What you need to know to maximise your ISA investments

By Jo Bentham13th August 2021

For over two decades, the Individual Savings Account (ISA) has existed to aid both savers and investors in making their capital work harder and maximising their potential returns.

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Now boasting four Adult ISA products (the Cash ISA, Stocks and Shares ISA, Innovative Finance ISA (IFISA) and Lifetime ISA) alongside the Junior ISA, the tax-efficient vehicle which renders all returns tax-free is still as popular as ever. 

This was showcased in 2019/20, when the market value of Adult ISA holdings hit a record £620 billion, with 13 million accounts contributed to and circa £75 billion in new subscriptions. 

But to ensure you’re using your ISA correctly – and making the most of what it has to offer – there are some important features to consider. 

 

You must remaining within the annual ISA allowance – and utilise as much of it as possible

The annual ISA allowance has been steadily increasing since it was introduced in 1999. Starting out at just £7,000, savers and investors now have a generous £20,000 (as of 2021/22) to subscribe as they see fit each year. 

It’s crucial that you do not exceed the stipulated allowance – any amount in excess will not benefit from tax-free status and you may be liable to a penalty by HMRC. 

Remaining within the limit is your responsibility, therefore it’s vital you are keeping track of your ISA allowance usage throughout the year and across all ISA products to which you contribute. 

But as long as you are not exceeding the allowance, using it in full – or as much as possible – is an important consideration for experienced investors in particular. 

A key reason behind this is it is not possible to carry any unused allowance into the next tax year, as it is given on a ‘use it or lose it’ basis. Thus contributing the full ISA allowance where possible is vital as this is likely to be one of the most tax-efficient components of an experienced investor's wider portfolio. 

This is even more important amidst the current low interest rate environment, where the ISA’s tax-free status could have an advantageous impact on boosting potential returns. 

And when spreading the ISA allowance across ISA products – which is possible as you are able to open and subscribe to more than one ISA each year – it has the potential to allow experienced investors to build a well-balanced portfolio that meets their different investment needs. 

 

You are able to open and subscribe to more than one ISA per tax year

The ability to open and subscribe to more than one ISA each tax year is a particularly beneficial one.

The current tax year runs from 6th April 2021 to 5th April 2022, and in a single tax year you can choose to split your allowance over the four different types of ISA if you are over 18 years old.

This enables experienced investors to build an ISA portfolio that can cater to multiple investment goals and timeframes. 

For example, experienced investor #1 who is looking for an ISA to supplement their pension in order to build a strong retirement fund for later life could find a Lifetime ISA is an appropriate option. Boasting a 25% Government bonus up to a maximum of £1,000 per year, the Lifetime ISA can be extremely beneficial in boosting a retirement fund (please note the annual subscription limit for a Lifetime ISA is £4,000 and this falls within your £20,000 annual ISA allowance). 

But if this investor is still some way from retirement and would also like funds accessible to them in a short-medium timeframe, an IFISA with a fixed-term of two to four years could be an important consideration – as long as the investor is willing and able to take on the increased risks associated with an IFISA. 

Therefore experienced investor #1 may choose to subscribe £4,000 to a Lifetime ISA and their remaining £16,000 to an IFISA. 

On the other hand, experienced investor #2 may want to invest into equities for the long-term with a Stocks and Shocks ISA, but also be looking to balance the well-known volatility of equities with an IFISA that is uncorrelated with stock market fluctuations and a Cash ISA so they always have easy-access to cash when needed. 

For this, experienced investor #2 may choose to subscribe £5,000 to a Stocks and Shares ISA, £5,000 to a Cash ISA and £10,000 to an IFISA. 

By doing so, both experienced investor #1 and experienced investor #2 are using the ISA allowance to its full potential in that tax year and splitting it across multiple ISA products that can aid in meeting their goals and timeframes. 

 

There’s an official ISA transfer process that must be followed

Being able to conduct an ISA transfer has significant benefits, and they can allow you to save or invest what could be considerably more than your £20,000 annual ISA allowance each tax year when completed correctly. 

But with ISA transfers, completing them correctly is key. You must never attempt to withdraw funds from one ISA with the intention of subscribing it to another without following the official ISA transfer process. This can remove them from the ISA wrapper and result in reinvestment being deducted from your current ISA allowance.

However, following the ISA transfer process – which will differ on a provider-to-provider basis, therefore you must contact the provider to begin the transfer in – means nothing will be deducted from your current ISA allowance. You are also not restricted to staying within the ISA allowance when transferring funds, as ISA transfers are not dictated by the allowance, providing opportunities to essentially invest up to the total value of your savings or investments held within your ISA wrapper.

Whilst it’s clear ISA transfer can be positive, there are some rules and features associated with ISA transfers you must keep in mind. Firstly, if you want to transfer money invested into an ISA during the current tax year, you must transfer all of it. This doesn’t not apply  if you wish to transfer money invested into an ISA in a previous year – in these scenarios, you can choose to transfer all or only part of it.

And beneficially, there is no limit on the number of transfers you are allowed to make, whether that’s in one tax year, or over your lifetime, giving you control over your portfolio to allow you to rebalance as and when required.

 

Utilising your ISA to its full potential

The ISA and its core features – from the ISA allowance to ISA transfers – offer experienced investors in particular unrivalled opportunities to maximise their potential returns by saving on what can often be significant tax bills. 

And understanding the intricacies of these features and how to utilise them in the correct manner is imperative for ensuring you make the most of your ISA.