In a couple of weeks, the current year’s ISA contribution deadline will pass. Any unused 2024-25 allowance an investor still has will disappear forever.
Of course, a new year’s allowance will open up. But I think it still makes sense for an investor to consider making the most of their existing allowance before it vanishes, if they can.
Not maximising the available tax benefits is not the only mistake one can make with an ISA, however. Here are another couple I am always keen to avoid!
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Mistake one: ignoring small-looking fees, year after year
Imagine paying 0.5% charges for an ISA with an initial £20,000 value each year for 25 years. Then imagine paying 0.75% instead.
What would the difference be?
In the short-term it sounds tiny. In fact, it is not. In one year, there would be a £50 difference between 0.5% (£100) and 0.75% (£150).
Over the long term, though, the contrast becomes even starker.
Chipping 0.5% off the ISA each year, after 25 years, the costs would add up to £2,355. At 0.75%, the costs would total £3,431 – over a thousand pounds more.
That is before even considering any change in share prices or dividends, remember.
I think it is a mistake for an investor not to pay close attention to the different fees and costs associated with various Stocks and Shares ISAs when deciding what one is best for their own needs.
Mistake two: taking money out of the tax-free wrapper unthinkingly
Another potential mistake is moving money out of one’s ISA unnecessarily.
When I say “unnecessarily”, I have a specific situation in mind – withdrawing dividends to spend as cash rather than using other available money.
Sometimes, of course, life’s expenses may make this necessary. But sometimes, instead of spending spare money that already sits outside of the ISA tax wrapper, it may be tempting to take dividends out of the ISA and spend them instead.
But once they are removed from the ISA, those dividends can not be reinvested inside the ISA without eating into the annual allowance.
This matters because, inside an ISA, dividends can compound with all the tax benefits of being inside the ISA.
Imagine a £20k ISA compounding at 5% per year for a decade. Within 10 years, that ISA will be worth almost £33k. So those dividends will have added another £13k of investable money inside the ISA — without using up a penny of allowance.
That helps explain why I hold shares like Topps Tiles (LSE: TPT) inside my Stocks and Shares ISA. By keeping the tile retailer’s dividends inside my ISA, I can use them to buy more shares in that company, or other ones.
Topps has been a disappointment for me lately, as it happens. The dividend yield of 7% is juicy. But the share price has fallen 23% in a year and last year’s dividend was a third less than the year before.
Ongoing weakness in the tile market overall remains a threat to sales, profits, and the dividend.
As a long-term investor, though, I plan to keep the penny share in my ISA.
I reckon tile demand will bounce back in due course. Topps’ large store network, growing online offering, and economies of scale should hopefully keep it competitive.
