is at risk and returns are not guaranteed.
They contribute their full ISA allowance each tax year
At present, the annual ISA allowance is £20,000. That’s £20,000 tax-free to save and/or invest each year – and for experienced investors, subscribing the allowance in its entirety every year is an important consideration when looking to maximise potential returns.
This is particularly evident when considering an additional-rate taxpayer would need to target a rate of return above 14% outside of an ISA tax wrapper in order to receive potential returns equivalent to those often targeted by an IFISA.
And remember, as soon as 6th April comes around, the annual ISA allowance is reset, and you can not carry any unused allowance over from one tax year to the next. Therefore, to ensure you are making the most of your allowance, make sure there is none leftover when the new tax year arrives.
To put the benefits of always utilising the annual ISA allowance in full into perspective, note the below illustration. This is an example of the potential sum an ISA saver or investor could have if they had contributed the maximum allowance each year since the introduction of the ISA in 1999 with an interest rate of both 5% and 7% for comparison.
They utilise ISA transfers to maximise returns
Though the aforementioned annual ISA allowance is a generous way of saving and investing tax efficiently, experienced investors will be aware there is a way of saving or investing what could be substantially more than that each tax year. This is possible through ISA transfers.
Some ISA holders will be unaware that the ability to transfer one ISA to another exists at all, whilst others may believe that doing so would contribute towards the annual ISA allowance, but this isn’t the case.
Provided the official ISA transfer process is followed, the transfer of funds (in-part or whole) from either one ISA to another of the same type with a different provider or to a different ISA product altogether can be done without leaving the tax wrapper and therefore without deducting from the holder’s annual ISA allowance.
Experienced investors often utilise ISA transfers as a means of adjusting their ISA portfolio when one of their existing ISA products or providers no longer aligns with their goals or requirements.
Importantly, ISA transfers are not governed by the £20,000 annual ISA allowance. As a result, an experienced investor with, for example, £50,000 in a Cash ISA who has become disillusioned with the rock-bottom interest rates and would therefore like to add more risk to their portfolio could transfer £40,000 into a Stocks and Shares ISA or IFISA to aid with diversification and to target higher potential returns.
Or, if after taking the appropriate advice an experienced investor decides they would like greater visibility and control over their investments, they could transfer any amount from a Stocks and Shares ISA to an IFISA.
Using the annual ISA allowance to maximise potential returns
When you consider that some investors have in fact become ISA millionaires by using the annual ISA allowance to its full potential, it’s clear that the tax-efficient benefits of an ISA are not to be underestimated.
Through spreading the allowance across a range of ISA products, using up the full £20,000 each year and utilising ISA transfers, experienced investors are maximising their ISA allowances by building diversified portfolios with the potential for greater target returns when compared to alternative products.
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).