ISA dos and don’ts

The allowance for the tax year 2019/20 means savers will be able to squirrel away £20,000 a year in an ISA. So now is a great time for you to look at your ISA savings and make sure your money is working hard.

Here’s a range of ISA do’s and don’ts to make sure you maximise your ISA this season and beyond:

What is an ISA?

Don’t forget to use your allowance

The best way to grow your wealth is to use as much of your annual ISA and pension allowances as you can afford. If you don’t use your ISA allowance by the end of the tax year you will lose it - there is no carrying it over to the following year.

Regularly topping up your ISA means you pay less to the taxman – and build a larger fund. The sooner you do this the more chance you have of benefitting from compound growth – that is, interest on interest or for stocks and shares ISAs, growth on growth.

Don’t ignore shares

Cash ISAs remain the most popular, but it’s important to consider the stock market for long-term savings.

It is easy to convince yourself that your money would be safer in a simple cash account, but shares have been shown to deliver much better returns over the long-term, where the value of cash will be eroded by inflation over time.

Do review your ISA

It is important to review your ISAs. Interest rates on cash accounts often drop after a certain period of time, which might convince you to switch to a better-paying account.

Stocks and shares ISAs need reviewing to ensure they continue to deliver as required. Markets and asset classes don’t all move neatly in line, so over time your exposure to different investments will change. This means your investments may have drifted into a different risk category from the one you originally chose.

Check your asset allocation and if necessary rebalance to reflect your current attitude to risk.

Don’t put all your eggs in one basket

Diversification is the cornerstone of any good stocks and shares ISA portfolio, to protect it from any market shocks.

A common mistake is having too much of your portfolio exposed to one asset class or sector. To make sure a portfolio is spread across asset classes, it could contain a blend of equities, bonds, cash, property and other asset classes such as commodities and gold, to benefit from their different investment cycles.

Don’t leave it to the last minute

Just because the ISA deadline falls on April 5 every year does not mean you should delay investment decisions until the day itself. It’s worth giving careful thought to how you want to allocate funds within an ISA throughout the year.

Consider your reasons for investing, the average annual return you are seeking, your time horizon and the amount of risk you’re prepared to take.

If you feel you don’t have time to make an informed decision before the deadline, then place the money in a cash ISA to ensure you don’t miss out on the tax break.

ISAs are flexible and allow you to switch money from cash to stocks and shares – as well as the other way around – so you can always take your time and choose funds in your own time, at a later date.