Ellis Bates Financial Advisers
ISAs are a type of savings plan where you can pay in lump sums and/or regular contributions. There are both advantages and disadvantages to having an ISA.
In this session we talk about Individual Savings Accounts (ISAs) and how they encourage saving and investing in a tax efficient way.
Individual Savings Accounts (ISAs) aim to encourage UK residents to plan for their financial future by saving and investing in a tax efficient way.
A cash ISA works mainly like a traditional savings account. You can open a cash ISA if you are a UK resident aged 16 or over and it allows you to save money and pays you interest. However, when you hold a cash ISA you do not pay any tax on interest you earn. With a bank or building society account you pay income tax on earnings exceeding £1,000.
Paying into a Cash ISA is often seen as the safest option as your savings aren’t subject to the ups and downs of the investment markets. You typically get an income and easy access to your money. However, an important factor to consider is the effect of inflation on your savings over time. With interest rates being so very low, the purchasing power of your money in real terms will decline over time.
With a Stocks and Shares ISA, your money is invested in assets such as shares, bonds, property and commodities. As the investment is tax privileged no tax is applied on capital gains you make or income such as interest and dividends you earn. You can keep everything you earn from your investment after all management charges.
You can pay into a stocks and shares ISA if you are a UK resident aged 18 or over.
Holding a Stocks and Shares ISA does present some risk since there is no guaranteed return and the value of your investment could go down. However, it also gives you the chance to earn higher returns than you could expect from cash savings.
One way to mitigate your risk is by remaining invested over the long term as this typically helps you smooth out the ups and downs of the market and gives your money time to benefit from the power of compounding.
Paying into a lifetime ISA allows you to save for your first home or your retirement and you don’t have to pay any tax on income you receive, nor capital gains tax. With this type of ISA, you will receive a 25% uplift on any amount you put in, up to a maximum uplift of £1,000 per year. This bonus is given every month and you’ll then receive interest or potential investment growth arising.
Opting for a lifetime ISA means you’ll hold cash or investments or a combination of both.
Lifetime ISAs come with many rules, for example:
A Junior ISA allows you to give your children a head start in life. You can open a Junior ISA for your child at any time as long as they are under 18, live in the UK and don’t already have a child trust fund. The amount you can put into your child’s Junior ISA each tax year is limited to £9,000.
When looking to open a Junior ISA you can choose to pay into a Junior Cash ISA, a Junior Stocks and Shares ISA, or both, as long you don’t go over your child’s annual allowance.
As with any investment, it is wise to get professional advice to ensure your investment strategy is in line with your personal risk tolerance and that the type of investment is appropriate to meet your personal needs and objectives.
10 practical steps to ensure your money is working hard for youIn these uncertain times, it’s more important than ever to make sure your finances are in order. The Bank of England believes that a painful squeeze on our living standards, driven primarily by soaring energy prices, is set to intensify and will push the UK economy into recession later this year.[1]
Making your finances recession-proof is all about taking practical steps to ensure your money is working hard for you. It is vital to be completely honest with yourself about your financial situation.
By conducting a thorough audit of your finances and gaining a comprehensive understanding of all your incomes and outgoings, this will show you exactly where your cash is going and, most importantly, help you identify problematic spending behaviour.
This will help you keep track of your spending and ensure that you’re not overspending.
Try to put away as much money as you can into a savings account so that you have a cushion in case of tough times.
Take the time to learn new skills or improve upon existing ones. This will make you more valuable in the job market if you need to make a job or career change.
Look at your bank account and remove any pain-free direct debits. Consider if you’re currently paying for things you don’t really need, for example, subscriptions.
Look at energy tariffs, home insurance, car insurance, broadband, TV package, mobile tariff – now might be a good time to switch.
Make sure you’re making all of your payments on time and in full. This will help you avoid costly late fees and keep your credit in good shape.
Prioritise any high-interest debt, such as credit card debt, freeing up more money in your budget to cover other expenses if your income decreases.
This is a must in case you lose your job or have any unexpected expenses. Try to save up at least between three to six months’ worth of living expenses so that your expenditure is covered.
