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An ISA is one of the simplest and most effective ways to save and invest, giving people the chance to tuck away up to £20,000 a year and take all returns completely tax-free.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Rumours are swirling that the government may cut the Cash ISA allowance in the upcoming Budget. Many savers will be upset if that happens. People love their ISAs, and understandably so.
Early reports suggested the Cash ISA could be slashed to as little as £4,000. Lately, the figure has hovered around £10,000 or £12,000. Today, it’s just speculation. Nothing will be confirmed until November 26.
Thankfully, there’s been no chatter about cutting the Stocks and Shares ISA allowance. That’s expected to remain at £20,000, as the Chancellor is keen to encourage Britons to keep investing in the stock market.
Making the most of your savings
The Cash ISA’s a good short-term home for money and is especially valuable for older savers who prefer to avoid the stock market. But it has one huge drawback. Many Britons leave too much money idling in cash, earning very little, when it’s likely to work much harder invested in stocks and shares.
Equities are more volatile than cash, but history shows that over time they’ve delivered far superior returns.
There are ways to manage the risk. A common approach is to invest in a low-cost fund that tracks a major index such as the FTSE 100 or S&P 500. That works fine, but I prefer building a portfolio of individual shares.
Building a steady portfolio
It’s more risky, but potentially a lot more rewarding. I’d suggest aiming for 15-20 shares over time, blending growth stocks with those paying dividends. Patience is essential. Stock markets aren’t a get-rich-quick scheme. The real benefit comes from allowing share price growth and dividends to compound and roll up over the years.
New investors can start small. Many platforms allow investments from £500 or even less, or monthly contributions from around £50.
I’d avoid anything too risky at first. A solid choice for beginners to consider might be Lloyds Banking Group (LSE: LLOY). Like all major banks, Lloyds was hammered in the financial crisis, but it’s a much more solid operation now, focused on core UK lending and saving with plenty of capital to support it.
The shares have done brilliantly lately. They’re up 60% in a year and 220% over five years. They now yield about 3.5%, adding income to growth.
Even so, there are risks. A wider stock market crash would hurt the share price, and past issues like the motor finance mis-selling scandal show how problems can arise unexpectedly. Growth isn’t guaranteed, nor are dividends.
Long-term view
Keep some cash for emergencies, but don’t rely on the Cash ISA for long-term wealth. The real rewards come from stocks and shares, which appear likely to remain fully protected in the Budget.
There are plenty more top FTSE 100 shares to consider buying today, and the sooner people get started, the more time their money has to grow.
