ARE you an Isa “early bird”? You can really fly ahead on growing your savings, if you are.
Last Tuesday was April 6, the first day of the new tax year 2021/22, the day when the Chancellor of the Exchequer waves his magic wand and magically resets our tax allowances for the year.
It’s a great time to start looking at our Isa savings options in particular. April is absolutely the best time of the year to take action.
As you may know, an Isa (individual savings account) allows your savings to grow tax-free, and can be a great way of saving for the longer term, while still having your money nearby in case of an emergency.
No matter if you are opening your first Isa account this month, or you’re an Isa aficionado who has had one since they were first introduced in 1999, April is the time to use it.
Research by the investment company Hargreaves Lansdown (HL) has just found that if you had put money into an Isa on the first day of the tax year, each year for the last decade, your savings would have grown by a third, because they had longer to grow, whereas if you had left it until the end of the tax year each time, they’d have grown by just a quarter.
HL found that younger people aged 18-34 are more switched on to this neat trick, with over a quarter (27 per cent) of them spreading their wings and using the early bird option last year (2020/21).
As a concrete example of how it works, they took the Legal & General International Index Fund and found that someone who put £10,000 into it on the first day of each tax year for the last decade would now have £145,860. Not bad for a £100,000 investment!
Those who invested their £10,000 on the last day of the tax year, however, would have just £128,040.
In other words, the ones who got in early would be £18,000 better off today. It pays to be an Isa ‘early bird’!
If you have some savings tucked away, but you don’t yet have an Isa, you can open one (or several) and save up to £20,000 this tax year. First you need to look at the various Isa types, to see which is likely to be right for you.
First there’s the cash Isa, which you can open from age 16, and your savings are protected up to £85,000, so you have absolute security. You can have an Easy Access Cash Isa, where you can draw out money just like from a standard bank savings account, with no penalty.
This is perfect if you want to have your savings accessible for when the car packs up (as they always do) or flights to Tenerife become available again.
Then there’s the Stocks & Shares Isa, allowing you to invest in funds and stocks. It’s a little bit more risky, but offers the possibility for greater returns. You have great choice over where your money goes. Just one example: you could ‘go green’ by choosing ethical funds for your Stocks & Shares Isa cash, so that your money is working to help the environment and the planet.
You’d be smart to check with an adviser first, though: these Isas sometimes come with fees that you need to understand in advance.
If you are saving for your first home, the Lifetime Isa could be for you. It can be opened by early birds aged 18-39, and helps you save for a house deposit or for retirement only, so no easy access to your cash. You can only save £4,000 a year into this one, but it is unique among Isas in that it comes with a brilliant 25 per cent government top-up. If you save £1,000 in the tax year you'll have £1,250, and if you’re able to save the full £4,000 each year, the bonus will take it up to £5,000. Free money – what’s not to like!
The Innovative Finance Isa allows you to invest tax-free in young companies needing to raise capital.
However, it can be a risky one, as you’re reliant on their ability to pay you back. Independent financial advice is essential here.
Now we come to my personal favourite, the Junior Isa or ‘Jisa’. As parents we all adore our children, and the Jisa is the perfect way to put some money aside for them. The Jisa is for smaller or larger children up to age 17.
If they are 15 or under, you need to open the account for them; if they’re 16 or 17 they can do it themselves.
This year you can save up to £9,000 for them, and the cash becomes theirs when they turn 18. Of course, the nest egg you planned to cover their university fees could end up covering beer and social life instead, and you’d have no say. It’s a risk that dads and mums take.
Would you like to be an Isa early bird, and sort something out this month that will really turbocharge your savings?
We love helping early birds here. While it’s still April, why not fly in our window for a chat?
:: Michael Kennedy is an independent financial adviser and pensions specialist and can be contacted on 028 71886005. Further information on Facebook at Kennedy Independent Financial Advice Ltd or at www.mkennedyfinancial.com