Don’t put all your eggs in one basket. Having multiple streams of income can really help. If one income source starts to dwindle – or gets eliminated completely – this will provide other sources to fall back on.
In addition to diversifying your income, it’s also important to diversify your investments. Review your investment portfolio and make sure your investments are spread across different industries and even different types of asset classes.
Following these tips will help you secure your financial future and protect yourself from the effects of rising inflation and the cost of living crisis. If you would like to find out more or to discuss your situation, please contact us.
Source data: [1] https://www.bankofengland.co.uk/monetarypolicy-report/2022/may-2022
With Policy changes, volatility and unpredictability the new norm it appears at times, a different approach is needed towards your finances and investment strategy.
Ellis Bates continue to emphasise the foundations for dealing with the current conditions lie in a well-diversified, global approach to assets that have long term potential to weather the immediate storms and deliver returns over the longer term.
For more information please visit our latest market insights “Growing Pains?”
Bank of England tries to rein in inflation, which has reached its highest value since 1981, almost five times the central bank’s target. (1)
The pound has fallen to a record low against the dollar as markets react to the UK’s biggest tax cuts in 50 years. (2)
It’s hard to find much good news in relation to Global Markets, with investors remaining worried about high inflation and low growth. (3)
Sources
[1] https://www.bloomberg.com/news/articles/2022-09-26/understanding-the-british-pound-s-sudden-crash-quicktake
[2] www.bbc.co.uk
[3] https://russellinvestments.com/uk/blog/inflation-recession-earnings-mwir
This session looks at how the strategy of diversification among investments can be used to reduce risk when investing.
The UK’s new Chancellor Kwasi Kwarteng unveiled “The Growth Plan 2022” which marks a step change in government policy, both financially and ideologically. The view of the new government is summarised by the assertion that “Economic growth is the government’s central mission” and to achieve this “the government must cut taxes, streamline the public sector, and liberate the private sector.”
As always, we disregard the political or social biases with our comments and focus on the reality of facts, or importantly, the facts so far. As the chancellor noted when challenged on the financial prudence of their plan, the new regime had been in place 19 days when it was issued and there will be additional measures in the future. Those doubting the priorities of the government and where these measures will be implemented, however, need only to focus on the highlighted quotes from the mini-budget and then consider the likely economic implications.
Currency markets have been in focus as sterling initially reacted negatively to the news, with fears that the higher-than-expected levels of borrowing would cause sustained higher inflation and, in turn, higher interest rates from the Bank of England which would have significant implications on the cost of government financing at a time when this already stands at historical highs.
However, part of the uncertainty may be due to lack of detail on how the stimulus package would be financed which provides additional risk in market pricing – back to the relevance of the facts so far, and the likelihood of further communications within the theme of the government’s chosen central mission. A Conservative government that has just taken a very open and public step to the right will be acutely aware of the financial markets’ need for information and aversion to uncertainty, so we must assume a pro-business regime will adopt an operating framework to match.
What next? Initially, more uncertainty, particularly as the government and Bank of England (BoE) establish an equilibrium on fiscal stimulus and monetary restraint to break the cycle of higher inflation and higher interest rates. For growth to reach the government’s stated objective of 2.5% that will need to happen sooner rather than later, and more than likely after an almost inevitable initial recessionary period. The focus on the private sector should, in theory, be positive for businesses as the government has identified them as the solution to remedying the current economic problems. However, this is clearly a significant risk at a time when government finances are already stretched, and the macroeconomic environment is as uncertain at any point since the global financial crisis in 2007-08.
At our client webinars we have emphasised the likelihood of heightened volatility for a number of years and the implications for financial markets over the short, medium and long term. The short-term risks for UK-based investments have certainly increased with the announcements on Friday and what may be perceived as bold in some quarters has equally been dismissed as reckless in others. While clearly our portfolios are not immune to the prevailing negative market environment, we continue to emphasise the foundations for dealing with the current conditions lie in a well-diversified, global approach to assets that have long-term potential to weather the immediate storms and deliver returns over the longer term. Risks are clearly elevated at the moment and the government will need to provide more clarity on how the stimulus will be accounted for to soothe the nerves of investors.
