By Melanie Wright
Investing in ISAs
There are just a few weeks to go before the end of the tax year on April 5 and if you haven’t used your ISA allowance by this date, it’ll be gone for good.
This tax year (2017-18) you can invest up to £20,000 into tax-efficient ISAs. You can choose from a cash ISA, an investment ISA or an innovative finance ISA, which involves putting your money into peer-to-peer loans, or you can put your money into a combination of these. There’s also the lifetime ISA, for those under 40 who plan to buy their first home or who are saving for retirement, or who want to do both, but you can only pay in a maximum of £4,000 a year into this type of account.
Choosing where to put your allowance
Many people opt for cash ISAs as they consider them risk-free, but low interest rates mean that there are currently no cash ISAs which can keep up with inflation, or the rising cost of living. For example, according to savings website SavingsChampion.co.uk, the market-leading variable rate cash ISA, the 95-day notice cash ISA from Charter Savings Bank, pays just 1.31% annual interest, less than half the current 3% inflation rate. You need a minimum deposit of £1,000 to open this account.
Returns from innovative finance ISAs are higher, but relatively few providers offer them. Lending Works offers a rate of 4.5% over three years on its innovative finance ISA, rising to 6% if you invest over five years, but returns are not guaranteed and your money isn’t protected by the Financial Services Compensation Scheme (FSCS) as it would be in a savings account.
If you’re comfortable accepting a level of risk, you may decide to put some or all of your ISA allowance into investments instead.
Danny Cox, of independent financial advisers Hargreaves Lansdown, said: “Stock markets can be a bumpy ride at times but over the long term they should give you a much better return on your money than it being sat in the bank. The longer you invest for, the greater the potential returns.
“First time investors could choose to invest in individual shares or consider funds. The main advantage of funds is they spread your risk and the fund manager makes the decisions for you. Most stocks and shares ISA give you the opportunity to increase your contributions or add lump sums as and when your budget allows.”
If you’re not sure where to invest, seek professional financial advice, and remember to try to hold a range of different investments. Mr Cox said: “It’s impossible to have every type of investment growing nicely all the time, life just doesn’t work like that, so a spread of investments where you have a foot in lots of different camps, means that when one sector has stalled, others will be providing you with good growth.”