You’ve only got a couple of weeks left now before the 5 April deadline for using up your 2017-18 ISA allowance. But be careful, and don’t fall into these common traps.
Not making the most of it
With a tax-free allowance of £20,000, it seems almost criminal to me to not make the maximum use of it that you can. I know very few people can afford to invest the full £20,000, but even a small amount missed today could mean a significant loss by the time you retire.
If you invest £1,000 today and achieve a 6% annual return, in 30 years you’ll have £5,700. And if you match the 30-year historical record of the FTSE All Share index of around 8% per year, you’ll nearly double that to £10,000 for every £1,000 invested.
Buying a Cash ISA
I see a Stocks & Shares ISA as a great idea, but think a Cash ISA is a dead duck. Sadly, millions of people in the UK put money into a cash ISA every year and get interest rates of a just a couple of percent per year at best.
It can be far more profitable investing in something that performs better and even to pay tax on the profits, than to save the tax on a lousy investment. Click here to learn more about the way shares have beaten cash hands-down over the long term.
Buying the wrong thing
I’ve covered the importance of using up as much of your allowance as you can, but I want to add a caution — it’s better to not invest in anything than invest in the wrong thing.
So don’t frantically look for shares to buy before the deadline and end up picking stocks that you might not buy if not under time pressure. I would never buy a stock unless I was confident I understood it and I was fully convinced of its long-term prospects, ISA or no ISA. The upside of not paying tax is nowhere near enough to compensate for the risk of buying something I hadn’t researched.
Fortunately, you don’t have to actually buy the shares by 5 April, you just need to get your money in by then.
Taking money out
Cashing in some of your ISA investments for short-term things, like a better holiday or a more extravagant birthday bash than you could otherwise afford, is forfeiting the beneficial effects of long-term investing.
There’s not a lot of point saving just a year or two’s tax on a short-term investment, when those savings could multiply massively over the long term and provide you with a significantly bigger tax-free pension pot.
Remember from above, if you take out £1,000 now, you could knock £10,000 off your retirement fund.
And you can’t put it back once you’ve filled your allowance — invest £20,000, take out £2,000, and you can’t top up beyond the remaining £18,000 again.
Forgetting your children
If the long-term benefits of investing in a Stocks & Shares ISA are that good, just think how much better they’ll be for your children now that we have the Junior ISA.
Introduced in 2011, the Junior ISA currently has an annual limit of £4,128 per year. I’ve written about the Junior ISA in more depth here. But £4,128 invested from birth with a 6% annual return would be worth £132,000 by age 18, and would grow to £1.5m by age 60 with nothing extra added.