ISA allowances – planning for your family’s future

We are fast approaching tax year end, a time of the year that sees a surge of interest in utilising ISA and Pension Annual Allowances.  Those tax efficient contribution limits are extremely valuable to an individual’s long-term investment and retirement plans.

I am going to focus, if I may, on ISAs in this brief article.  The Individual Savings Account is a product that enjoys tax-free growth, as well as tax free interest and dividend payments.  The government do not give many breaks on income, capital gains or savings taxes, so it is important you make the most of them where you can.

In the 2023-24 tax year the overall ISA annual allowance is £20,000; a generous level, and one which, even if only partially utilised every year, can generate a vast sum of tax-free capital (and income) over time.

Indeed, there are quite a growing number of ISA “millionaires” – those that have been able to make the most of the various annual allowances since ISAs, and their previous incarnations, were first introduced.  Making the most of these allowances, as well as good investment decisions and, hence, returns, has created portfolios which are now at seven-figures.

The ISA annual allowance is per individual; therefore, a couple will be able to take advantage of two tax free nest eggs under one roof.

There are multiple types of ISA (including a Lifetime ISA which receives tax relief if its rules are adhered to), but overall, they can be broadly split between Cash or Investment.

Cash ISAs are, typically, for saving over a shorter time frame, perhaps up to 3-5 years; or as an emergency fund.  The product holds monies on deposit, normally as an “instant access” account or for a “fixed-term” – the latter of which, usually, pays a higher rate of interest.

Investment ISAs can hold various types of permitted investments: typically, these are individual shares, collective funds, investment trusts, or a combination.  Due to the higher level of volatility associated with these products and their underlying investments, a normal investment time horizon to hold is 5-years and longer – great for those thinking about the potential for enhanced long term growth.  However, they should be managed, and the risk and rewards understood before investing.

But what about the children?” I hear some of you say (normally grandparents).  Well, the government has them covered too, currently to the tune of £9,000 annually.  Again, both Cash and Investment “JISA” versions are available.  Junior ISAs can be started from birth, and will become fully controlled by the child once they turn 18.

Why not add some of their pocket, birthday or Christmas money in each year? By adulthood they may be funding their own university studies; or have a sizeable deposit for their first home; or spend it on a gap year they will never forget travelling South-East Asia!  I leave the financial responsibility chat to the parents…

Whether you are looking to put something away for yourself, your partner, child or grandchild, the opportunity to utilise these tax-advantaged allowances is extinguished on 5th April each year, to start afresh in the new tax year.  You cannot back-date your contributions, or utilise any previously unused allowances, so you need to make the most of them when you can.

The ISA (and pensions) tax year end clock is ticking, perhaps it is time you took a closer look at tax efficient investing.

As with anything finance related, I should point out that there are risks to capital when investing, your circumstances, as well as ISA rules, may change in the future. The above examples and regulations are simplified for the purposes of highlighting the potential benefits of holding ISAs.  If in doubt, professional advice should be sought.

This article is for information only, and does not constitute a recommendation or financial advice. It was written by Lloyd Walton, APFS, a Chartered Financial Planner at Wynchwood in Stratford upon Avon.