Ignore Isas at your financial peril, says JEFF PRESTRIDGE

We live in financially challenging times. Bills and taxes continue to rise, while higher interest rates are a double-edged sword, offering financial comfort to savers but inconvenience to mortgaged homeowners.

At such times, it may seem appropriate to put long-term savings aside. For some, it is even the only course of action available.

But if you can, I advise you to keep an eye on the future and keep saving through thick and thin.

Fortunately, while the country’s finances and ours are under pressure, we have a government that encourages us to save. It does this by giving us generous tax breaks for money we create in our business or personal retirement. It also allows us to build wealth in a Private Savings Account, a form of tax-free shell.

While most of us are automatically enrolled in a retirement plan by our employer, the same hand does not apply to Isas.

No one will push you into an Isa. They are for you to set up, fund and, at some point in the future, access when you need to, whether it’s paying for the vacation of a lifetime, a new car or our retirement income to fill in. It is up to you.

> The essential guide to Isas: What you need to know about tax-free savings and investing – and how to get started

I think Isa’s are hugely undervalued. Perhaps it’s because we’ve always been told that pensions are the bees – a result of the fact that we get generous tax credits on the pension contributions we pay, as well as additional payments from our employers.

But ignore Isas at your peril. Not only are they a perfect addition to retirement savings, they also offer a simplicity that pensions don’t have.

In short, think of an Isa as your tax-free fortress whose keys are owned by no one but you. Whatever you put into this financial fortress – cash, stocks or investment funds – the IRS can’t get behind any part.

The result is that all savings and investment income earned within an ISA is tax-free. In addition, any capital gains from investments are tax-free.

So when it comes to Isas, you can forget about the impending cuts to the annual tax-free dividend and capital gains taxes. And to top it off, any withdrawal you make is not subject to tax (unlike a pension, where most withdrawals are taxable) or subject to reaching a minimum age. Withdrawals are tax-free at any time. All rather convincing, I would say.

So use an Isa to build up tax-free wealth and financial independence later in life. Adults can stash up to £20,000 each tax year from April 6 to April 5 of the following year, while children can stash £9,000.

These are generous annual fees that I implore you to use, even if, like me, you have no way to stash away the maximum amount allowed.

As for the Isa strategy you adopt, it’s really up to you. The key is to be comfortable with the fundamentals of your Isa risk to the underlying capital.

Don’t be intimidated into doing anything beyond your normal risk tolerance, for example because of peer pressure, when friends brag about the rising value of their Isa over a pint in the pub. Do your own Isa thing.

Now that the Bank of England’s base rate is 4.25 per cent. compared to only 0.1 pc. in early December 2021, a cash based Isa now looks pretty attractive if it comes with an attractive interest rate.

Some cash ISAs that allow instant access pay 3 pc. interest rate or more, while fixed rate deals can be found above 4 pc.

Most of these top deals are offered by building funds and specialized online savings institutions.

Keep an eye on This is Money’s best-buy savings interest rates for an up-to-date overview of the best rates.

Due to a higher interest rate on cash savings outside an ISA, more people have to pay tax on their savings income because their annual interest is higher than the tax-free personal allowance. This is currently set at £1,000 for base rate and £500 for higher rate taxpayers. Transferring some of these savings to a tax-free money Isa is financially solid.

Long Game: Stocks & Shares Isas gives you the opportunity to generate a mix of capital and income returns over the long term

Shares and shares of Isas should not be excluded

While cash-based plans are the most popular type of Isa, stock and equity plans should not be ruled out.

Indeed, you can mix and match them by putting part of your contributions into a cash-based plan and the rest into another Isa that allows you to invest in stocks, mutual funds, and exchange-traded investment funds.

While the banking crisis in the US and parts of Europe has upset stock markets – and may continue to do so – stocks and shares of Isas offer you the opportunity to generate a mix of capital and income returns over the long term.

The best approach is to set up an online Isa with an investment platform such as AJ Bell, Bestinvest, Charles Stanley, Fidelity, Hargreaves Lansdown and Interactive Investor.

> How to choose the best (and cheapest) shares of Isa and the right do-it-yourself investment account

You can then invest when you want, how you want (for example in direct shares, mutual funds or a model portfolio designed by the platform) and according to your financial situation.

The only condition is that you adhere to the £20,000 annual limit.

Investing instead of saving also makes perfect sense as the basis for a Junior Isa (Jisa), which can be set up by parents for their children. This is due to the long time horizon – shooting of a Jisa cannot be done until the age of 18.

Still, the rules for investing apply to Jisas in the same way as they do to stocks and stocks Isas. That means spreading investments across mutual funds – and making monthly contributions instead of an occasional lump sum.

Some platform providers, such as Hargreaves Lansdown and Interactive Investor, are doing everything they can to bring Jisa clients to justice by slashing their fees to the bone. However, there is one last warning. If you’re concerned about using this tax year’s Isa stocks and shares or Jisa rights, put some money in first — and then invest it when you know where it could best be put.

In a financial services industry not known for making things particularly easy for customers, Isas is as straightforward a proposition as you’re likely to find.

They are a good financial habit that you should embrace with enthusiasm.