Reached 50 without any investments stashed away to help provide for your retirement? It’s never too late, and investing in an ISA can provide a very attractive tax saving advantage. At the current annual allowance, you can invest up to £20,000 and not pay a penny in tax on any gains you withdraw, no matter how much your investments might grow.
But you need to be careful to avoid these common mistakes.
Stocks and Shares, not a Cash ISA
A top Cash ISA today pays only around 1.5% in interest, which doesn’t even match inflation, so you’re guaranteed to lose money in real terms. But at least it’s still worth saving the tax, you might think? How much would that actually be?
If you can invest the whole £20,000 of your allowance at the start of the ISA year, at 1.5% you’ll earn £300 in interest. Even if you’re in the 40% tax bracket, you’re saving just £120 per year in tax on that, and I think that’s a waste of a golden opportunity to do something a lot better with your money.
It’s got to be a Stocks and Shares ISA for me, and even if you just put the lot into a FTSE 100 index tracker you’d be set to receive around 4.8% in dividends (based on current 2019 forecasts). That would earn you £960 in dividends alone, more than three times a Cash ISA return, and over the long term, share prices have always risen too.
Maximise your allowance
Got a bit of spare cash near the end of the year that could go into your ISA, but you really fancy an extra holiday instead? That could be a big mistake if you haven’t properly provided for you retirement, and could end up costing you income when you can least afford it.
You might not be able to invest the full £20,000 per year, but a difference of even a thousand or two can make quite a difference.
A target of around 6% per year in total from Footsie shares seems reasonable to me – I think you can beat that, but I’ll be conservative here. At that rate, investing, say, £500 per month (£6,000 per year) would net you a total of approximately £144,000 after 15 years.
But if you spent £1,000 of that on luxuries, you’d reduce your expected retirement pot to £120,000. Alternatively, if you can save a bit harder and add £1,000 per year to your ISA instead, you’d push your total to £168,000.
Don’t take it out
You might need emergency cash from time to time, and sometimes it’s unavoidable, but you really should try not to take anything out of your Stocks and Shares ISA if you possibly can, especially if you’ve been able to use the full allowance.
Money taken out doesn’t go back on to your allowance for you to use again later – so if you invest £20,000, and then take some out, you can’t put any more in that year. And if you take money out early from a Lifetime ISA, you might even have to pay a penalty.
On top of that, money taken out now will lose the compounding effect of reinvesting your gains over the years. Every £1,000 taken out now could reduce your total in 15 years by more than £2,300, at that 6% annual return.
