Congratulations on using your full ISA allowance. Not many people managed to do this. The latest statistics from HMRC show in the 2022/23 tax year 7.9 million people subscribed to Cash ISAs, but the average subscription per Cash ISA account was only £4,330, not the full £20,000 annual allowance.
The key question for you will be whether to continue saving or start investing. And the answer depends on your life stage, financial goals and attitude to risk.
However, just because an allowance is there, doesn’t mean you should use it. So, have you carefully defined what financial goal you are using your Cash ISA for? Perhaps it is your emergency fund in case of job loss or a health setback. Or maybe it is for a short-term savings goal within the next 5 years, say a wedding or dream holiday. Those would both be appropriate uses for a Cash ISA.
Regulator the Financial Conduct Authority found 8.6m consumers are storing more than £10,000 in cash savings that could be used as an investible asset but are not yet invested. “Many consumers who might gain from investing currently hold their savings in cash. Over time, these consumers are at risk of having the purchasing power of their money eroded by inflation,” the watchdog said.
Cash in the bank can give us a sense of comfort. But if your savings interest is lower than the current rate of inflation, your money runs the risk of losing its purchasing power. The current UK inflation rate, measured by the Consumer Prices Index is 3.00 per cent in the year to January 2025.
If you’re stashing the money away for an undefined goal or one that’s more than 5 years away, and can’t see a need to dip into it in the interim, any financial adviser would tell you to consider investing it. Investing in shares will give your money a better chance to grow and beat inflation over the long term (more than 5 years) than keeping it in cash. Investing does carry the risk of getting back less than you put in but this risk is reduced the longer your timeframe.
But if you’re still wedded to cash, then the good news is that the new ISA year starts on 6 April, when you will have another £20k Cash ISA allowance to use. So be ready to top up your holding.
Also, remember if you have a spouse they have an ISA allowance too. You can transfer money to them so they can fill their ISA allowance. The same applies to your kids, who have their £9,000 annual Junior ISA allowances (that’s on top of your £20k individual allowance). That makes a family of two adults and two children have total annual ISA allowances of £58,000. Though if you fill your kids’ allowances, they get full control of the money at age 18 to spend as they wish.
If you don’t have a spouse or child’s allowance to use, Premium Bonds could be a tax-efficient solution for surplus cash, or keep saving in a non tax-wrapped product like an easy, regular or fixed savings account.
For those who want to start investing, it’s best to use tax-efficient wrappers where you can. You could wait until the following tax year, which starts on the 6th April and open a Stocks and Shares ISA. Or, you could think about contributing to a pension where the annual allowance is £60,000, though your money is locked away until 57 (increasing to 57 in 2028).
Other tax-efficient options include UK government bondsThe financial world’s version of an ‘I owe you’, bonds can be issued by companies or governments. You’d invest in bonds to receive an annual interest payment, plus the initial value of the bond back when it ‘expires’. (gilts), the redemptions of which are free of capital gains tax (CGT). Because the UK Government is unlikely to go bankrupt, gilts are seen as low-risk investments.
Also, all gold, silver and platinum bullion coins produced by The Royal Mint are CGT-free for UK residents due to their status as legal British currency. But you take the risk they decrease in value, plus there’s the cost of insuring them and safe storage.
Otherwise, you can invest using a general investment account, where you can hold investments like shares and fundsFunds, also called ‘tracker funds’, are financial instruments that have been set up to match or ‘track’ the price of a market index. Investing in a fund lets you get exposure to different financial assets like shares and bonds, without having to buy them directly.. A GIA doesn’t offer tax advantages, meaning you may have to pay CGT on profits and income tax on dividendsThe amount of profit that a company returns to its shareholders. received. But you do have some exempt allowances – you’re allowed to receive £3,000 in profits and £500 of dividends a year before you pay tax.
Whether you’re investing in a pension, a Stocks and Shares ISA or a GIA, if you haven’t tried investing before, there’s usually a lot of help on offer for beginners. Look out for ‘Ready-made’ or ‘Tracker funds. These are portfolios of investments built and managed by experts or track the performance of a market index. You can usually choose from a range, based on your risk tolerance and goals. It’s a simple way to start investing and means you don’t have to spend lots of time on investment research.
Tax treatment depends on individual circumstances and may change in the future. Investments can go down as well as up, and you may get back less than you invest. Moneybox or its associated third parties do not offer personal financial advice or make specific recommendations based on your individual circumstances. If needed, seek independent financial advice before making decisions regarding your financial goals.