Time is running out to use your remaining tax-free ISA allowance: these are your options

By Jo Bentham25th February 2021

On 6th April 2021, the new tax year begins, and with it comes a reset ISA allowance and more opportunities to invest tax-free. But in order to maximise potential returns, it’s important to ensure you have taken full advantage of any unused ISA allowance from 2020/21 before you lose it.

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For both savers and investors, 2020/21’s £20,000 tax-free ISA allowance was – and still is – a chance to reap the tax-efficient benefits of accounts including the Cash ISA, Stocks and Shares ISA and Innovative Finance ISA (IFISA)

And in order to make the most of the annual ISA allowance, utilising it in full each year – if you’re able to – is a crucial consideration, because you can’t carry any remaining allowance over into the new tax year.

Read more:download Making the Most of Your ISA Allowance, our free guide

 But if you have any unused ISA allowance from the current tax year, don’t worry – there’s still time to put it to work before 6th April. With three core Adult ISAs to choose from, you should be able to find an appropriate option for your personal circumstances and investment goals. 

 

A Cash ISA could still be a consideration for cautious investors

The Cash ISA is the most popular type of ISA on the market – its low risk profile, position as a savings product and Financial Services Compensation Scheme (FSCS) protection make it a valuable consideration for more cautious investors.

However, it’s important to be aware that with lower risks, come lower returns – and Cash ISA interest rates are dwindling. 

Already low pre-Coronavirus pandemic, cuts to the Bank of England’s base rate – which hit a record low when it was slashed to 0.1% in March 2020 – have resulted in rates offered on Cash ISAs falling to rock-bottom. 

According to Money Saving Expert, the best easy-access Cash ISA at present is providing a return of just 0.5%, whilst those able to opt for a fixed rate option can receive marginally higher at 1.15%. 

These interest rates are failing to keep pace with inflation, with data revealing savers who subscribed £10,000 to a Cash ISA 10 years ago would have had their capital eroded – even after the addition of interest, the value would now be just £9,772.

 

Investors with a long-term outlook could consider a Stocks and Shares ISA

It’s imperative that advice is sought from an independent financial advisor before deciding where to subscribe capital, but if your risk appetite allows, it could be worth considering the likes of a Stocks and Shares ISA or an IFISA if the Cash ISA fails to meet your investment goals. 

A Stocks and Shares ISA is the product most investors will think of when considering an investment ISA – it has been around since 1999, and target returns are typically in excess of 4%.

However, the Stocks and Shares ISA is an investment product, and a notoriously volatile one at that. It’s crucial to remember that investments can go down in value as well as up, meaning you could lose money.

Stocks and Shares ISAs are likely to be a better choice for investors with a long-term outlook, and you should be prepared to be invested for at least five years - allowing time for any falls in value to recover.

For an example of the volatile nature of the stock market, look back at the beginning of the COVID-19 pandemic in 2020 – very few companies were able to escape the falls, meaning most investors holding stock and shares in a Stocks and Shares ISA will have been affected.

But for those willing and able to take the risk, the potential returns on offer from a Stocks and Shares ISA could make it an attractive option. 

 

Experienced investors could benefit from an IFISA

On the other hand, if the volatility of the stock market is off-putting, or you’re looking to invest your unused ISA allowance into an investment with a medium-term, it could be worth taking a look at the IFISA.

One of the latest additions to the ISA family, the IFISA was introduced as a means of strengthening and accelerating the UK’s booming alternative finance market. 

Experienced investors with the appropriate appetite for risk are able to hold peer-to-peer loans and debt-based securities within an IFISA, while targeting high tax-free returns often between 4% and 8%.

Many investors have shunned the Stocks and Shares ISA as of late, but IFISA subscriptions have been on the rise. The latest data from HMRC showed a £5.2 billion decline in Stocks and Shares ISA subscriptions in 2018/19, whilst subscriptions to an IFISA increased by 18%

The IFISA has a multitude of benefits outside of the obvious tax wrapper. This includes the ability to invest into a range of assets, including property, green energy projects and SME lending. 

And though it is an investment product whereby capital is at risk and returns are not guaranteed, asset-backed options - such as the property-backed IFISA - that can have a first-ranking (or equal first-ranking) security over assets of the borrowers can offer an additional layer of security.

Opportunities to invest for impact by providing alternative finance to regional housebuilders – which in turn aids in the bounce-back of the UK’s economy and the delivery of much-needed housing – and the fact that the it is uncorrelated to both the Bank of England’s base rate and the fluctuations of the stock market make the IFISA an important investment consideration, particularly in the current climate. 

 

Choosing where to invest your unused ISA allowance

The ISA is a tax wrapper that’s been offer for over two decades now, and this continually proves to be a negative and a positive, depending on who’s asked.

For some investors, it has proven to be a route for them to become, quite literally, millionaires. Numerous stories and examples regularly circulate of people utilising their full ISA allowance each year and, through a combination of accounts and the benefit of compound interest, now sit with over one million pounds within a tax-free ISA wrapper.

Yet for others, it appears to be little more than a financial product they don’t give thought to - even though it’s not only providing tax-free returns, but as the above audience will attest, it’s arguably one of the best ways to save or invest funds each and every year.

And so with the new tax year on the horizon, regardless of which of the two camps you fall into, it’s time to act and determine where the best option is for you to start putting any unused ISA allowance you have to work.

 

 

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).