All savers will have a brand new, tax-free savings allowance from this Thursday, which is the beginning of the new tax year. Over the following year, you can save up to £20,000 in Individual Savings Accounts (Isas) completely tax free.
You can use this allowance however you like – all at once or throughout the year, and saving as much or as little as you can or wish to.
Here are our 20 golden rules to help build the biggest possible nest egg and make the most of your allowance.
The first ten predominantly apply to Cash Isas; the second half largely to Stocks and Shares Isas.
1) Why a little goes a long way…
Everyone over the age of 16 can save up to £20,000 every tax year in Isas. But most get nowhere near to using up their full allowance.
Steady growth: Everyone over the age of 16 can save up to £20,000 every tax year in Isas
Savers put away around a quarter of this amount on average, but many save considerably less.
So don’t be intimidated – just save whatever you can manage.
Squirrelling away a little bit here and there may not feel like it will amount to much, but over time it can significantly add up. Getting into the habit is key.
2) Do a check-up on your Isa every year
If you’ve not checked your old Isas in a while, you may assume they are quietly accruing interest and growing away for a rainy day. But this is not necessarily the case. Many Cash Isa providers offer an enticing one-year introductory rate, after which your savings are shunted on to a deal that pays out diddly-squat. Similarly, many providers increase rates offered to new customers, while keeping loyal savers on rock-bottom deals.
So make sure you check your Isas at least annually to ensure you are still getting a good deal. If you are not, transfer your money to a new provider or ask your existing one for a better rate.
3) Rethink if you’re getting less than 3%
Interest rates on Cash Isas have improved significantly over the past year and are now at their highest since February 2009.
There are a number of easy-access Cash Isas that pay over 3 per cent and several fixed-rate versions that pay over 4 per cent. If you are getting less than this, shop around for a better deal.
4) Save like a robot … with a direct debit
Save like a robot: Set up a direct debit or standing order into your Isa so that money is moved over automatically
Saving is hard. It requires self-control, delayed gratification and is a lot less fun than spending. So make it as easy as possible by removing the need for willpower altogether.
One option is to set up a direct debit or standing order into your Isa so that money is moved over automatically. Alternatively, use a ‘pay yourself first’ model – putting money into your Isa the moment you get paid so that you are not tempted to spend it.
5) Also Consider challenger banks
Millions of savers simply take out an Isa with their existing bank. However, if you want the best rates, you will have to look further afield.The so-called challenger banks often offer the best interest rates, while the high street banks have been slower to offer competitive deals. You can check the best Cash Isa rates at our sister website This Is Money’s savings tables. Go to thisismoney.co.uk/save.
6) It’s unfair… but best rates are online
Many savings providers offer better rates to customers online than to those who open an account in branch. We think this is deeply unfair. Customers should not be penalised for preferring to bank in person or not being comfortable or able to go online. However, this practice is increasingly common.
To get the best rates, don’t just rock up to your branch – check the latest rates online. If you cannot do it yourself, perhaps ask a trusted friend or family member for help, or even request in branch for assistance setting up an Isa online.
7) Withdraw money and pay it back in
Some, but not all, Cash Isas are flexible. That means you can withdraw money from your Isa and replace it – without the replacement counting further towards your allowance. If you may want to take money from your account and then replace it within the same tax year, make sure you pick an account that offers this flexibility.
8) Consider Isas for all the family
All family members are eligible for an Isa; adults can save up to £20,000 and under-16s up to £9,000 every tax year. Family members and friends can also pay into children’s Junior Isas to help set them up with an invaluable financial cushion. (See overleaf for more information).
9) Ttransferring between Isas
Switching Isa providers every year or two can help ensure you’re still getting the most competitive deal. However, be careful how you transfer your funds. If you withdraw your cash and transfer it into a new Isa yourself, your money loses its tax-free status. Ask your new Isa provider to manage the transfer instead and your tax-free wrapper remains unscathed.
10) Transfer wealth to your partner
Your spouse or civil partner can inherit your Isa allowance when you die – and vice versa. As well as their normal Isa allowance, they will be given an additional tax-free amount up to the value of your Isa at the time of your death.
