JEFF PRESTRIDGE: My golden rules for your Isa
Nothing in the savings and investment world, backed by government support, comes without obligations.
Despite the increase in pensions in Chancellor Jeremy Hunt’s budget last week, there are still a myriad of rules about how much we can contribute without losing the booster rocket of tax relief.
But of all the ways the government reluctantly encourages us to become financially self-sufficient, I think the beauty in the parade is the individual savings account.
Please note: nothing in the savings and investment world is without obligation
It’s a friendly little number. A financial star. I beg you to embrace it and use it to build long term wealth.
The tax-friendly Isa is a financial fortress, with bulletproof walls protecting its contents from the clutches of the taxpayer.
Behind the solid walls lie tax-exempt rules, so the more you put in, the more your fort can help you achieve long-term financial goals: a supplement to a pension, or a vehicle used to support some of the good things in later life like a world cruise or vacation of a lifetime.
Delicious choices to make. Isas can be so powerful. Over the years I’ve observed them closely – and yes, I also use them to prepare for life when there’s no work left and slippers are the norm over Chelsea boots. Along the way I have spoken to hundreds of readers who have fallen in love with Isas.
Indeed, eight days ago I was minding my own business at a football game when I was approached by a retired gentleman who was happy to tell me that he and his wife Isa were millionaires. Not individually, I hasten to add, but collectively. How amazing. He was immensely proud – and rightly so. Their collective prudence paid off, leaving them with a super financial buffer for the rest of their lives.
So, how can you use your Isa to build a financial fortress? Here are a few golden rules I picked up along the way. Most of them are based on common sense and I’m sure many of you already apply some of them to your own Isa suite.
Get the best rate for your Cash Isa
We all need a helping hand in case something goes wrong in our lives – little things like a washing machine packing up or bigger issues like the car deciding it’s had enough or (God forbid) getting fired of your job.
Some people keep this stash of cash in a bank account – and use their tax-free personal savings deduction (£1,000 a year for base rate taxpayers, £500 for higher rate taxpayers) to protect most of the taxpayer’s interest.
But a majority of savers have held onto the fact that holding cash in an ISA makes more sense.
This is because tax-free interest is guaranteed, while a base rate taxpayer with around £29,000 in a non-Isa savings account is currently earning interest in excess of their £1,000 annual personal savings. A Cash Isa means you don’t have to worry about taxes – and you can usually access some of your cash when you need it.
As my colleague Rachel Rickard Straus pointed out, Cash ISAs are by far the most popular ISAs in the country. They are safe from a capital point of view (indispensable for many savers, especially those of a later age) and provide financial ballast for households.
If you are part of the Cash Isa gang, I just want to insist that you earn good interest. If not, switch to a provider that gives you a better deal. Rate comparison websites such as Moneyfacts.co.uk and Savingschampion.co.uk provide information to help you make this switch.
Readers often question whether Cash Isas are hip enough – and wonder if they should instead use their financial fortress to invest in stocks and mutual funds in hopes of better overall returns. There is no standard answer. If you like security in your financial affairs, cash is king and you should stick to it.
But if you have a long-term investment horizon, a more nuanced approach may be better: building a portfolio that includes cash as well as stocks and Isas stocks.
That’s what I do: use my Cash Isa to deal with occasional financial emergencies like paying a tax bill and leave my Investment Isa to surf the waves of the stock market.
Save every month to grow that pot
For those who like to use some (or all) of their £20,000 annual Isa allowance to invest, I prefer a conservative strategy to a more gung-ho one.
While some investors like to use their allowance as soon as a new tax year arrives (the next one starts on April 6) or wait until the current tax year is about to end (using a use it or lose it approach), I prefer a different method.
I think monthly investing is the best way for most Isa investors.
It means not putting all your money into the stock markets in anticipation of a sharp correction – relevant now given the market turmoil caused by the collapse of Silicon Valley Bank in the United States.
It also allows those of us who don’t have access to large wads of cash to participate in Isas.
With all investment platforms – the best providers of Isas Investing – you can set up a monthly direct debit from your bank account.
It then invests your money according to your specific instructions.
Indeed, on all platforms you can top up your Isa whenever and wherever you can. Leading platforms include AJ Bell, Hargreaves Lansdown and Interactive Investor.
Hard lesson to learn…but boring is best
I’ve learned to my detriment over the years that chasing investment trends — technology stocks, for example — is often a foolish game. Boring is better.
I prefer mutual funds over individual stocks for diversification reasons. And when it comes to funds, I like funds that are committed to a mix of income and capital growth.
This usually attracts me to equity funds – UK or global – and in particular equity income mutual funds listed on the London Stock Exchange.
Mutual funds have features that set them apart from the maddening investment crowd – and make them particularly Isa-friendly.
A big plus is their ability to generate growing income through thick and thin – a result of being able to manage the dividends they receive from their holdings so that the income payments they make to shareholders gently increase.
I have this confidence in my Isa. The income they throw away not only sits in my account, but is immediately used to buy more trust shares. Reinvesting dividend income is as close as you can get to investment nirvana.
Those interested in finding out more can take a look at the ‘income finder’ section of the Association of Investment Companies’ website (theaic.co.uk).
Do not forget about the little ones in the family
As a starting grandfather (passed twice), Junior Isas are on my radar. I can’t think of a better financial gift for a newborn than a Jisa.
Although the rules require my sons Matthew and Mark to open Jisas for Archie and Arthur respectively, I can contribute provided total payments are within the annual stipend of £9,000.
Indeed, anyone can. Like regular Isas, Jisas can be cash or investment based. But with potentially an 18-year time horizon before they are accessible, investing is best.
Have fun hunting Isa. Go build that fortress.
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