2022 is long gone yet there are still some benefits you can get from it. One of the biggest benefits when it comes to investing – those living in the UK can still use their ISA allowance.
The above is true due to the weird way the financial year falls in the UK. This doesn’t match the actual calendar year.
Below I will give a quick summary of what are ISAs, what benefits these give. I will also give you some top line advice on how to best use these and how to get the maximum benefit out of these in the next couple of months.
what is ISA and what are the benefits of these?
ISA stands for an Individual Savings Account. ISA is also one of the biggest tax benefits the government gives people in the UK. Let me explain this in more detail.
This is a type of investment/savings account wrapper that allows the holder of this to benefit from tax free gains. YES, all the gains, dividends or saving interests you make are totally tax free.
The total annual allowance you get is £20,000. This gets reset once a year. This means – next year you can benefit from another £20k. One of the issues though – whatever you don’t use in this financial year gets lost forever.
This wrapper can be applied to a number of different account types. You can use these to save money, invest into bonds or shares, lend money or use specially designed accounts to save for your first home with additional government benefits.
I have previously written an article of how best to use different types of ISAs to achieve certain financial goals in life. This article can be found here.
when is the deadline to use your ISA by?
One of the funny things about ISAs – the annual allowance starts in April. And to be more precise – next years ISA will start on the 6th of April 2023. This means – you have all the way up to the midnight of 5th of April 2023 to use your allowance from last year.
While you can invest the money on the last day of the period – I would normally encourage people I know to spread these investments over time.
The trick with the above – cost averaging your investments. Traditionally total market tends to go up on average. There are however periods when prices dip.
By spreading your investments over longer period of time – you are making sure that you don’t buy all of your investments when the stock market is at its peak.
how to maximise the benefits for 2022/23 financial year
For those who haven’t used ISAs much before – this will be a shortcut to how to maximise the benefit of having one… or multiple.
Out of the £20,000 annual allowance you have – you can put £4,000 into Lifetime ISA… or LISA for short.
The benefit of this account – whatever you put in, government tops it up by further 25%. That’s free money right there for you. No investment will give you those sorts of returns over long term.
So for every £100 you deposit, you get extra £25 for FREE!!
You can then use this money to either save it or invest into stocks or other securities.
The biggest issue with LISA is – you can only use it later in life or if you are looking to buy your first home. For first time buyers – this is a no brainer in my personal view. Government is ready to cover a large chunk of your deposit for you.
The £16,000 left after you max out your LISA can go either into cash ISA or investment ISA. If LISA is not for you – you can put all £20,000 into one of these or spread them.
how to invest it?
This is the question that stops many from starting their journey. I will give you a short answer that can work for you in the current environment. I would encourage you to do more research before committing your money.
For short term – I would suggest to look into cash ISA or buying short term government bonds. Currently the central bank interest rates are high. This makes the potential returns on your cash or bonds look very attractive as well.
Currently you can look for savings account with annual interest of 5% or even higher. This allows you to grow your money in a predictable way while also having access to it at a relatively short notice. Some account actually allow you to access your money instantly without any penalties at all.
For long term – my personal view is stock market. Many believe it is a gamble yet there are fairly safe options for those looking to invest for over 5 years.
My ideal allocation would be ETFs that are tracking S&P500 (50%), FTSE100 (30%) & Developing Markets (20%). In this way, you get a great spread between many global markets. These investments will also do slightly different things for your portfolio.
S&P500 – tracks 500 biggest companies in the US. This has delivered a solid performance for over 100 past years. When you zoom out to a long enough period – you can expect returns of up to 10% per year on average.
FTSE100 – this tracks the 100 biggest companies in the UK. The growth this delivers is somewhat behind its US sibling. Returns of 5-6% per year can be assumed. The strength of this investment – on top of the growth you get an annual dividend of roughly 3.5-4%
summary
For those who haven’t started their journey or haven’t benefited from ISAs yet – there is still time to maximise the allowance you were given last year.
Not only you can shield the profits you make on your investments from the tax man, you can also get some free cash from the government.
There are many companies you can create your ISAs with. You can find the one that works the best for you. Keep an eye on the fees these charge as some can be relatively expensive.
A couple of names that I have dealt with in the past are HL and Barclays. There are many online only companies that are competing with these giants. The benefit these companies often offer are significantly reduced fees you pay.