Minimise the amount of tax you pay on your hard-earned money
From July 2014, Individual Savings Accounts can now be used to hold stocks and shares or cash, or any combination of these, up to the current annual limit. An Individual Savings Accounts (ISA) is a ‘wrapper’ that can be used to help save you tax.
ISAs enable you to minimise the amount of tax you pay on your hard-earned money. Some ISAs give you instant access to your money and can be used to plan your finances for the short term. On the other hand, if you have longer-term savings goals, you can invest in an ISA for your future.
In the current 2022/23 tax year, you can put £20,000 into your tax-efficient ISA before the end of the financial year on 5 April. The current tax year started on 6 April 2022 and ends on 5 April 2023.
If you are a UK resident over the age of 18 (age 16 for a Cash ISA only), you can open one of each type of ISA in a tax year, providing you don’t exceed the annual allowance. Cash ISAs are suitable for your short-term savings goals as they don’t invest in the stock market but with current low interest rates, your savings won’t grow much, and you might not be keeping up with inflation. You might consider a Cash ISA as your ‘emergency’ pot of money for any unexpected expenses or a last-minute holiday.
This is a tax-efficient investment that allows you to invest your money in shares, government bonds (gilts) and property with peace of mind that you won’t pay any Capital Gains Tax or Income Tax on the proceeds. This type of ISA is more suitable for your longer-term goals as it has the potential to outperform Cash ISAs over the medium to long term, but with varying levels of risk.
The three main factors to consider when choosing between a Cash ISA and a Stocks & Shares ISA are the length of time you’ll be saving or investing, your appetite for investment risk and the impact of inflation over time.
This is a type of investment account that allows you to lend your money through peer-to-peer lending platforms to receive tax-efficient interest and capital gains. You could be lending money to serve personal loans, small business loans or property loans, or a combination of these.
Interest rates can often be much more attractive than Cash ISA rates, but peer-to-peer lending is a higher-risk form of investing and your capital is entirely at risk as there is no protection from the Financial Services Compensation Scheme (FSCS).
If you are aged 18 to 39, and are looking to save for your first home or for later life, you could consider a Lifetime ISA. You can hold cash in a Lifetime ISA or choose to invest it just as you would with a Stocks & Shares ISA. You can put in up to £4,000 each year up to and including the day before your 50th birthday but remember that this £4,000 allowance contributes to your full annual ISA allowance.
The government will pay a 25% bonus on your contributions (£1 for every £4 you put in), up to a maximum of £1,000 a year but you must be aware that a charge of 25% will be applied to any withdrawal if it is for any reason other than buying your first home, at age 60 or if you are terminally ill.
A Cash or Stocks & Shares ISA account, or both, can be opened for a child subject to the annual allowance, which is £9,000 for the 2021/22 tax year. The account must be opened by the child’s parent or guardian but anyone can contribute once the account has been opened. Savings in a Junior ISA account cannot be withdrawn until the child reaches age 18.
For further information or to discuss your financial planning requirements, please contact us.
As world events continue to affect the investment markets, we recently held an open Q&A session for all Ellis Bates clients to ask their questions to our in-house Investment Team.
Headed by our Director of Investment Alan Cram, questions included the ‘Ukraine’ impact on Russian funds, the changing role of China within the markets, re-assessing attitude to risk with the current market volatility and how to spread investments over the short, medium and long term.
Clients welcomed the opportunity to gain a better understanding of the ups and downs of the markets and how this affected their investment portfolios and ongoing investment decisions.
Ellis Bates are here to enhance people’s lives by delivering peace of mind, enabling financial freedom and helping clients achieve their goals.
If you would like more information about our financial advice and investment services simply book a chat.
Since 1980 our experience has helped our clients to keep and grow their money, as well as make sensible decisions for your future. Whether you are new to investments or want to re-evaluate your portfolio, we can help you. One crucial area of discussion relates to your comprehension of risk, which is supported by an initial questionnaire and assessment.