The cut-off point for this year’s 'use it or lose it' ISA allowance is 5 April and there are a host of options for this tax-free investment - including bricks and mortar.
Individual Savings Accounts (ISAs) are a great way of building tax-free savings. But where your choices used to be limited to cash or stocks and share, there are now more options available - including residential property.
With 5 April deadline to use this year's allowance looming, here are eight things you need to know about ISAs.
1. You can save up to £20,000 tax-free this year
You can slot up to £20,000 in the current 2017/18 financial year in an Individual Savings Account (or ISA) – the highest ever annual allowance. This is the amount you can save without paying any interest.
But to take full advantage, you’ll have to use your allowance by 5 April, as it can’t be rolled over into the following financial year.
Over the years, saving into an ISA can rack up a tidy sum to be used for a long-term goal - whether you’re saving for a home, retirement or family.
2. ISAs are more flexible than ever thanks to rule changes
April 2016 rule changes mean you can now withdraw money from an ISA and return it to your account within the same financial year, without reducing your ISA allowance.
This applies to cash or stocks and shares ISAs, so long as your provider offers a flexible ISA. Previous rules meant that any amount taken out and paid back in would use up a portion of your allowance.
3. Cash ISAs aren’t the only option
You don’t have to stick to cash ISA accounts. You can invest in stocks and shares, trusts, bonds and even property through an ISA.
What you pick will depend on any savings you already have, your goals, and attitude to risk.
But remember it’s wise to avoid ‘putting all your eggs in one basket’, as the old investment adage goes. If you’ve already got a lump sum in cash for a rainy day, consider diversifying.
4. You can now invest in residential property with your ISA
With just £100, you can open a Property ISA from Bricklane.com. You can invest as much as you like – although the tax-free portion is limited to your annual ISA allowance. If you want to shake up your savings pot, you can also shift ISAs held elsewhere into a Property ISA.
Your money is held in a fund that’s used to buy property in some of the UK’s fastest growing cities. They include Leeds, Birmingham, and Manchester – or you could choose a separate fund that focuses on London.
Your investment grows from rental income, and potential changes in house prices. And because you’ve used the ISA tax wrapper, income and gains are paid free of tax.
As with any investment, there’s the risk you could lose money. Your investment could rise as well as fall, but then again, there’s the potential for greater returns over the long-term than a cash ISA.
If, say, you slotted £10,000 into a Property ISA five years ago, this would have risen in value to £14,789 today – or a hefty £4,053 more than if you held the sum in a cash ISA, paying 1.4%.*
5. If you’re under 40 you could also get a Lifetime ISA
Aside from cash or investments, you could also opt for a Lifetime ISA.
The Lifetime ISA, launched in April 2017, is available to savers aged under 40 and is specifically aimed at anyone saving towards buying a first home, or retirement.
You can save up to £4,000 in these accounts every year, and you’ll get a £1,000 tax-free top-up from the Government.
You can save into a LISA between the ages of 18 and 50. You can receive a maximum bonus of £32,000 from the Government if you’re able to save £128,000 in that period.
On the downside, if you need to take money from your LISA before you turn 60 and you’re not buying a first home, you will get hit with a 25% withdrawal penalty.
6. You can invest in multiple ISAs
You can pay your full ISA allowance into stocks and shares, cash, a Property ISA, or peer-to-peer lending through an Innovative Finance ISA.
Or, you can combine these, paying into one cash ISA, one stocks and shares ISA, and an Innovative Finance ISA, for example.
That’s provided you don’t go over your annual ISA allowance of £20,000.
Remember, you can shift your ISA savings between cash, stocks and shares or other ISAs, in the future.
7. ISAs are still attractive – even with the Personal Savings Allowance
The Personal Savings Allowance (PSA) is the amount of interest you can earn tax-free outside of ISAs. Introduced in April 2016, it amounts to a maximum £1,000 a year if you’re a basic-rate taxpayer, with the limit falling to £500 if you’re a higher-rate taxpayer.
This could make ISAs seem worthless. After all, you can rack up tax-free interest outside an ISA. But remember that if interest rates rise, or you have a large chunk of savings, your PSA is quickly used up.
And if you find yourself in the higher-rate tax bracket, your PSA halves, while top-rate taxpayers aren’t entitled to any tax-free savings outside an ISA.
If you’ve maxed out your ISA limit, your tax status changes – or interest rates jump – ISAs are a helpful tax-free tool.
8. You can pass on the tax-free benefits of ISAs
Changes made to ISAs back in April 2015 mean ISAs’ tax-friendly status no longer dies with you. Any savings held in ISAs can now be passed on to spouses or civil partners, with their tax benefits intact.
However, the Personal Savings Allowance cannot be passed on. Any money inherited outside a standard savings account is subject to tax.
*This calculation is a simulated historical performance. Past performance is not a reliable indicator of future performance.
Unlike with a Cash ISA, with any investing, your capital is at risk.
An ISA is not always suitable for you. If you’re unsure where to invest, you could seek professional financial advice. Tax rules can, and do, change, and their impact on your savings depends on your personal circumstances, which may also change.
Zoopla Limited is an introducer appointed representative of Gallium Fund Solutions Limited (Reference number: 487176) which is authorised and regulated by the Financial Conduct Authority.