What should I do with my New ISA?
17/06/2014
Do you want to save on a regular basis? Are you are unsure on the best way to save?
A recent online poll that was carried out by financialAdvice.co.uk has revealed that the majority of those people who took part, would prefer to put some of their savings into a Stocks and Shares ISA fund, rather than choosing the safer Cash ISA option, this tax-year.
However, this doesn’t necessarily mean that you should be doing the same. Everybody has their own reasons as to why they’re saving, and this is why it’s tricky for us to tell you exactly what you should be doing with your hard earned cash in a financial blog.
So, what we have decided to do is to put together some money saving scenarios, based on questions that we have received through the financialAdvice.co.uk website. Andrew Gurton, a qualified financial adviser in our Financial Advice Support team, has kindly offered his recommendations on what these people could be doing with their savings.
This will hopefully give you an idea of what you need to consider before choosing where to save your money – but if you are still unsure, why not speak to one of our qualified financial advisers who are able to provide help, support and answers to your money saving questions.
So, to get things started, let’s introduce our first example of a typical saver:
Meet Tom:
Tom is a young professional, working as a sports physiotherapist after graduating from university around three years ago.
He is living in a rented flat at the moment, but would ideally like to save up for a deposit to buy a house of his own, as well as saving a little extra to keep as a general savings pot he’d like to build up over the long-term – although he hasn’t saved any money yet!
After working out his finances and cutting back on a few luxuries, he has found that he is able to save around £300 a month towards a house deposit, but is still a little unsure of where he should put this money.
He would ideally like to see a return on his savings to get him to his savings targets a little bit quicker and to beat the rate of inflation; however, at the same time he wouldn’t be so keen to take the risk of seeing his hard earned savings reduce in value.
What would Andrew recommend?
First and foremost, I would clarify what Tom’s target amount is for his deposit and how long he anticipates this will take to build up based on saving £300 per month. It’s always good to have a goal in mind!
As he is looking to save for a deposit, I would suggest a cash-based account, so he has relatively easy access to the money when he finds the property. He should be looking to save in a tax efficient manner so that any interest earned is free of income tax as this will help his savings grow.
I would therefore suggest a Cash ISA; saving £300 per month will utilise only £3,600 of his overall allowance of £15,000, so he has plenty of scope to save more towards his deposit, if the opportunity arises.
Rather than an instant access Cash ISA, he may wish to look at a fixed rate ISA for a set period of time as these may offer a better rate than their instant access counterparts.
Meet Fred:
Fred is married to his wife, Sarah, (both in their mid 30’s) and they have two boys, aged 1 and 3 years. Both he and his wife are in work, Fred is a fireman and Sarah works in an office. Their combined income is £60,000 a year, and they have monthly mortgage repayments of £800.
Until now they haven’t built up much savings for their long-term future, having recently spent their money on a deposit for a house and settling into family life. However, they do have ambitions to save for their retirement as well as to save some money to give their children on their 18th birthday, and would like to start a savings account to run separate from their current pension plans.
What would Andrew recommend?
The two boys are eligible to have Junior ISAs, so this would be a tax efficient way of saving for when they are 18 years of age. Fred and Sarah can save up to £4,000 per tax year into each Junior ISA for the boys. They can save on a monthly basis or in lump sums such as at birthdays and Christmas.
There are two types of Junior ISA; a Cash Junior ISA, so you don’t pay tax on the interest on the money you save, or a Stocks and Shares Junior ISA, where the money is invested and you won’t pay tax on the capital growth or dividends you receive.
The boys can have one or both types of Junior ISA, so depending on Fred and Sarah’s attitude to risk, they could invest in cash, Stocks and Shares or both.
In relation to Fred and Sarah, they are in a position whereby they can start to look at longer term savings for themselves, so I would suggest that they look to utilise their own ISA allowances too.
In effect, they can save up to £15,000 into their ISAs each tax year, so that is £30,000 between them!
Assessing their attitude to risk will establish whether a Cash ISA or a Stocks and Shares ISA is appropriate for them. It will depend on their personal circumstances and the amount of risk they are prepared to take, but with a Stocks and Shares ISA they should be looking to invest for a minimum of five years.
Historically Stocks and Shares ISAs have performed better than savings in a bank or building society account, but there’s no guarantee they’ll do so in the future. Investments can go down as well as up.
Meet Samantha:
Samantha is a 42 year old self employed, single lady and earns around £125,000 a year. She lives in rented accommodation in central London, costing her around £2,000 a month. She has savings totalling £35,000 (£30,000 in a Stocks and Shares ISA and £5,000 in a Cash ISA) and soon plans on purchasing a house.
Samantha has always been comfortable with seeing her investments fluctuate in value, as she is looking to the long term for her returns. She understands the risk that is involved with investing in a Stocks and Shares ISA, and that she may get back less then she has invested.
She currently has a surplus income of around £1,200 a month – although sometime she can have more if business is going particularly well.
What would Andrew recommend?
It is important that Samantha regularly reviews the performance of her existing Stocks and Shares ISA to ensure that it is meeting her investment goals and objectives. How has the fund performed?
If the fund that the existing Stocks and Shares ISA is in, does not meet her current attitude to risk, it may be beneficial to switch to another fund that is closer aligned to this, be it with her current provider or another.
By regularly reviewing the performance of her existing Stocks and Shares ISA, along with her investment goals, I would be able to ascertain how she wishes to save her surplus income each month. With this surplus income, she will come close to fully utilising her ISA allowance of £15,000.
How she splits the surplus income each month will depend on her short, medium and long term goals. If she is saving towards something like a holiday, it may be more appropriate to save this in the Cash ISA. For longer term goals, the opportunity to save in to her Stocks and Shares ISA may be more beneficial.
As she is looking to purchase a house, she may not want to add further funds to her investment ISA, as I would generally recommend a minimum term of 5 years for such an investment.
In addition, when she is looking to buy a property, she may decide to switch her Stocks and Shares ISA investment in to a Cash ISA, as this will then be more accessible to her and carry a lower level of risk; the value of the Cash ISA will not be subject to fluctuations in its value.
Meet Edith:
Edith is a retired care worker; she has a state and private pension totalling around £4,500 a year. She is married, and her husband also receives around £6,000 a year in pensions. However, they spend most of their income on general living, holidays and treating their grandchildren.
They have also been saving for the majority of their lives, and have a further £58,000 saved in a Cash ISA. This money is for general living costs and emergencies, as well as the odd holiday. But they would also like to leave some of it behind to their two children when they die.
What would Andrew recommend?
This will depend on what level of risk that Edith wishes to take. As the money is for general living costs and emergencies, Edith may not want to invest the money in her Cash ISA in to a Stocks and Shares ISA as she may need to draw on it at any time with little or no notice.
It may very well be the case that Edith simply reviews the interest rate she is getting paid on the Cash ISAs to make sure that she is getting the most competitive rate. It always pays to shop around!
Need financial advice?
Do you need help choosing where best to invest your savings? Our professionally qualified financial advisers are able to answer any of your questions online or over the phone by calling 0800 092 1245.
Please note that everybody’s individual circumstances are unique and you should not make an investment solely based on the recommendations in this article. This article is intended to provide a basis of knowledge of the different options an individual may have when looking to invest their savings.
If you are unsure over where to invest your savings, you should always seek professional advice from a qualified financial adviser.
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