You might be dedicated to using up your annual ISA allowance, which stands at £20,000 in the 2021/22 tax year. But given the impact of the Covid-19 pandemic on businesses and the economy, is it wise to invest your ISA allowance in the stock market?
Interest rates on cash are at a record low after the Bank of England cut the base rate to just 0.1%. Meanwhile, shares have the potential for greater returns over the long term once the market makes a full recovery from the crisis.
Here are some factors to consider before putting your money in an Investment ISA in the current climate.
You might want to focus on building up your cash reserves to boost your safety net. But if you don’t plan to access your money for many years, and so have a long investment timeframe, now could be a good time to invest. A financial adviser can help to ensure you have the right split between cash and shares for your personal situation and financial goals.
Stock market ebbs and flows are all part of investing, and the market has demonstrated that over time, no matter what crises are endured, it has recovered and often gone on to reach fresh highs.
Use it or lose it
Bear in mind that you can often move money into your ISA account and hold this in cash until you are ready to invest. That’s if you aren’t comfortable with diving into the market just yet. This way, you ensure you use your ISA allowance, which can’t be carried over into the next tax year.
Access to cash
Ideally, you want enough cash set aside for six to nine months’ worth of living expenses, whatever your stage of life. This will help you pay for unexpected emergencies, such as home repairs or a period of
unemployment. The right amount of cash depends on how much you need to feel financially secure and your personal situation. A financial planner can help you with this by carrying out a cashflow analysis. You should only invest if you are comfortable with the risk that you could lose as well as gain money. However, the longer you invest, the less likely it is that your return will be impacted by stock market gyrations.
Set fear aside
When you’re investing, it’s important to focus on your longer-term goals.
Bear in mind that if you have many years to go before you’ll need the money, you could benefit from major gains during some of the stock market’s most volatile periods. When the market falls, you could pick up shares at a cheaper price, and benefit from their potential recovery.
You can drip feed your savings
The market might endure volatility for some time.
No-one can know when markets will fully bounce back, and you may feel more comfortable drip-feeding your money into an Investment ISA over the tax year. Regular contributions to the stock market benefit from compounding, where you earn returns on your returns.
Gradually putting money into the market over several months will mean you buy more shares when the market falls, and fewer when it rises. This may help to smooth volatility over the long term.
Ensure you are diversified
Consider where your money is already invested. Your money should ideally be spread across a variety of companies, sectors, and geographical locations. One way to ensure this without having to do the hard work yourself is by investing in a ready-made ISA portfolio. Plenty of wealth managers such as Brewin Dolphin offer Investment ISA portfolios that are already diversified.
It’s generally considered wise to make use of your ISA allowance every year, if you can afford to do so. Investing in an ISA is a flexible and tax-efficient way to benefit from stock market growth. An adviser can help you boost your returns over time by providing tailored options suited to your personal circumstances.
The value of investments, and any income from them, can fall and you may get back less than you invested. Neither simulated nor actual past performance are reliable indicators of future performance.
Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Information is provided only as an example and is not a recommendation to pursue a particular strategy.
Opinions expressed in this publication are not necessarily the views held throughout Brewin Dolphin Ltd.