With March almost upon us, the end of the tax year is in sight. That means you only have just over one month to use up your full ISA allowance.
Here’s a reminder of why all at the Fool hold this kind of account in such esteem and why we think every investor should be making the most of them.
Use it or lose it
Let’s start with the basics. The two versions of the account that are probably most relevant for readers are the standard Stocks and Shares ISA and the Lifetime ISA (LISA).
Both are tax-free wrappers. In other words, any profits you make or dividends you receive from the investments you own are protected from the taxman in either account. Buy a stock for £1,000, sell it for £2,000 and whatever’s left over after fees is yours.
There are, however, also some key differences between these accounts.
The maximum amount you can pay into an ISA is £20,000 in any one year. This allowance runs until April 5 and can’t be carried over. Contributions to the LISA count towards this limit (as does anything you put in a Cash ISA) but are capped at £4,000.
The extent to which you can get to your money also differs.
While there are no restrictions when it comes to retrieving your cash from a normal ISA, you can only access the money in the LISA when you reach 60 years of age or earlier if you wish to fund the purchase of your first home.
Assuming you’re not a first-time buyer, the LISA is therefore only something to be considered if you can leave your money well alone. As an incentive, whatever you feed into to this account over the year entitles you to a 25% bonus from the government. So, paying in the full £4,000 gets you an extra £1000 to invest as you please. Cash out early and you’ll be hit with a 25% penalty.
Taking all this into account, it’s not hard to see why having at least one of these accounts is a no-brainer for the vast majority of investors looking to accumulate wealth.
Another thing worth doing within your ISA or LISA is taking advantage of regular investing plans. Rather than invest a lump sum all in one go, it can be psychologically easier (although not necessarily more profitable) to invest a fixed amount each month. This allows you to buy more of a particular share or fund when the price is low and less when the price is high, thereby smoothing out your returns.
Depending on your ISA or LISA provider, using a monthly investment plan can also reduce buying costs by as much as 90%! As many experienced investors will attest, keeping a lid on costs can be just as important as the investments you choose.
Every little helps
Over a long enough timeline, the full benefits of the ISA allowance really become apparent. Assuming you are able to invest the maximum £20,000 per year (and for simplicity’s sake, assuming the allowance does not change over the years), you’d have almost £2m after 30 years, assuming a return of 7% per annum.
Of course, very few of us are able to make the maximum contribution every year (if ever). Nevertheless, the more you can stash away in either account, the more you’ll benefit from compounding over time.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.