Content Manager, Saxo Bank Group
Summary: ISAs, or individual savings accounts, are a great resource for building up a pot of money that can add to your financial security over time. However, that pot can become much larger if you know how to make it work harder for you. Read our seven tips below and find out how you can supercharge your ISA returns.
Whether you choose an investment or cash ISA, you don’t need a big lump sum to get started. Smaller contributions on a regular basis will still help your savings pot to grow, and you’ll be less aware of the money going out. However, remember that if you don’t use your full ISA allowance each year, you can’t carry the unused balance forward.
If you choose to invest in a stocks and shares ISA, putting in a set amount each month can also help take the stress out of natural stock market fluctuations. The value of investments tends to move up and down in the short term, but by making monthly deposits you can avoid the risk of putting all your money in just before a big drop. Financial advisers call this process ‘smoothing’, as it delivers a smooth progression of investment growth and risk protection over time.
2) Don’t forget the past
The humble ISA is 20 years old, having been introduced in April 1999. It’s possible that many of us will have an old ISA or two knocking around that’s been forgotten about. Since the rates on many best-buy cash ISAs have dropped dramatically in recent years, and your old investment ISA might not be in the right funds for your current circumstances, it’s worth taking the time to evaluate your options.
The good news is that your ISAs can be rehabilitated, with most providers allowing for ‘transfers in’. This means you can seamlessly transfer an old ISA into a newly opened account. Just don’t withdraw the money – you’ll lose the ISA benefits – and make sure you go through the proper transfer procedures. Your new provider should be able to help with this.
3) Take (appropriate) risks
With UK interest rates standing at just 0.75% and inflation well above 2%, the money in most cash ISAs and other savings accounts is effectively losing value in real terms every year.
According to HMRC, subscriptions to cash ISAs fell by 697,000 in 2017-18, while subscriptions to stocks and shares ISAs rose by 246,000. In total, the share of cash ISA subscriptions as a proportion of all ISA subscriptions fell from 77% in 2016-17 to 72% in 2017-18.
This highlights that people are more willing to embrace the risks of investing, in a bid to achieve better returns. History shows us that stock investments perform better than cash in the long run, so the additional risk of an investment ISA could lead to a healthy reward.
Just make sure the amount you invest is suitable for your risk tolerance – a financial adviser can help guide you if you’re unsure.
4) Review frequently
The ISA you have may not be the one you need. Cash ISA rates drop, investments fall out of favour, and your circumstances can change too. That's why it’s important to do regular health checks on your ISA and be proactive – you might find you’re better off allocating your money elsewhere. Use all the available tools and resources to do your research and make decisions, as this will help you build a savings pot that’s right for your circumstances and future goals.
5) Choose the right ISA
Are you a first-time buyer or saving for retirement? A help-to-buy ISA or lifetime ISA comes with an additional government bonus of 25% but, as their names suggest, they can only be used for specific life events.
A stocks and shares ISA is available to any UK resident over 18 and offers great flexibility when it comes to investing your money. With many providers you’ll have the opportunity to select your own investments, often from thousands of eligible shares, ETFs, bonds and investment trusts.
6) Ride your pay rises
If your wages rise or you finally pay off a long-standing debt, try not to get used to the extra income immediately. Instead, increase the contributions into your ISA. You’ll end up with more savings without feeling the pinch.
7) Keep it diverse
If you choose an investment ISA, make sure you keep your eggs in a variety of baskets. Investing in shares across a range of countries and sectors, as well as holding assets such as corporate or government bonds, will help ensure that your portfolio can ride out a market downturn in a specific asset class, sector or region of the world.