How do I maximise my ISA allowance
When it comes to maximizing your ISA allowance each year, there are several levels of understanding. To help you navigate this post more quickly, read the following statements and see which you are most likely to say. Then, you can skip to the related section:
- Errrrr, what’s an “Aye-zar”?
- What do you mean maximise my ISA? There’s a limit?
- Don’t worry, I’ve got ages.
- Don’t partronise me moneystepper. Obvs, I maximise my ISA every year. Like a boss. £5,760 in cash. That bad boy is maxed out. What? A “stocks & shares” ISA – what’s that?
- Yeah, I know, I know, a stocks & shares ISA. But, the stock market is too risky for little old me. My friends/parent/relative/made up person lost big on the stock market. It’s just a gamble and I’m no gambler.
- £11,520 nicely invested, half in my cash ISA, half in my stocks & shares ISA, just like I’m allowed to do.
- £11,520 invested in my stocks & shares ISA. Roll on 6th April 2014!!!
1. Errrr, what’s an “Aye-zar”?
Well, the first stage to recovery is admitting you have a problem.
An ISA is an “individual savings account”. Quite simply, it is an account which allows you to save money. More importantly, it allows you to invest money – yes, there is a BIG difference between the two.
You have to put your own money in the account. This means that it has already been subject to income tax. However, once invested into your ISA, you will never have to pay tax on it again.
2. What do you mean maximise my ISA? There’s a limit?
Because you do not pay any tax on your interest or capital gains (we’ll speak about these more later) in an ISA account, the government aren’t too keen on letting you invest everything in this account.
Instead, they set a limit on the maximum amount you can invest each year.
3. Don’t worry – I’ve got ages
The limit is applied every tax year. This means that you can only invest a certain amount of money every tax year. Once you miss the end of the tax year (5th April), you can no longer invest money for the prior tax year. If you forget about it, you lose it.
What is the limit? Well, it changes every year.
Therefore, if you haven’t fully invested yet for the 2013/14 tax year, you only have until 5th April to do so.
4. A stocks & shares ISA – what’s that?
Right, this is where things get a little complicated. Well, not really, but it’s a part many people don’t understand.
Your total ISA limit for 2014, for example, is £11,520.
You can save any amount of the total in the stocks & shares ISA, but only a maximum of half in the cash ISA.
- £9,000 Stock & Shares ISA ; £2,520 Cash ISA => ALLOWED
- £2,520 Stock & Shares ISA ; £9,000 Cash ISA => SORRY BRO, NO ENTRY!
Setting up a cash ISA is very simple. It is essentially just a bank account and the process is almost identical to setting up a bank account. All banks (whether high street banks or online banks) offer cash ISAs.
Stocks & Shares ISAs are a tiny bit more complicated to set up (but not majorly so).
There are two major types of stocks & shares ISAs: ISA funds & Self-select ISAs:
ISA funds are accounts with ISA providers (often banks, often not) where your investment is automatically made into that specific product. Take, for example, the HSBC FTSE All Share Index. If you sign up to this ISA, your money will be invested in a HSBC fund which tracks the overall UK stock market.
If you are going via this route, there is one key thing to look out for. There can (and will) be a charge. On the HSBC example (which is a comparatively cheap option), the initial fee is 0%, with an annual charge of 0.25%.
However, another option, the “Liontrust Special Situations” ISA fund charges an annual fee of 1.75%. Over time, this fee has a HUGE impact.
Self-select ISAs are just that. They are an account where you have the freedom to invest your money where you wish. You could buy individual shares in your favorite companies, you could buy ETFs or you could buy a range of the funds above. The benefit of this option is cost.
I personally use svssecurities, and would recommend them highly. They are very reasonably priced and I have found the customer support extremely helpful in the past. There is no annual charge on this account. In the current tax year, I used the majority of my stocks & shares ISA to purchase the Vanguard FTSE 100 ETF (VUKE). This fund has an expense ratio (annual charge) of 0.1%. To buy this ETF cost £5.75 (<0.1% one-off fee as I was investing around £8k). Given that I do not intend to trade this fund for many, many years, this one-off fee is essentially 0% over the life of the investment.
Therefore, my annual expense is reduced from 0.25% to 0.1%. It doesn’t seem like much, but with £10k invested every year for 20 years at an 8% return, this difference would add up to around £7,500!
You can support moneystepper by signing up to svssecurities today, and all trades in the first 30 days will only be £1. Therefore, if you sign up now, you can maximise your ISA allowance before the April deadline for only £1 in fees.
5. The stock market is too risky for little old me
I hear this argument a lot when it comes to investing in stocks & shares ISAs. People stop at the cash ISA limit as they don’t want to “gamble” their money in the market.
First of all, AND THIS IS ESSENTIAL, if you are thinking like this, please read this post on whether you should invest in property, cash or shares and specifically watch the video at the foot of the article!
Now, you should be convinced that investing in the market in the long-term is the right thing to do. No-one ever got rich by investing in fixed rate accounts!
However, if you meet the following criteria, you should consider keeping more in your cash ISA:
- You are saving for a short-term goal (less than 10 years) such as buying a house
- You are nearing retirement
- You are extremely risk adverse
If it’s the later, read that post again! Watch that video again!!
Even in these scenarios, I would suggest putting your money into the stocks & shares portion of your ISA.
Let’s say you are saving up for a house that you intend to buy in 5 years time. You could mitigate your risk (and if you are not sure, please contact a financial advisor) by investing in a fund or ETF which is split X% in equities and Y% in cash/bonds. The closer your goal, the higher the bond percentage will be. This way, you take a little bit of risk, but a manageable amount to ensure that you meet your goals.
6. Half in my cash ISA, half in my stocks & shares ISA
Go back and read step 5! Unless you are nearing retirement or saving for a short term goal, I believe that you should be putting your entire annual amount into your stocks & shares ISA.
Even in those two cases, you should consider the mix of equities vs cash/bonds available through ETFs and funds which may help you obtain a better average return, but reduce your volatility down to acceptable levels to meet your goals.
7. £11,520 invested in my stocks & shares ISA Roll on 6th April 2014!!!
Well done my dear friend. You have completed the ISA game.
A new game starts on 6th April 2014. Get ready. But, not too quickly…
If you have the full 2014 allowance of £11,880 ready now (see the note below for the ISA changes following the 2014 budget), should you invest it all at once on 6th April 2014, or should you dollar average it over the year? The traditional advice is to split your investment by putting in a fraction 1/X every 12/X months. The X would depend on your current diversity, the amount you are investing in total and your risk tolerance.
However, I’m not so sure. I personally didn’t know how I should invest my 2014 ISA allowance, so I researched the best method based on historical data from the past 30 years:
If you have any ISA questions, please ask them in the comments below and I’ll get straight back to you.
Update from the 2014 budget
Since this article was pubished, big changes have just been announced in the 2014 budget. They can be summarized as:
- The overall ISA limit is to rise to £15,000 from July from £11,520
- All of the new £15,000 allowance can be held in either cash or shares
- Savers can transfer funds freely between existing cash ISAs and shares ISAs
Whilst these changes are positive for short-term savers and long-term investors alike, they have very little impact on your method of investing your ISA. Therefore, all the rules above still apply, but you now can “max” £15,000 and this can be held in either a cash ISA (if you are saving for a short-term goal) or a stocks & shares ISA (if you are investing for the long-term).