With the new tax year on the horizon, you will soon have a reset £20,000 ISA allowance available to subscribe to an ISA (or importantly, ISAs) of your choice. But amidst the current confusing and volatile savings and investment landscape, this choice may not be a simple one.
It’s clear that with their tax-efficient nature, generous allowance and variety of product options – some of which are still targeting inflation-beating returns even as inflation sits at a three-decade high of 5.5% – an ISA remains to be an important and valuable consideration for experienced investors in particular.
And what makes it all the more valuable is the ability to spread your ISA allowance across multiple products. Doing so is a crucial consideration as it allows you to build a balanced and diversified ISA portfolio, suited to your individual requirements, and benefit from the individual features of each ISA.
How many ISAs can you have?
In total, accumulated over multiple tax years, you can have as many ISAs as you would like. This means that technically, you could have opened a Cash ISA every year since their inception in 1999, meaning you would now have 22 Cash ISAs.
Whilst this likely isn’t the best idea in practice – as it could become difficult to track and manage your portfolio – it is entirely possible.
The more important question is how many ISAs you can subscribe funds to per tax year, as this does have a limit and getting it wrong will affect your tax-free returns. The answer, put simply, is four separate products.
In a single tax year, which runs from the 6th April to the 5th April the following year, you can choose to subscribe your ISA allowance to just one ISA, or you can split it across up to four – a Cash ISA, Stocks and Shares ISA, Innovative Finance ISA (IFISA) and Lifetime ISA.
However, you can not subscribe to more than one of the same type of ISA in the same year. As an example, you could not subscribe to two Stocks and Shares ISAs in 2022/23, even if one of them had been opened in a previous year.
But when opening a new ISA account with a new provider – for example, you opened a Cash ISA in 2021/22 but found a new Cash ISA provider for 2022/23 offering a better interest rate, and this is where you would like to subscribe your new allowance – you do not have to close your old one if you don’t wish to do so, as long as you do not attempt to add funds to both, and your funds can continue to generate a return within that ISA completely tax-free.
What could be particularly beneficial in this situation however are ISA transfers. This is because any funds transferred from an ISA that were subscribed in a previous tax year do not contribute towards your current ISA allowance.
Therefore, taking into account the above scenario, you could transfer capital from the Cash ISA opened in 2021/22 (in part or in full) to your new Cash ISA opened in 2022/23 as well as also subscribing your new ISA allowance to your latest Cash ISA.
What are the benefits of having more than one ISA?
The core advantage of having more than one ISA is the diversification and balance this can allow, providing experienced investors with opportunities to gain exposure to a range of assets whilst always benefiting from the ISAs tax-free wrapper.
Interest rates on the Cash ISA are hovering around all-time lows and being outstripped by inflation, but the Financial Services Compensation Scheme (FSCS)-protected product could still be a beneficial option for all-important cash savings due to its tax-efficiency.
The equities market has been extremely volatile and unpredictable over the past two years, but its potential for strong long-term capital growth means the Stocks and Shares ISA still has an important role to play in an experienced investor’s portfolio.
Furthermore, with the IFISA, experienced investors can diversify further with the addition of alternative investments – such as property bonds, which often target returns in excess of an inflation-beating 7% – to their ISA portfolio.
But remember: unlike the savings-based Cash ISA, the investment-based Stocks and Shares ISA and IFISA are not protected by the FSCS should your investment perform poorly (though the Stocks and Shares ISA is covered for up to £80,000 in the event your provider fails).
Being able to subscribe your ISA allowance each year to a mix of these products provides greater balance and enables you to meet a variety of saving and investment goals.
As an example, an experienced investor who would like to maintain some exposure to the equities market but would also like to add an ISA to their portfolio that can offer more structured, fixed target returns – whilst still understanding these returns are not guaranteed – may subscribe £2,000 to a Cash ISA (for instant-access savings), £8,000 to a Stocks and Shares ISA and £10,000 to an IFISA.
Alternatively, another experienced investor disillusioned with the performance of their Cash ISA, in which they have £30,000 contributed in past tax years, may transfer £10,000 of this to an IFISA in 2022/23, whilst also subscribing their full £20,000 2022/23 ISA allowance to the IFISA.
Considering your ISA options ahead of the new tax year
By now, the benefits of having more than one ISA should be clear – from balancing the fluctuations witnessed with a Stocks and Shares ISA with a more predictable IFISA, through to maximising potential returns by holding higher risk, higher return investment ISAs alongside the savings-based Cash ISA.
And with the new tax year just around the corner, it’s time to start considering how you will utilise your reset ISA allowance, as well as any unused 2021/22 allowance before you lose it.