Make the most of your ISA allowance
Robin Bailey, Nationwide's director of savings and investments, provides some top tips for those looking to incorporate ISAs into their financial planning.
As the end of the tax year gets ever closer, it is expected that more and more people will open or top up their ISAs before they lose this year's annual ISA allowance forever. However, with different types of ISAs to contend with, it is easy to get confused with what's on offer and, most of all, what offers you the best return for your savings.
1. Use it or lose it - cash ISAs are saving consumers £680 million in tax over the year
There are very few opportunities in life to ‘beat the tax man' and one of those opportunities is to take out an ISA. ISAs are a great way to save and, looking at cash ISAs alone, the total amount deposited in them is £200 billion. We estimate that cash ISAs alone are saving consumers over £680 million in tax a year - clearly a substantial saving.
However, although ISAs have been available for quite some time now, we believe that around two thirds of eligible people do not have a cash ISA and only 1 in 7 has a stocks and shares ISA. Many consumers are therefore not taking advantage of their full ISA tax break and, what's more, once a new tax year begins, the previous year's annual ISA allowance is lost forever.
2. Understand your attitude to risk - cash, stocks and shares, or both?
Savers have varying attitudes to the risks they are prepared to take with their money for greater potential returns. Before committing to any ISA, a saver should consider their attitude to risk, their own individual circumstances and the return they are looking for on their savings. And, depending on what they are saving for - for example a rainy day, emergency funds or a wedding - attitudes to risk and return for those different pots of their money may differ.
There are a range of ISA options with different rates of potential return depending on your attitude to risk.
Cash ISAs - minimal risk
These are deposit accounts and are ideal for cautious customers or for holding emergency funds and, typically, customers can find a range of easy access, notice and fixed rate cash ISAs. Cash ISAs are also ideal as a first port of call for cash savings.
Cash ISAs that are linked to the stock markets - minimal risk
Cash ISAs linked to the performance of stock markets are designed to provide the potential for stock market linked growth and to return at least the customer's original capital at the end of the term. This means the initial capital investment is protected,
Stocks and shares ISAs - varying degrees of risk, up to high risk
On the other hand, if a customer wants their money to work potentially harder than deposit-based accounts, a stocks and shares ISA portfolio may be ideal. These should be held for a longer term, typically five years or more and their suitability depends on your attitude to risk and desired return, as stocks and shares can go up as well as down.
3. Consider all options - 2009 was the best year for stocks and shares ISA since 2001
When it comes to building a balanced financial portfolio, getting the combination right is important and only by considering all options can your financial needs be met. Although cash ISAs are the most popular, stocks and shares ISAs, are increasing in popularity. In 2010 stocks and shares ISAs saw sales reach £3.9 billion, their best year since 2001. There could be a number of factors for this, with one of them being the low interest rate environment making stocks and shares more attractive in comparison to standard savings accounts. Unfortunately, too many customers stop once they have used their cash ISA allowance and fail to take full advantage of their full £10,200 allowance so ending up paying tax on the interest they earn on their remaining savings. Whether an individual should take out a stocks and shares ISA will depend very much on their attitude to risk, but for many it is the easiest way to start investing in equities.
4. Need a regular income from your savings and investments?
Some savers - especially those who are retired - like to receive an income from their savings and investments. Nationwide offers a number of options, such as the Fixed Rate ISAs and stocks and shares ISAs, which give the opportunity of receiving a regular income with no further tax to pay.
For example, a customer who has fully maximised their cash ISA allowance over the last four years (£13,200) and is planning to maximise their cash ISA allowance of £5,100 this year, will have a balance of £18,300 to invest. Assuming customers receive a rate of 2.50% interest, they would receive an income of £457.50 per annum, tax free.
If savers consider investing in stocks and shares ISAs as well, they could increase the amount of money invested in an ISA over the same time period from £18,300 to £38,600. Doing so would allow investors the potential for additional capital growth on their investment.
Nationwide offers a number of savings accounts and investment funds which are specifically designed to generate income for the consumer. Financial advice is available to help customers understand their options, identify their attitude to risk, along with their investment goals, and to help them build a balanced portfolio to meet their needs.
5. Upcoming increased allowance is great news for savers - from £10,200 to £10,680
The fact that ISA allowances will continue to rise each year is great news - more savers will be able to save more of their money without the taxman getting their hands on it.
Overall, I think the run-up to the end of the tax year is an exciting time for those looking to invest in an ISA. Unfortunately, there are still a large number of eligible people without an ISA, so my biggest piece of advice is simply: use it or lose it.