Why you should use up your ISA allowance

Individual Savings Accounts; ISAs

Tracy Dove, Thomas Oliver’s Financial Adviser based in North London and Essex, reviews why customers should use their Individual Savings Account (ISA) allowance in their financial planning. 

Tracy Dove said: ‘When I meet new customers and offer financial advice I am conscious of how many people are unaware of the advantages of investing into an ISA. Most people know there is a tax benefit, however, they don’t fully understand how the ISA works and how they can make significant gains by using up their ISA allowance every year. Instead they focus on the current low interest rate environment and the relatively low interest rates that banks offer on cash ISAs.

My first priority is to help customers understand the main features of ISAs, and its place as a government allowance vehicle. It is important to understand that an ISA is simply a way for you to grow your capital free from income tax. You invest into income producing assets. These assets include bank deposits, bank short term bonds, and fixed income assets. The ISA enables you to supplement your income without paying any tax. This becomes extremely valuable if you are able to use your annual ISA allowance every year over the long-term.

In the current 2017/18 tax year an individual can save up to £20,000p.a and a couple can save £40,000p.a.  For example - If you maximised your savings and used this allowance an individual could save every year for 20 years, and accumulate £400,000 in a tax free cash ISA. You would earn the annual interest rate on your savings. If we assume interest rates were 5% you would earn £20,000p.a. Even if the interest rate is only 2% this is still £8,000p.a which is tax free. If you are a higher rate tax payer this is a significant tax saving. So your ISA could become a really valuable income producing asset if you were planning to retire. It is worth remembering that if you don’t use your ISA allowance in a tax year it cannot be reclaimed at a later date so would lose the chance to save.

Tracy Dove, Thomas Oliver’s Financial Adviser continues:

‘It is important customers understand the issue about short-term return, as currently we are in a period of massive austerity, where our government has used quantitative easing (QE). Our Central Bank has printed money and allowed the supply of money to increase, so money has become cheaper which is partly the cause of the low interest rate environment we have experienced since 2008. This explains why cash ISA interest rates are currently relatively low, and although this situation may continue for a while the tax advantages illustrate why ISA investments should generally be considered an important part of your long-term financial planning solution. 

For more risk tolerant customers who are willing to accept equity market volatility and invest for the medium to long-term, (over five years) you could consider investing into equity backed options, which I will review in a future article. However, please note the value of equity investments may go down as well as up.’

To arrange a financial planning appointment please call Tracy Dove on 01707 872000.