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Six steps for ISA investing in peace

The Individual Savings Account passed its 18th birthday last year and has undergone as many drastic changes as any teenager.

ISAs grew out of PEPs – private equity plans. But they were invented by the Tories, so Gordon Brown didn’t really like that and he changed the name to ISA (helpfully for product providers, still three letters) and made them more flexible. That’s politics!

The big providers like to call the few weeks before the end of the tax year (April 5) ‘ISA Season’. This implies a level of behaviour among savers and investors who leave it all to the last minute and then flap, like attacking the nearest crocodile to the canoe, and buy any old ISA. But the organised saver and investor doesn’t wait until the last minute, rather they take their time and makes a calm and rational decision.

This year (2018/19) your limit is £20,000 split any way you like among ‘Stocks and Shares’ and cash. You don’t pay tax on savings in a cash ISA. Cash goes in, gets interest added to it and then cash plus interest comes out for whatever purpose. The Junior ISA has a limit of £4,260 and can be opened for any child under 16. There is a delicious anomaly here in that if your child is 16 or 17, they get two ISA allowances – the JISA allowance and the adult cash ISA allowance of £20,000, but be aware that a junior ISA converts to an adult ISA when the child turns 18.
As simple as painting by numbers in black and white.

There’s always risk with a stocks and shares ISA, because you are investing in the markets, you need to think carefully if this is the right investment for you. On the other hand, you may access bigger rewards and faster growth. 
There are however, some other forms of a tax-efficient savings wrapper.

The Help-to-Buy ISA - where first-time-buyers can save up to £200 a month. Then the Government will give you a 25% tax-free boost. Save £1600 for the minimum £400 bonus or £3,000 maximum on £12,000 savings.
The Lifetime ISA – where those aged 18 to 50 can save up £4,000 every tax year either for retirement or their first home. Again, the Government will give a 25% boost. And there is an Innovative Finance ISA - which invests in peer-to-peer lending schemes like Zopa and Ratesetter.  But these are specific, not offered widely, and certainly not for every palate.

There are abundant ways of choosing which product is best for you but before you do, let us help you narrow down your search a bit with a few easy steps. 

 1. Have a Plan. For first timers especially, what are your savings goals? Do you need instant access to your cash, in which case you will sacrifice some of the best available rates? If you don’t need access to all of it, perhaps consider getting a better interest rate with a longer-term lock-in.
 2. What is your attitude to risk? If you aren’t bothered by top performance, but instead prefer the safety of cash, then don’t bother with stocks and shares.
 3. Keep an eye on your savings rate. Just because you’ve snapped up the headline rate does not mean it will stay that way. Especially considering that the Bank of England base rate may rise in the next few months.
 4. Never be afraid to transfer out of a poor-paying ISA. It’s your money – make it work as hard as you can.
 5. Diversify. Spread your risk, maximise your reward. Think about a blend of stocks and shares and cash.
 6. Take your time. You have another 11 months before the deadline and the noise starts again.

 By Steve McDowell


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