The Individual Savings Account (ISA), introduced in 1999, has long been one of the UK’s favourite vehicles to both save and invest. Its tax wrapper renders returns free from income tax and capital gains tax, and there are now four main Adult ISAs available, as well as the Junior ISA – which can be used to save or invest on behalf of a child.
The unrivaled benefits of an ISA make it important for savers and investors to consider taking full advantage each tax year, and with numerous options to choose from within the ISA wrapper, the more time you have to prepare and seek advice from an independent financial advisor, the better position you’ll likely find yourself in.
Understanding the ISA allowance
For the 2020/21 tax year, the annual ISA allowance is £20,000 – where it has sat since 2017/18, after it increased from £15,240.
However, the allowance is subject to change. Any changes, or lack thereof, are announced in the Chancellor of the Exchequer's Budget, which this year will take place on 3rd March 2021.
Though there has been no movement in the ISA allowance for the last four years, it has been on a consistently upward trajectory since the introduction of the account, when it was just £7,000.
It’s important to note that each ISA has its own annual subscription limit – the maximum that can be subscribed to a certain type of ISA – and these may not always be inline with the overall ISA allowance.
As of 2020/21, the Cash ISA, Stocks and Shares ISA and Innovative Finance ISA (IFISA) all have a subscription limit of £20,000. On the other hand, the Lifetime ISAs subscription limit is a comparatively small £4,000.
For under 18s, the Junior ISA has a subscription limit of £9,000, which increased from £4,368 in March 2020’s Budget.
Having more than one ISA
One of the main questions surrounding ISAs is whether it’s possible to have more than one. The short answer is yes - and having multiple ISAs is a key consideration when looking to form a balanced portfolio and maximise potential returns - but there are several rules when it comes to having more than one ISA.
To start, you are only able to open and invest into one of each kind of ISA per tax year, with total investments capped at the annual allowance.
For example, in the 2020/21 tax year, you could open and split your ISA allowance across one Cash ISA, one Stocks and Shares ISA, one IFISA and one Lifetime ISA.
Splitting your ISA allowance can be incredibly useful when looking to build an ISA portfolio that meets both your investment objectives and caters to your risk appetite.
While a more cautious investor may choose to subscribe their full allowance to a Cash ISA, an experienced investor could opt to split it across a Stocks and Shares ISA and IFISA, giving them exposure to - for example - the FTSE100 and asset-backed property bonds.
Remember: the appropriate ISA for you will depend on your personal circumstances and appetite for risk. The Cash ISA is a savings product which is covered by the Financial Services Compensation Scheme (FSCS) up to £85,000, while the Stocks and Shares ISA and IFISA are investment products whereby capital is at risk and returns are not guaranteed.
Transferring your ISAs
It is important to point out at this point that the above only applies to new ISAs opened and doesn’t account for transferring a previous year’s ISA. With this possibility, investors have the opportunity to actually invest more than their £20,000 annual allowance.
By way of an example, investors opening an IFISA that was targeting a 5% return per annum could invest their entire £20,000 annual ISA allowance on 6th April. Assuming the target interest rates were achieved, the investor would have realised a tax-free gain of £1,000 in 12 months time.
However, that same investor could also transfer a previous year’s ISA - let’s use the example of £20,000 in a Cash ISA - into this IFISA. The investor would then have a total of £40,000 in their IFISA - which, assuming the interest rates were achieved, would produce a tax-free return of £2,000 in 12 months.
There are several intricacies to consider with ISA transfers and, as with all investment elements, it’s vital to take the appropriate independent advice where required, but bringing ISA transfers into your ISA planning could prove beneficial.
Utilising any unused allowance
Whilst considering your ISA options with time to spare before the beginning of a new year is crucial to making the most informed choices for the coming 12 months, it does have another clear benefit - you may find you haven’t taken full advantage of your current year’s allowance and can take action accordingly.
It’s important to note that the annual ISA allowance is offered on the understanding it can only be used within the current tax year. You can not carry any unused allowance over into a new tax year – therefore, if you have any of your 2020/21 allowance remaining, it could be prudent to consider how you may utilise it before the midnight deadline on 5th April.
As discussed above, to make the most of your ISA allowance, splitting it across a mix of savings and investment accounts is worth exploring – as long as your risk appetite and personal circumstances permit.
But the last year has been a confusing one for investors, and knowing where to invest amid the ongoing Coronavirus pandemic can be complex, even for the most experienced of investors.
Due to a fall in the Bank of England base rate – which was cut to 0.1% in March 2020 – Cash ISA returns are at rock-bottom lows. Coupled with the rate of inflation, while capital in a Cash ISA may be protected, its real world value is in fact decreasing
And though stock market fluctuations are normal and to be expected, the volatility throughout the COVID-19 crisis has shown just how extreme it can be. The week commencing February 24th 2020 was the worst for US and UK stock markets since the financial recession of 2007/08, with losses associated with Coronavirus surpassing £3.8 trillion in a single week.
However, a number of sectors have remained relatively resilient throughout and property in particular has proven to be buoyant, with the residential housing market consistently surpassing expectations after its closure during the UK’s first national lockdown.
With the IFISA proving particularly beneficial here, IFISAs enable investors to make the most of the continually booming housing market without needing to purchase property outright for the likes of buy-to-let.
Through a property-backed IFISA, investors can target tax-free returns in excess of 4% while also investing for impact and having control and visibility over the investment. Investors’ funds aren’t simply a number on a page or spread across a multitude of funds - they can be quite literally going towards building homes to combat the housing shortage the UK faces.
Making the most of your ISA allowance
The annual tax-free ISA allowance – and how you use it – is the key to maximising returns and making your money work harder. When used to its full potential, it can mean attractive tax-free returns for investors.
To make the most of your allowance, utilising it in its entirety each year – if you are able to – is key.
With the 2021/22 tax year fast approaching, the sooner you begin considering your ISA options, the better. You’ll very likely find yourself in a stronger and more confident position in terms of maximising the ISA for your personal circumstances - and could very well discover there is an opportunity to invest any unused 2020/21 allowance before 6th April comes around.