ISAs are pretty simple, in fact, it’s one of the reasons many people choose them over other savings options. There are many ISA options you can choose from, so doing an ISA comparison and learning about different account options should be your first move before you commit to this type of retirement savings plan. Our ISA tips will discuss how you can get the most out of this type of savings account and the common mistakes most people make that you can easily avoid.
If you live in the UK, with an ISA you’ll be able to add funds and any future gains generated by your investments or other forms of income to your individual savings account, tax-free.
However, this doesn’t mean that investing and saving in ISAs don’t come with some drawbacks.
Different Types of ISAs
The first mistake most newbies make when signing up for an ISA is choosing the wrong type. During the current tax year, you’ll be able to save up to twenty thousand pounds in an individual savings account and split the contribution however you want between a lifetime ISA, stocks and shares ISA, or cash ISA. While all types of ISAs offer an impressive range in terms of tax advantages, each type serves a different purpose. Unfortunately, many people end up choosing the wrong type of ISA.
Stocks and shares ISAs and Cash ISAs are the most popular options. While the cash ISA is usually the best choice if you need money in the short term, they can also be a great choice for any saver who isn’t comfortable with investing their funds in the stock market.
But with inflation and falling cash ISA rates, many people are losing money in real terms. Unfortunately, rising prices are currently running at nine times the average cash ISA rate. Because of this, if you have enough cash on hand in the event of an emergency, and you don’t need to access your funds in the short term, you may want to consider a stocks and shares ISA.
Long-term investments can offer higher returns and can even keep pace with rising prices, however, unlike a cash ISA, they tend to dip in value, which means you may end up getting back less cash than what you put in.
Splitting your cash between stocks and shares and cash ISAs can be a happy medium.
The Importance of Diversifying Your Portfolio
Failing to diversify a portfolio is one of the most common mistakes people who invest in ISAs make. Instead, they tend to put all of their eggs in one investment basket. If you end up holding most of your funds in one type of investment, then the fate of your ISA portfolio will be tied to that asset. You’ll be rewarded if that investment performs well, but you could essentially end up losing it all if the investment crashes and burns.
Because of this, holding a mixture of investments in your ISA portfolio is crucial. A good spread ensures smooth returns considering not all of your investments will be performing well at the same time.
When some of your investments start performing poorly, other investments may be delivering better than average returns.
In terms of investing money at a low risk, stocks and shares ISAs have many avenues. An ISA provider can work as a custodian for cash savings. Another option is exchange traded funds, which are low-risk short-dated bonds that offer cash-like returns.
Cash ISAs can also be used for investment purposes.
When you draw funds from your ISA, you must be careful. While ISAs are pretty flexible these days, it can be a huge mistake to take your funds out, transferring them over to a new provider if you have more than twenty thousand pounds in your ISA. Once those funds leave the tax shelter then you’ll be back to square one.
Investment losses cannot be offset against taxable gains that you have elsewhere. Which is why it will make more sense to show a little restraint when you’re investing. Take the time to think any financial move through before you decide to chase after the latest investment.
Start Off Small
Investing early and setting aside only a small amount of funds can come with plenty of long-term benefits. Saving just one to two hundred pounds a month can grow over time. Begin by creating a budget, one that allows you to live comfortably, but cuts out any unnecessary spending.
If you’re struggling to create a budget that works for you and your family and can’t pinpoint any cuts to your monthly spending that need to be made, meet with a financial advisor. These professionals will be able to help you create a monthly budget that you and your family can live with, and one that will allow you to put more funds in your ISA every month.
For more information, you can click here to read our extensive guide on ISAs.