Financial planner Bill Saunders gives advice on how to optimise your Isa allowance
TAILOR IT TO YOUR NEEDS
Short-term volatility should not be of concern, so long as you have the discipline to keep your nerve during market turbulence. Equities will always outperform cash in the long run. Equally, if you are younger and looking to save for a shorter-term goal, such as a deposit for your first home, a cash individual savings account (Isa) would be more appropriate.
DRIP-FEED YOUR INVESTMENTS
From 1 July, you can invest £15,000 tax-free a year into an Isa – a sizeable lump sum to invest in the markets. While you could be lucky, there is the risk that you could be investing just before a fall. Instead, consider using your allowance to invest up to £1,250 a month. In this way, even if the market does go down in the months following the initial investment, you will be buying more units at a cheaper price, which will benefit you when prices recover.
BE AN EARLY BIRD
Isas are 15 years old tomorrow and investors who regularly put money to work on the first day of the new tax year, rather than the last, are typically better off by £6,519. Analysis by Hargreaves Lansdown shows that if an investor had put their full Isa allowance into the FTSE All-Share from the outset of each tax year since 6 April 1999 they would now have £172,955, compared to £166,796 for a last minute Isa investor.
USE NEW OPTIONS WISELY
Currently it’s possible to switch cash Isas to stocks and shares Isas but you can’t transfer money the other way. That will change from 1 July, however. The new ability to switch freely from shares to cash could be an ideal way for older investors to lock in gains made on the stock market and reduce risk as retirement approaches. Conversely, if you have built up cash Isas over the years, it may be a good time to switch a proportion to stocks and shares, especially since interest rates are low.
If you are looking for a cash Isa, shop around for a competitive rate. But be wary of fixed-term plans, which may offer an attractive headline rate but tie you in for a number of years. With interest rates only likely to rise in the years ahead, better returns may be on offer a year or two from now.
• Bill Saunders is a certified financial planner and head of financial planning at Acumen Financial Planning