Use it or lose it

Time is running out to use your 2021-22 individual savings account allowance

Use it or lose it: 5 April is the final day of the 2021-22 tax year – and therefore your last chance to use your individual savings account (Isa) allowance for the year. Once the clock strikes midnight, you’ll get a new allowance for 2022-23, but any unused Isa allowance from 2021-22 is gone for good.

First things first, however. It is important to understand that an Isa is not a savings or investment product in its own right; rather, it is a shelter inside which you can hold a broad range of savings and investments in order to protect them from tax. Each tax year, you can make up to £20,000 of savings and investments through Isas – every penny of income or profit you earn on those assets will then be tax-free, even when you withdraw them from the Isa.

Where you can put your money

The array of investments on offer through Isas really is remarkably wide. Through cash Isas, you can put money into bank or building society savings, knowing that all the interest you earn will be tax-free. Through stocks and shares Isas, you can put money into the stock market and other assets that fall as well as rise in value – but also offer at least the potential for superior long-term returns compared to cash deposit – either directly into the stock market or through professionally managed funds. The dividends and capital gains that these investments generate will be tax-free too.

That makes Isas a fantastic financial planning opportunity. You can use cash Isas to plan for short-term goals – to build up an emergency cash fund for a sudden and unexpected need, say, or as a savings vehicle for a new holiday or car. You can use stocks and shares Isas, where the potential rewards are higher, but with additional risk, to plan for more long-term objectives – building a nest egg for children, say, or for retirement savings.

Moreover, once you’ve opened your Isas, the rules allow you to change what is in them whenever you like without affecting your tax benefits. You can move from cash to stocks and shares, or vice versa , if your circumstances and goals change (though you can only have one type of Isa each tax year). Or you can change the specific investments in your cash or stocks and shares plan. And you can typically take money out as and when you need it – there aren’t usually restrictions, as there are with private pensions, for example.

Specialist Isas for specific needs

In addition to standard Isas, there are also several specialist versions of the scheme for specific needs. Lifetime Isas, for example, are aimed at people saving for a deposit on their first home or for retirement. You must be between the ages of 18 and 39 to open a “Lisa” and you can put in up to £4,000 a year; in addition, the Government will pay a 25% bonus to top up your contribution, up to a maximum of £1,000 a year.

Lisa savings pots then have to be used as part of a first property purchase, or left untouched until you reach age 60. Withdrawals made for other reasons are subject to penalties and charges.

Elsewhere, junior Isas are aimed at children who don’t have child trust funds ( any child owning a CTF isn’t eligible to hold a junior Isa unless the CTF funds are first transferred to a junjor Isa and the CTF is closed). You can invest up to £9,000 a year on behalf of a child aged 18 or under, and the money can go into cash or stocks and shares assets. These funds can be a great way for parents, grandparents and others to save on behalf of children with no need to worry about tax – though it must be the parent (or legal guardian) who actually sets up the account.

More broadly, Isas work very well as a way to pass wealth on to future generations tax efficiently. You can make cash gifts to your children of up to £3,000 a year into their Junior Isas – both parents get this allowance – with no need to worry about inheritance tax implications.

Moreover, if your family is concerned about inheritance tax liabilities, Isas can help you manage them: for example, once you reach retirement, it may make sense to live off Isa savings first, rather than cashing in your pension funds. In most cases, the latter don’t count towards inheritance tax but can usually be passed on to heirs. The fact that Isas can be cashed in without penalty at any age – unlike pensions, where you must usually wait until age 55 (and soon 57) – may also be useful here.

How to make your Isa choices

The key to using your Isa allowance effectively is to focus on the savings and investments you already have, your financial needs and goals, your ability to withstand losses, and your attitude to risk . This will help you make the right choices.

Try not to think of Isas as a one-off investment to be made each year. Rather, aim to save and invest consistently over time, maximising the use of your Isa allowance, but focusing on your objectives. You don’t have to invest a lump sum – many people making regular contributions to their Isa holdings with a direct debit each month – and if you don’t have enough spare cash to use the full £20,000 allowance, that’s fine too.

Your aim should be to have enough cash easily accessible for any short-term needs that may come up, for which cash Isas are a good option. Stocks and shares Isas then offer a good way to target longer-term objectives. And the options available continue to grow – many fund managers now offer funds that invest with environmental and ethical principles in mind.

This year, stocks and shares Isas look particularly attractive. With the Bank of England now predicting that inflation could hit 8% by the spring, no cash savings account offers an interest rate that offers a positive real return. Stocks and shares Isas may be a good way to cope with rising inflation.

If in doubt, take advice

If you’re not sure how to use your Isa allowance to best effect, consider taking professional financial advice. An adviser can help you work out the best way to achieve your goals, both for you and your family, and to do so in the most tax-effective way possible.

Importantly, advisers will also look at the savings and investments you have already made. They may suggest you move previous Isa investments around, for example. Or they may help you move other investments into an Isa in order to protect them from future tax – this strategy, sometimes known as a “bed and Isa” is important to manage carefully, as it could give you a capital gains tax liability.

Similarly, if you’ve used your Isa allowance in full, there may be other ways to invest tax-efficiently. A financial adviser can help here too.

With or without help, the bottom line is that now is the time to take charge of your savings and investments – the Isa deadline for 2021-22 on 5 April gives you a good opportunity to do exactly that.

Content correct at the time of writing and is intended for general information only and should not be construed as advice.

  • Share