This tax year’s ISA deadline is now only a few months away so it could be time to start thinking about how to make the most of your allowance.
Most investors make the fundamental mistake of leaving ISA contributions until the last minute, which is fraught with risk. The tax-free ISA wrapper can save you thousands of pounds in tax over your lifetime. Therefore, it makes sense to make as much use of this year’s allowance of £15,240 as possible. If you leave it to the last minute, you may find that you’ve missed the deadline.
Plan ahead
It always pays off to start planning how you will use your ISA allowance (and where the money will come) from early. If you already have the funds for your ISA earmarked before the deadline, there’s less chance you’ll make a costly mistake such as missing the end-of-year deadline, depositing more than you can afford or dipping into other savings accounts.
As no money can be added to an ISA outside the tax year created, it makes sense to use the account as a long-term savings account with other short-term accounts that offer more flexibility on the side.
Study fees
Planning where your ISA cash will come from is just one of the best ways to get the most out of your ISA. The second relatively easy way to increase your ISA performance is to seek out accounts with the lowest management fees. TD Direct Investing is one of the lowest cost providers around. The online broker charges £30 per year for ISA management although this fee disappears if you have a stock portfolio of £5,100, or have an active regular investing facility, which costs £1.50 per month.
In addition to low platform fees, low-cost funds are also an essential part of boosting returns.
Low-cost tracker funds can cost as little as 0.3% per year and offer better performance than relatively high cost, active funds. Buying individual stocks yourself is another way to get around fees.
Buy stocks
The third method I believe is essential to getting the most out of your ISA allowance is to hold stocks and shares, not cash.
According to Money Saving Expert, the highest interest rate currently on offer from a cash ISAs is 1.6% fixed. At the time of writing the FTSE 100 supports an average dividend yield of 3.5%. So, by investing all of your ISA funds into a FTSE 100 tracker, even after fees (0.2% per annum) the annual yield would still be double that of what’s currently on offer for cash ISAs — excluding any capital gains.
Equity income funds might provide a higher yield but watch out for fees. For example, Neil Woodford’s CF Woodford Equity Income fund currently supports a yield of 3.4% but charges 0.75% per annum in management fees for a net return of 2.7% excluding capital gains.
The bottom line
So, to make the most of your ISA allowance this year, it’s best to plan ahead and seek to keep costs as low as possible for the best long-term returns.
