Top ten ISA tips for 2018
Make the most of your ISA in 2018. Here are our top tips for making investments and using your ISA wisely.
Your ten step guide to ISA funds in 2018
- Your ISA allowance for 2018/19 is £20,000
This includes investments made through a Lifetime ISA (LISA), as well as a normal stocks and shares ISA. Therefore if you put £16,000 into your ISA, you could put another £4000 into your LISA (assuming you are eligible for one), which would later be topped up with the £1000 bonus.
- You can only fund one ISA account in any one tax year
Don’t make the mistake of opening up more than one ISA account, even if you do invest less than £20,000 across the two. When you open an ISA, you need to tell your provider what your National Insurance (NI) number is; HMRC keeps records of who opens what, and where, and can take action against those who transgress.
- Holding cash in a stocks and shares ISA is absolutely fine
It’s a common misconception that cash can only be held in a Cash ISA.
Stocks and shares ISAs have many avenues to invest money at low risk. Your platform provider will be able to act as a custodian for your cash savings, and there are also low risk short-dated bond exchange traded funds (ETFs), which offer a cash-like return.
- Be careful when withdrawing money from your ISA
ISAs nowadays are flexible, meaning you are limited to a net contribution of £20,000 in the tax year, but you can withdraw and deposit funds throughout the year to get there. If you put £20,000 in the ISA in June, took out £10,000 to buy a car in July and then put another £10,000 into the ISA in December, that’s fine.
However, if you have more than £20,000 in your ISA, it is a huge mistake to take your investments out and transfer them over to another provider yourself. Once they leave the tax shelter, that’s it, you’re back at square one.
- You cannot carry forward your losses
The great benefit of ISAs is that they have tax-free income and capital gains.
The drawdown is that investment losses cannot be carried forward and offset against any taxable gains you may have elsewhere. Therefore, it makes sense to show some restraint when you invest; take time to think whether you are chasing the latest investment bubble, or genuinely committing savings to something that will grow your wealth.
- Think about your trading costs
Each time you deal in a stocks and shares ISA there is cost. If you bought a FTSE 100 share, you would pay a dealing charge, 0.5% stamp duty ( ETFs and some other shares are exempt), and in addition there is the frictional cost of the market bid-ask spread. If you over trade, you could place an unnecessary hurdle between yourself and long-term profits.
Similarly, foreign exchange (FX) fees can really eat into your returns. IG charges just 0.3% to deal foreign shares, which can result in huge savings relative to other platforms.
- Spread your investment risk in more than one area
It can be very tempting to buy the best performing areas of the market, a strategy which often ends up being a mistake, as those investments are priced for perfection. In short, having all your eggs in one basket may end up with an entirely avoidable egg-on-face moment.
Instead you should consider getting exposure to a range of different asset classes, via ETFs or Investment Trusts. You may also think about choosing to use an IG Smart Portfolio as your core investment, and a share dealing account for your best ideas.
- Re-invest your dividends
It’s easy to forget this in a bull market, but all the long-term studies of equity markets highlight the fact that dividends make up a large proportion of an investor’s total return. Dividends may seem like free money – especially so in an ISA – but they are not. Re-investing your dividends (the FTSE 100 has a dividend yield of circa 4%) will lead to much greater gains over time due to the effect of compounding.
- Great oaks from little acorns grow
The long-term benefits of investing little and early, as opposed to doing nothing, cannot be overstated.
Saving as little as £100 or £200 a month into an ISA can grow over time into a substantial investment. For example, a £200 monthly investment that grew at 7% a year (net of fees) could be worth £34,600 in ten years’ time.
Setting up a monthly standing order into an IG Smart Portfolio would eliminate the need to pay regular trading fees on a share dealing platform, and could be a very efficient way to invest over time.
- Make sure your reasons for holding your investments are still valid
People often buy shares and forget about them when they perform poorly. You should continually assess your investments; if you wouldn’t buy more of it at the current lower price, should you still hold it?
Similarly, make sure that your entire investment portfolio is suitable for your stage in life. If you have school fees, a wedding to pay for, or retirement coming up, then a 100% equity allocation may not be the right approach. It’s better not to hold an investment, than to be a forced seller at low prices.