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Make the most of your ISA allowance while you can!

Make the most of your ISA allowance while you can!

Category: ISAs
Author: Leanne Macardle
Date: 27/01/2017

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

The current tax year is rapidly drawing to a close, which means if you haven't yet utilised your ISA allowance for 2016/17, you're running out of time! You wouldn't want to miss out on a year's worth of tax efficiency, so now's the time to take a look at the market and see how you can make the most of things.

Do I really need an ISA?

Ok, so we realise that the ISA market isn't exactly surging ahead at the moment. Except for the long-term ISA sector, which has been enjoying a glimmer of hope recently, all cash ISA rates are at record lows, which means many could be wondering if there's any point in investing in such an account. This apathy could be heightened by the Personal Savings Allowance (PSA), which means interest of up to £1,000 can be earned tax-free each year regardless of where the money's held. So do you really need an ISA?

Yes! These accounts should still form a key part of your savings portfolio, despite the current landscape, because it's all about thinking long term. After all, being able to earn £1,000 in interest a year may seem an impossibility for the vast majority of savers, particularly with rates so low – you'd need to have £100,000 in one of the top-paying easy access accounts just to meet that limit – but that may not be the case forever.

Rates will hopefully rise at some point in the next few years (it may take a while, but we live in hope!), and if you're focused on building up a long-term savings pot, at one stage you'll hopefully have enough in it to earn more in interest than the PSA limit, particularly if you're securing a higher interest rate (if you were able to find an account paying 4%, for example – which would have been fairly easy to achieve just a few years ago – you'd only need £25,000 in savings before you breached the allowance).

Then there's the fact that there's no telling how long PSA rules will last, so your tax-efficient savings may not stay that way forever. But, if you keep as much as you can in an ISA, your savings will remain tax-free for life, no matter what happens to savings rates or PSA rules in the future.

Think outside the box

Of course, all this isn't taking away from the fact that it's difficult to achieve decent returns in the ISA market at present. As it stands, there's only one long-term ISA available that matches the current rate of inflation – so you may want to lock into it before the current tax year ends on 5 April to keep your savings as protected as possible – which means it could be time to think outside the box.

What about a stocks & shares ISA? These accounts allow you to invest in the stock market, rather than keeping your funds in cash, which means there's the potential for far greater returns. However, this also ups the level of risk involved, so this route should only be considered by those who are comfortable with that and can afford to lose some of their savings should the market not perform as well as they'd hoped.

Having said that, investing in a stocks & shares ISA could be the perfect long-term solution – such an investment is recommended to be at least a three to five-year endeavour, so if you're viewing ISAs as a long-term route to securing your finances (as discussed above), it could be a way to go.

Indeed, the current low interest rate environment means many are considering taking this route, with the potential for returns being the key driver. However, as research from Selftrade from Equiniti shows, many people are concerned by the current level of volatility in the stock market: 34% of investors are confident about the performance of their investments in 2017, yet 35% are concerned, which is why it's so important to be prepared, and to go about it the right way.

It's vital to stay on the ball with this kind of investment, which means you'll want to review your savings frequently – at least once a year – to ensure you're continuing to invest in the right places. The phrase "don't put all your eggs in one basket" is key, too, so make sure to diversify to maximise your chances of levelling out any volatility. Above all, make sure you're happy with investing rather than saving, and if you're thinking of going down this route, don't wait too long – you want to make the most of the current tax year, after all!

Mark Taylor, CEO of Selftrade from Equiniti, comments: "People are really struggling to know what to do with their money at the moment, and we have seen investors shocked into inactivity by recent market conditions. As we see it, the key is regular investing; putting what you can, when you can, into your ISA irons out the ups and downs in the price of a fund or a share over time."

What next?

Find out more about stocks & shares ISAs to see if they're worth the risk

Want to stick with the safety of cash? Compare the top cash ISA rates to make the most of your allowance

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.