Dusting down my old ISA article...
As many of you will be aware from the annual advertising bombardment that surrounds the ISA year end – you have until midnight next Monday the 5th of April to ensure that you use (or lose) this year’s ISA allowance.
Given this reality, in the lead up to the deadline, I wanted to revisit some of the key points I have made about ISAs in recent years. For many people, understanding these points and acting on them will significantly increase the chance of getting properly wealthy (detail-oriented readers will note that I've written most of what follows before. I make no apology for this because the points remain valid - and important - year after year)... So please find below a few of the key things to remember about ISAs:
Stocks and shares ISAs
Stocks and shares ISAs are brilliant and should arguably be the number one focus of every person in the UK who wants to invest and save (that should mean absolutely everyone for what it is worth - this is categorically not just for "the rich" or people who are "interested in finance").
- As a reminder: Every British resident may put up to £20,000 a year into an ISA account – so that’s up to £40,000 per married couple.
- I think it is worth explicitly highlighting that we are extremely fortunate in the UK to benefit from this reality. The fact that you can invest such a relatively large sum in an investment account and then pay no tax on any progress you make with that money is a huge investing advantage that almost no-one else in the world has the way us lucky Brits do. This is a function of Britain being one of the most advanced countries in the world when it comes to financial services – something too few of us realise and make use of, sadly. People in Karachi, Mogadishu (or New York or Berlin frankly), have nothing like the freedom we do to invest successfully and without troubling the tax man. It is a huge shame to miss out on this happy advantage of living in the UK.
It is for this reason that there is such a thing as a “stocks and shares ISA millionaire” and there will be many more of them in future, that's for sure.
- I have written in the past about how you might give your child as much as £200,000 on their 18th birthday by maxing contributions to a Junior ISA from birth. Since I wrote that piece, the government has more than doubled the Junior ISA allowance, so this could be even more attractive nowadays - particularly to grandparents perhaps.
- More generally: An adult maxing their ISA contributions and making high single digit average returns over time can realistically expect to have saved more than £1m in about twenty years. A couple doing the same will take about fifteen years and could have nearly £2m by the time they have been investing for twenty.
Cash ISAs
Crucially - I would repeat my belief that cash ISAs are very likely a complete waste of your time. They return less than real inflation, so you are guaranteeing a loss of real wealth every year if you use them. I have explained this several times in the past and this was the particular subject of this article I wrote in February 2018.
There are no “cash ISA millionaires”, that’s for sure – and very likely never will be – given it would take more than forty years of maxing your ISA to get there, by which time your money will be worth far less than it is today having been eroded by inflation.
This shows us once more the huge advantage the investor has over the saver. Small differences in annual returns make enormous differences to your real wealth over time. It is imperative to be an investor, not just a saver.
Regular Automated Investment
The best way to benefit from a stocks and shares ISA is by regular automated monthly investment.
A good proportion of long-time followers have worked out what they can afford to invest in a stocks and shares ISA each month and invest that sum automatically by direct debit each month.
This has a number of advantages:
- First – it defeats the natural inertia we all have about doing the admin. If you do this once – it is a “set and forget” solution. From then on you will have to do very little else and will be amazed at how your investment account will very likely grow as a result.
- Secondly – it smooths your entry price into whichever investments you decide to buy. This means you really needn’t worry overly about what stock markets are doing over time - in the long run at least. If there is a crash of any kind – you will continue to buy in the months that follow that crash – i.e. at what might be a pretty good level. This has a long track record of improving investment returns.
- Thirdly – a related point: Regular automated monthly investment removes you from the equation emotionally. This is a very good thing. We humans are hard wired to be bad investors – buying high and selling low as our decisions are impacted almost perfectly negatively by following the headlines (a very bad idea - I wrote on the merits of ignoring the news in some detail last year).
Happily, I know first-hand from the many emails I receive, that many of our readers have set up automated regular monthly investment in recent years and are enjoying the results and the peace of mind that comes from this approach to investment already.
A good proportion of people reading this will have just invested the “twelfth 12th” of this year’s ISA allocation automatically. For some, this will now be several years where they have not had to worry about an ISA deadline or, indeed, whether the stock market is going to "crash" or not.
(For what it is worth, I contributed a chapter on this very subject entitled “How to invest so that crashes don’t matter” to Harriman House’s 2017 “New Book of Investing Rules”).
NB - You can max your ISA today and worry about how to invest it later!
For those who haven’t yet managed to set up automated monthly investment into a stocks and shares ISA, I think it may be worth making you aware that you can max your ISA today if so desired (in cash) and decide what to do with that money in your own time (i.e. after the deadline). Too few people understand this fact, suffer “paralysis by analysis” and, tragically, then don’t make use of the ISA’s superb tax benefits.
Many people wrongly think that they need to work out what to invest their ISA money in before they can fund an ISA account. This is incorrect. Most ISA providers will let you open and fund an account with cash. When you then manage to find a bit more time, you can instruct most good quality ISA providers to make automated regular payments into whichever fund, funds or stock market investments you choose at a later date. The point being is that you want to get money into an account if at all possible to shelter it from tax.
In conclusion
Given all of the above, I strongly recommend that most people should do their very best to ensure they get as much as you can afford into a stocks and shares ISA every year, without fail. Automation throughout the year will help you to achieve this with the minimum of fuss and worry, but if you haven’t got around to that yet and have cash sitting in your account, do make sure that you get that money into an ISA account in the next few days, if at all possible.
I hope the above helps remind you of some of the key things to remember when it comes to ISA investment...