11) You can take out more than one
You don’t have to choose between a Cash and a Stocks and Shares Isa – you can have one of each. That way, it’s possible to build up a bit of cash for an emergency as well as investments for your longer-term financial goals. Just remember: you can only pay into one of each type of Isa within any one tax year.
12) 1,666 could be your lucky number
If you plan to use your full annual Isa allowance, but don’t want to pay it in as a single lump sum, consider setting up a monthly transfer into your Isa of £1,666. Over 12 months, this will add up to almost £20,000.
13) Don’t wait until the right moment
There is little point in waiting for the best market conditions to invest. There could be a stock market crash waiting around the corner or markets could be gearing up for a massive boom – we just don’t know.
However, putting off investing until conditions might be better guarantees that you will not benefit from market returns.
To reduce the risk of investing at a bad time, drip feed your money rather than investing a lump sum. That way you’ll invest through all market conditions – good and bad – and hopefully it averages out over time.
14) Prepare for turbulence ahead
Financial markets may stay volatile for some time, with inflation proving stubborn and central banks pushing up interest rates even higher. But Susannah Streeter, head of money and markets at wealth platform Hargreaves Lansdown, says there are ways to ride this turbulence.
‘In uncertain times, it’s even more crucial that investors stay well diversified across a range of geographies, industries and asset classes and focus on their long-term goals,’ she says. ‘Investors may also want to consider funds that focus on companies that pay regular dividends if the economic weather turns harsher.’
15) Stay disciplined with your funds
At the beginning of the new tax year, many investors pick new funds to add to their Isa portfolio.
But Jason Hollands, managing director of wealth platform Bestinvest, suggests that investors should not get carried away.
‘My golden rule when investing in my Isa is limiting the number of funds in my portfolio,’ he says.
‘In my case, the magic number I have set is 20 funds. This stops me from being tempted to add yet another fund each year.
‘This discipline means I always review what I already hold before buying a new one and consider whether I could top up an existing holding instead.
‘This means that I don’t end up buying new funds that invest in areas or companies that I already hold enough of.’
16) Short and long term investing
Stocks and Shares Isas are likely to make you a higher return than a Cash version over the long term. But if you think you might need your money soon, investing will not be right for you.
Myron Jobson, senior personal finance analyst at wealth platform Interactive Investor, says: ‘I’m prioritising saving into my Cash Isa this year, rather than my Stocks and Shares one. I am finally closing in on my financial goal of buying my first property so will need ready access to my savings.
‘Due to the up and down nature of the stock market, investing is only suitable for the long term – typically at least five years.’
17) Try a core and satellite approach
To ensure you are not taking on too much risk, try a core-and-satellite approach to your portfolio. That means putting the bulk of your investments into a well-diversified fund or funds that invest in a large number of companies from all different sectors and geographies.
Then, use a sliver of your investments to buy funds or shares that are a bit more of a punt.
Boost: If you are saving for your first home, a Lifetime Isa may be a good option
For example, if you think UK smaller companies, global healthcare or even artificial intelligence are showing potential, you could put investments in these areas into your satellite fund options, without exposing yourself to too much risk.
18) Don’t forget Innovative Finance
These are the least popular member of the Isa family, but for some people may be worth considering.
They allow you to lend money using a peer-to-peer model. They tend to be riskier, but often offer good rates of return.
Ben Yearsley, investment director of Shore Financial Planning, says: ‘I have a Stocks and Shares Isa for the majority of my funds, but I also have an Innovative Finance Isa. These are typically for more sophisticated investors and are often more risky.
‘But, as the Bank of England base rate has increased, rates offered through Innovative Finance Isa providers have increased also.’
19) Homebuyers get an extra boost
If you are saving for your first home, a Lifetime Isa may be a good option. You can pay in up to £4,000 every tax year and get a 25 per cent top-up from the Government.
However, there is a long list of eligibility criteria that you need to check before going ahead.
Read This Is Money’s guide at thisismoney.co.uk/lifetime-isa.
20) Finally, Don’t be intimidated
Investing has become much easier over recent years. You do not have to pick individual company shares, have a view on the state of the economy or even have to pick your own investments.
There are a number of investment platforms that offer ready-made funds. You just need to answer a few questions about how much risk you’d be happy to take and how long you are investing for, and they will suggest a fund that is right for you.
Go to thisismoney.co.uk/platform for an excellent round-up of the best investment platforms.
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