As this year’s ISA deadline fast approaches on 5th April, now is the last chance to take advantage of that £20,000 tax-free allowance but, with so many account options available, many investors are often left wondering which will work best for them.
With no income or capital gains taxes to worry about, the compounding growth of investments added regularly in small amounts can make a huge difference to a person’s financial future.
Although some charges need to be considered when withdrawing money or calculating returns, the overall tax advantages of ISAs are hugely beneficial to investors.
Here, Trustnet looks at the various ISA options available to investors and asks which is most suitable depending on an individual’s situation and goals.
Tim Bennett, head of education at Killik & Co, said that while cash ISAs (which work similarly to regular savings accounts) are often a good option as a safety net, today’s high inflationary environment – which hit 6.2% in the UK last month – means investors’ money will lose a lot of purchasing power over time. As such, they have not been included.
Older Savers
Those nearing retirement have a range of expenses to consider when they stop working and there is often some confusion as to whether ISAs or pensions are better at offering financial support during this time.
Weighing up the options, Bennett said that pensions are generally the better option in this scenario, especially for low-to-average income earners.
Not only do they have generous tax reliefs, but employers will contribute to them over a number of years, increasing the available allowance.
This was echoed by Sean McCann, chartered financial planner at NFU Mutual, who said: “The tax relief available from pensions can give a significant boost to returns, particularly if you’re going to be in a lower tax band when you take the money out.”
In his opinion, the 3.6 million people in the UK aged between 55-64 with an average ISA value of £35,337 would be better off adding that capital to their pension instead.
However, Bennet did warn high earners to be wary of the maximum pension limit of £1.1m, which can attract penalties if exceeded.
If the cap is reached, he recommended switching to an ISA instead as they do not hold a lifetime value limit.
Furthermore, older people should be aware that pensions are often free of inheritance tax in the event of death whereas ISAs are not. Retirees should therefore consider spending their ISA savings first so that some money can be left to family if worse comes worst.
Young Adults
One of the main financial aspirations for people in this age range is to own a house, or for older millennials, to save for retirement and a Lifetime ISA (LISA) could be helpful in achieving this.
LISAs were set up specifically to assist young people in reaching these goals and the government will match 25% of any investment put into an account up to £1,000 a year.
However, if account holders want to put that money towards anything outside of purchasing property or funding retirement, they will be charged 25% of the withdrawal, in some cases losing more money than they put in.
Investors looking to save for the long-term can choose to keep their capital in cash or put it towards holding in stocks and shares, adjusting the risk exposure depending on how much volatility they are willing to withstand.
Children
Parents can set up a Junior ISA for their children, which will appreciate over time and turn into a regular stocks and shares ISA when the child turns 18.
Although investments should often have long-term horizons, savings in Junior ISAs have a much longer time frame before they can be accessed, leading to higher growth potential.
Therefore, Bennett suggested investing Junior ISA savings into more volatile assets, stating: “Surely if someone cannot take a bit of investment risk when they are a child, when can they?”
He also added that the smaller allowance of £9,000 doesn’t just need to be added to by parents – family and friends can also be encouraged to contribute as a gift on birthdays or Christmas.