April 3rd, 2018

The "twelfth 12th” of your 2017/2018 ISA

By Andrew Craig

Reading time: ~ 6 minutes

As many of you will be aware from the annual advertising bombardment that surrounds the ISA year end – you have until midnight this Thursday, April the 5th to 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:

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" - this is for everyone).

  • 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 elsewhere on how you might give your child as much as £200,000 on their 18th birthday by maxing contributions to a Junior ISA from birth.
  • An adult maxing their ISA contributions and making high single digit average returns over time (entirely possible) – can realistically expect to have saved more than £1m in about twenty years. A couple doing the same will take about fifteen and will have nearly £2m by the time they have been investing for twenty years.

Cash ISAs

Crucially - I would repeat that cash ISAs are genuinely rubbish and 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.

There are no “cash ISA millionaires”, that’s for sure – and very likely never will be – given it would take about 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 of these emails 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:

  1. 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.
  2. Secondly – it smooths your entry price into whichever investments you decide to buy. This means you really needn’t worry about what stock markets are doing over time. If there is a crash of any kind – you will continue to buy in the months after that crash – i.e. at a great level. This has a long track record of improving investment returns.
  3. 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).

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 recently published “New Book of Investing Rules”).

NB - You can max your ISA this week 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, please be aware that you can max your ISA this week if so desired 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. The best ISA providers (I personally use Hargreaves Lansdown - quite simply because they have the best customer service of any company I use for anything in the UK (e.g. vs. British Airways, EDF, O2, Apple – you name it – HL are in a league of their own) - but there are plenty of good options these days. This is a solid recent article on the subject which might help.

You just need to open and fund an ISA account. When you have more time, you can then instruct most good quality ISA providers to make automated regular payments into whichever fund, funds or stock market investments you chose.

In conclusion

Given all of the above, I strongly recommend that you do your very best to ensure you 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 this week 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.