ISA savers may want to revisit their savings (Image: Getty)
ISA savers may be able to vastly increase their savings with a simple change to how they use their accounts. A key benefit of these accounts is that they are entirely tax-free.
You can deposit up to £20,000 each tax year into ISAs. As the allowance renews on April 6 each year, savers may want to use up as much of their current allowance before moving into the new financial year.
Andrew Prosser, head of Investments at investing platform InvestEngine, said: “If you don’t use your ISA allowance before the end of the tax year, you can’t carry it forward, so that opportunity to shield money from tax is gone forever. Even if you can’t afford to contribute the full £20,000 allowance, it’s still worth putting in what you can because the benefits compound over time.
“Every pound invested within an ISA grows free from tax, which can make a significant difference to long-term returns. For people who have spare savings sitting outside tax wrappers, topping up an ISA before the tax year ends can be one of the simplest ways to make sure their money can earn interest or returns while still being tax-efficient.”
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Long-term compounding
Although many savers may leave it until the last minute and use up their allowances as the tax year ends, it may be worth making deposits at the start of the new year. Mr Prosser said: “Investing earlier in the tax year can give your money more time in the market, which increases the potential for long-term compounding.
“Over many years, that additional time invested can translate into meaningful differences in the final value of a portfolio. People who invested their full allowance at the start of the tax year since the creation of ISAs in 1999 into a stocks and shares ISA could be almost £88,000 better off than those who invested last minute at the end of each financial year.”
But he said the most important principle here is to keep up your savings habit. The investment expert said: “The most important habit is consistency. Whether you invest monthly, annually at the start of the year, or closer to the deadline, regularly using your ISA allowance is far more important than trying to perfectly time contributions.”
Savers with stocks and shares ISAs may be concerned by the Iran war, and how this could impact economic markets over the months ahead. But Mr Prosser said it’s important to hold your nerve through these troubling times.
Stay focused
He urged: “In times like this it’s easy to get spooked by a few big market falls, but it’s important to remember to stay focused on the long term. While your portfolio might be taking a few hefty knocks now or over the next few weeks and months, these market moves become much less relevant over 5, 10, 20 years or more.
“Trying to time the market by waiting for ‘the perfect moment’ rarely works in practice. Many of the strongest market recovery days occur very close to the worst downturns, so investors who sit on the sidelines risk missing the rebound.”
He shared another tip for building your investment-based savings over time. Mr Prosser said: “For long-term investors, the key is usually staying diversified and focused on their time horizon rather than short-term headlines. Market dips can actually provide opportunities to invest at lower prices, particularly for those contributing regularly to investments through vehicles like stocks and shares ISAs.”
Some key changes are coming up when it comes to ISAs. From April 2027, the ISA allowance is being restricted so you can only use up to £12,000 of the allowance divided as you choose between cash ISAs and stocks and shares ISAs. The remaining £8,000 will have to be used for investment-based accounts.
However there is an exception to the new rules. Savers aged 65 and over will keep the current £20,000 allowance.