I'm saving for a house - how do I maximise my ISA allowance?
08 July 2021
Question by Darshu
I have a Help to Buy ISA, 1 share dealing account and 2 independent savings accounts.
I want to start investing and maximise my ISA allowances better. What can I do given my current situation and what is the best place to start?
I am currently saving for a house and in general trying to get a better return on my savings.
Answered by Nicola Crosbie
Darshu, it's truly refreshing to hear that you are focussed on amassing savings and building good financial habits. Firstly, I would recommend you attempt to draw up a life plan setting out your goals and objectives. Like any good plan, it will be open to change and divergence, but it helps you understand what pots you need for what. Is it primarily focussed on your house deposit? Or do you also need to save for longer term goals and objectives like retirement, travel, or family?
UK Residents have a £20,000 ISA allowance (2020/21) you can use each for tax free savings. No tax is payable on profit, interest, or income. You can opt to use this for a Cash ISA, Equity ISA, Lifetime ISA, or an Innovative Finance ISA. You can combine and utilise your allowance over the different types so long as you do not exceed the maximum £20,000 in any tax year (Lifetime ISA up to a maximum of £4,000). Your Help to Buy ISA allowance does not form part of this £20,000. You can choose to hold your share dealing account, making your own investment choices, in an Equity ISA wrapper or invest in a collective portfolio under an advised proposition. Peer to Peer lending can be facilitated through Innovative Finance ISAs.
If your main goal is to save for a deposit for a property and you are aged 18-39, you should consider if a Lifetime ISA could suit your individual needs. Annually, you can save the £4,000 tax-free towards your first home (up to house price £450,000), or if not used for this purpose, your retirement from age 60. You would then receive a cash bonus of up to 25% of what you save (£1,000 per annum maximum). However, whilst you can hold both the cash-based Help to Buy ISA & either the Lifetime ISA on a cash or investment basis, you can only receive the 25% bonus for a house purchase on either of them, not both. If you decide not to use your Help to Buy ISA for a first home, you can withdraw your cash whenever you want and forfeit the bonus penalty free, at any time. You can therefore choose which one merits the bonus more for the house deposit, being reflective of your personal circumstances. A Help to Buy ISA permits both regular contributions of £200 per month and £1,200 lump sum in the first month. The Lifetime ISA allows regular contributions or lump sums in any amounts up to £4,000 but needs to be in place for 12 months minimum to receive your initial bonus. You can also be penalised up to 25% if you withdraw this early (currently waivered up to April 2021).
Your Personal Savings Allowance offers value to you too - you can accrue £1,000 in interest per annum tax free if you are a basic rate 20% taxpayer (£500 per annum if you are a higher rate 40% taxpayer). Do your research online if your tech savvy to source the best rates for your savings accounts and maximise your tax-free allowances. Websites like Which or Money Savings Expert provide independent research. Cash may not be king just now, but you need to have funds set aside for emergency short term needs. Having 3-6 months net outgoings in an accessible cash account is strongly advised to fall back on. If you are looking to buy a property within a five-year period, it would be prudent to keep your deposit in cash as there would be no guarantees of investment performance over that period, short term markets can be volatile, and you might not get back what you have invested during that time. There are no guaranteed returns when you invest, and you need to ensure that it is risk appropriate for its purpose/time scale.
Consider the tax benefits of Pension Contributions for long term savings. Contributions receive tax relief at your marginal rate of tax meaning for every £1 invested, it costs a basic rate taxpayer 80p and a higher rate taxpayer 60p. Annually you can personally contribute 100% of earnings up to the annual allowance of £40,000 in any tax year. It is an excellent tool to amass a tax efficient pot of money to facilitate financial freedom in retirement.
Chartered Financial Planner
With 20 years’ experience behind her, Nicola takes a coaching approach to financial advice, helping even the most nervous investors to take control of their financial situation by empowering them to make more confident, positive decisions for the future. Based in Lochwinnoch, Scotland where she is the Director of Moran Wealth Management Ltd, thanks to secure remote-working practices Nicola supports clients all over the UK.