The Individual Savings Account (ISA) has long been one of the UK’s favourite savings and investment options. Introduced in 1999, their tax-efficient wrapper - which means any returns aren’t liable to income or capital gains tax - sees investors wanting to take full advantage each year.
There are various rules that apply to both the ISA wrapper as a whole, and the individual products that fall within it.
When you're considering your ISA options, two of the most common questions for savers and investors are;
- How many ISAs can I have?
- How many ISAs can I open in one tax year?
Before making any descisions, it's important that you understand the rules around how many ISAs you can have overall, and how many you can open in single tax year. Any mistakes and you could lose your tax benefits.
How many ISAs can I have?
In theory, you can have as many ISAs as you want. In practice though, this probably isn't ideal. For example, if you decide to open a different Cash ISA and Stocks and Shares ISA with different providers each year, you will soon end up with a portfolio that may become difficult to track and manage.
The key question is;
How many ISAs can I open in a single tax year?
This is the really important point - get it wrong and this will affect you tax free returns.
The current tax year runs from the 6th April 2020 to the 5th April 2021, and each tax year UK based savers and investors over 18 years old have an annual ISA allowance (which is £20,000 in 2020/21).
In a single tax year, this allowance can be invested in one specific type of ISA with one provider.
If you're over 18 years old, you can choose to split your annual ISA allowance over four different types of ISA;
- Cash ISA
- Stocks and Shares ISA
- Innovative Finance ISA
- Lifetime ISA*
*Please note - annual investment into a Lifetime ISA is capped at £4,000.
Splitting your ISA allowance across different types of ISA can be useful. This approach allows savers and investors to build a diversified ISA portfolio and structure it in a way that meets your overall investment objectives and risk appetite.
For example, Investor #1 - who is a more cautious investor - may choose to save their total £20,000 annual ISA allowance in a Cash ISA. The rate might not to too attractive (the best Cash ISA rates are typically around 1% per annum and barely keep pace with inflation), but the returns are guaranteed.
However, Investor #2 - a more experienced investor - may choose to take a bit more risk, splitting their £20,000 ISA allowance across a number of different types of ISA. For example;
- Cash ISA - £5,000 with a guaranteed return of circa 1% per annum.
- Stocks and Shares ISA - £5,000 with a target return of circa 5% per annum. This will be subject to the volatility of the stock market.
- IFISA - £10,000 with a target return of circa 7% per annum.
It's important to bear in mind that each of the above are very different types of ISA. The Cash ISA is a savings product which benefits from up to £85,000 protection form the Financial Service Compensation Scheme (FSCS). On the other hand, the Stocks and Shares ISA and IFISA are investment products, and as with all investment products, your capital is at risk and returns are not guaranteed.
Each ISA have different pros and cons, and different risk/return profiles. The best type of ISA for you will depend on a number of factors, including;
- your age
- your savings or investment objectives
- your risk appetite
- you investment experience
It's important to understand that risk/return profile of each type of ISA and the annual ISA allowance clearly before investing.
Understanding your ISA allowance
Every tax year, savers and investors are given a generous ISA allowance. For the 2020/21 tax year, it’s £20,000.
Both Adult ISA (Cash, Stocks and Shares, and Innovative Finance) and Junior ISA allowances have consistently been on an upward trajectory.
The Adult ISA allowance rose from £15,240 to £20,000 in the 2017/18 tax year, where it’s stood ever since, and the Junior ISA allowance rose from £4,260 to £4,368 in the 2019/20 tax year - with an even bigger leap in 2020/21, as the Junior ISA allowance rose to £9,000. Separately, whilst the Lifetime ISA allowance hasn’t increased since it was first introduced in 2017/18, it offers a generous £4,000 allowance per year.
Clearly a generous allowance, understanding your available ISA allowance is key, as knowing how much you can invest into the ISA wrapper as a whole is just as important - if not more so - as understanding how many ISAs you can invest into.
Splitting your ISA allowance
The reason behind this is generally speaking, there’s no limit to the amount of ISAs you can have in total. If you’d opened one Cash ISA every year since 1999, you would currently have 21 ISAs - and that’s without accounting for any of the other ISA products within the ISA family.
This is all entirely appropriate, however the basic limitation is in relation to where you allocate your allowance, as you’re only able to pay into one of each type of ISA per tax year.
What this doesn’t mean, however, is that you’re restricted to having only one type of ISA each tax year, as you can split your ISA allowance across multiple different ISA products.
And this is where the real power of ISAs can become apparent.
As long as your total ISA product subscriptions don’t exceed your annual ISA allowance, you have the opportunity to reap the benefits of each ISA individually. This can be hugely powerful in many ways, such as by giving your investment portfolio a strong level of diversification by allowing you to spread your investment across a range of asset classes in order to mitigate risk.
Take Mr A as an example. He currently has £50,000 in a Cash ISA, but he’s becoming increasingly disillusioned with the low interest rates on offer. Deciding that in the 2020/21 tax year he wants to diversify within the ISA wrapper, he’s aware that Cash ISAs are the safest ISA available (as they’re a savings product, not an investment product), so he decides to keep his original £50,000 in his Cash ISA.
However, with the ISA allowance reset in April, Mr A will have an additional £20,000 to invest and as an experienced investor, he plans to subscribe £10,000 to an IFISA, investing in a property backed fixed term bond that will create jobs and provide homes in his local area. Mr A then decides to add £6,000 to a Stocks and Shares ISA, and as he wants to give his child a head start at getting on the property ladder, he subscribes his final £4,000 to a Lifetime ISA.
Read more: compare IFISA eligible fixed term bond rates
ISA planning for the new tax year
Being able to hold more than one ISA product can be hugely beneficial. Allowing investors to diversify without needing to move away from the tax efficiency of the ISA wrapper, you can split your annual allowance between a Cash ISA, Stocks and Shares ISA and an IFISA in any ratio that’s preferrable - and even invest up to £4,000 per year into a Lifetime ISA without impacting on your allowance.
Mitigating risk whilst allowing you to target returns that are more generous than many other investment options, you do need to be exposed to a certain degree of risk (excluding with Cash ISAs), but for many experienced investors, the level of risk is acceptable and directly proportional to the potential returns.
An important consideration within most experienced investor’s planning for approaching tax years is having confidence that you’re making the most of the available ISA products to directly help you develop a strong portfolio that helps you meet your wider portfolio requirements.
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).
Originally published 12th February 2020, updated 6th May 2020.