The annual ISA allowance is a “use it or lose it” investment opportunity. Hence the proliferation of press advertisements exhorting investors to utilise the allowance before the tax year end.
The allowance currently stands at a very meaningful £20,000, which compares with £15,240 maximum investment in the tax year 2016/17 and just £7,000 in 2006/7.
However, instead of being shoe-horned into the tax year-end window, investors might benefit from choosing their own time to invest, earlier in the tax year, and thereby taking advantage of a longer period of tax-free potential returns.
Until now, the great majority of ISA investments (77% of the total) have been made into cash ISAs, but investors are starting to favour stocks and shares ISAs. In 2016/17 new investments in cash ISAs fell by nearly £20 billion to £39 billion, while investment in stocks and shares ISAs increased to £22.3 billion.
A half-way house could be to mix and match within the £20,000 allowance, investing partly in cash and partly in stocks and shares.
The relative decline in popularity of cash ISAs is due not only to unattractively low interest rates but also the introduction of the Personal Savings Allowance, which undermines ISAs’ tax advantage by permitting basic rate taxpayers to receive up to £1,000 of savings income each year free of tax.
Investors with existing cash ISAs are able to switch from cash to stocks and shares funds within their existing ISA wrapper; although interest rates are set to rise this might well make sense for those with a longer time horizon.
It is vital, however, that the existing ISA should not be closed, otherwise the tax wrapper will be lost. Instead, the holdings within the wrapper must be transferred.
If the existing provider offers both cash and stocks and shares funds the move will be straightforward. But it is highly desirable to take the opportunity to shop around and consider the universe of funds available. In such a situation, however, the existing provider may levy a transfer charge.