On 6 April, the allowance of £20k reset for ISAs. That means we can invest as much as £20k in a Stocks and Shares ISA between now and 5 April 2022. Then the allowance should reset again. In some years the allowance increases. But this year, the government set it at the same level as last year.
Why I’d choose a Stocks and Shares ISA
Of course, I don’t have to invest the full ISA allowance every year. I can invest part of it. And I’d likely invest around £10k this year. The allowance is just a maximum amount. But it’s worth using because all the gains from investments will be sheltered from tax when they’re in the ISA. And when I eventually take the money out, under the current ISA rules there’ll be no income tax to pay either.
Another advantage of ISAs is I don’t have to invest the money I’ve put in one immediately. And for my own investment strategy that’s a huge advantage because there are times when I’d prefer some of my investment funds to remain in cash. There’s an old stock market saying I sometimes follow: ‘cash is also a position’.
For me, getting cash into a Stocks and Shares ISA is an important thing. That’s because the allowances time-out every year. If we haven’t used some or all the allowance it doesn’t roll over into the next year. However, regular contributions every year can build up. Even if I don’t use the entire allowance. And I reckon the flexibility of the ISA rules makes the vehicle a great addition to my financial retirement plan. For example, Stocks and Shares ISAs are not as restrictive as Self-Invested Personal Pensions (SIPPs).
Mitigating the risks of shares
Of course, the investments I choose will come with all the normal risks associated with shares and share funds. Stocks can go down as well as up. And sometimes they can remain down. Even dividend income isn’t guaranteed. Company directors have the full power to stop or reduce shareholder dividend payments whenever they choose. And they will almost certainly do that if the underlying business is underperforming or in trouble.
Nevertheless, if I select shares and funds carefully, I think the enhanced potential for returns is worth embracing the increased risk. I’d aim to balance risk against potential rewards. And then I reckon my returns will have a fair chance of beating the performance of cash savings. Although even then, a positive outcome isn’t certain.
But I’d aim to diversify across many shares by investing in share funds. In many cases, I can make regular investments into funds as low as £25. And I’d aim to invest every month from within my ISA. Spreading the investment programme over the year like that reduces the risk of investing everything near a stock market peak. And it also gives me a chance of investing at better prices if the markets fall.
I’d build a core portfolio within my Stocks and Shares ISA of tracker funds, managed funds and investment trusts. But I’d also strike for higher returns by investing in a few shares of carefully chosen individual companies as well.