What’s the best ISA strategy for you?
Annabelle Williams, personal finance specialist and Gary Shepherd, investment writer at Nutmeg, the digital wealth manager
Saving and investing used to be for scrooges and squares, but they’ve become pastimes for millions of people who know that being financially savvy is far from geeky – it’s the way to fund their best life. Strategising, maximising and squirrelling away more of their income has become a lifestyle for legions of younger Brits, helped along by online communities who share tips on having ‘no-spend’ days or weeks, growing their wealth through investment and
potentially reaching complete financial freedom.
Among the best tools for reaching your money goals are ISAs, which are savings and investment accounts where people don’t pay tax on the interest or investment returns they receive. Each person has an annual allowance of £20,000 which can be spread across cash or stocks and shares ISAs – although some like the Lifetime ISA have lower limits.
Knowing which ISAs will give you a fighting chance of reaching your future goals can be complicated, so we asked author and expert in personal finance Annabelle Williams and investment specialist Gary Shepherd about their personal ISA strategies.
ANNABELLE
Money was a struggle for my parents throughout my childhood and those memories make it hard for me as an adult to put money away into anything that’s not immediately accessible. Even though covering stock markets has been the bread and butter of my working life, starting to invest my own money was difficult for me. Any savvy investment has to be left to mature for at least three to five years – but what if I need the money before then?
The same goes for pensions – I’m well aware that taxpayers get a top-up of 20 or 40 per cent (depending on their income tax bracket) but I won’t be able to make withdrawals from my pensions until the age of 57 so that money is locked away until then, (today’s fifty-somethings can withdraw from their pensions at 55 but the age is slated to rise to 57 for today’s thirty-somethings).
So my ideal ISA strategy focuses on having as much choice as possible around when I can access my savings, while maximising the benefits available to me. That means having a cash ISA stocked with the finest English pounds, ever-ready and waiting for me to withdraw if disaster strikes. Alongside this, I have a stocks and shares ISA earmarked for when I start a family in five years’ time. Meanwhile, I can put up to £4,000 a year into a Lifetime ISA until I reach 50 and receive a 25% government bonus. That money is invested, and even if not used for a house purchase it can be withdrawn from the age of 60 – slightly different to the age when I can get at my pension savings, which will give me options.
With pensions I’m playing catch-u as I wasn’t entitled to a pension with any employer until I was aged 28 – but even then I was earning so little that I contributed just £30 a month on the minimum rate. So now I’m putting as much as I can afford into a workplace pension to maximise tax relief/get my employer’s matching contribution. Pensions will give me a range of options when I’m older; I could withdraw a cash lump sum with no tax to pay, the money can be converted into an annuity which pay out a set amount of money for life or I could keep it invested and live off the returns.
GARY
Thinking back, I’m very grateful to my late grandad for opening my first cash ISA for me not long after they were introduced in April 1999. Although it was a very modest sum, interest rates were a little higher back then so the accumulation helped me both to pay for the some of the essentials in early adult life and to appreciate the value of tax-efficient saving. I’d love to say the personal finance bug stuck with me, but it wasn’t until my late 20s, when I opened a stocks and shares ISA, that I truly began to pay full attention to investing for the future. I still have that stocks and shares ISA, investing a regular monthly sum into it to take advantage of the benefits of pound-cost-averaging and putting the money to work during market dips.
Having not so long ago passed 40, my attention is now very much on saving for retirement; I am taking advantage of a generous workplace pension scheme, while also now saving regularly into my SIPP, which I hold with Nutmeg. Having a working knowledge of investment markets, my stocks and shares ISA and personal pension are a key focus going forward in the coming years.
There is always the option of taking advantage of a cash ISA allowance, and though this comes without the risk of investments, the lowly rates on offer from high-street banks remain way below the current rate of inflation so this is not a priority for me. I’d rather put my savings to work – though of course keeping some cash in reserve should the unexpected happen. Being over 40, the Lifetime ISA is not an option for me. I also currently don’t have any children, but I have encouraged my family to invest in my niece and nephew’s Junior ISAs, which I make investment decisions for on behalf of their parents.
Given I have a regular income from my job, with no significant outgoings beyond my mortgage and bills (and maintaining my expensive vinyl records habit!), I’m happy to invest for the long-term. Despite recent market volatility and ongoing concerns around the eroding effects of inflation, history shows us that risk assets tend to outperform in the long term.
For more information – and to start your own investment journey go to nutmeg.com As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Tax treatment depends on your individual circumstances and may be subject to change in the future.