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Five of the biggest IFISA & ISA mistakes

How to avoid the five IFISA & ISA mistakes?

Most people are aware of the tax benefits of using an IFISA or ISA to save but there are lots of common mistakes we’re all making which means our money doesn’t grow as much as it could do.

From not using the full ISA allowance to putting all of your savings in one type of ISA, there are lots of mistakes you could be making which mean your money isn’t working as hard as it should be. 

In a time of high inflation and a cost-of-living crisis, it’s more important than ever to get the most from our money, and you can’t afford to be making mistakes which can stop your savings growing.

That being said, Please remember you may not get back the full amount you put in. Your capital is at risk if you invest and not protected by the Financial Services Compensation Scheme (FSCS).

Here we look at five of the most-common mistakes and how to avoid them.

 

1-Not making use your IFISA or ISA allowance

If you save into an ISA, you’ll be able to put away up to £20,000 each tax year without paying tax. 

There’s less appeal to ISAs now that the personal allowance exists, but they are still a valuable asset to have.

That’s because they often pay higher rates of interest than standard savings accounts and if you do exceed your personal allowance you can benefit from the added tax-free benefits of the ISA.

Plus, the earlier you open an ISA in the tax year, the sooner you’ll start earning interest on your savings. It’s not the most existing admin job on the list but if you put it off and leave your money lingering in an account paying little or no interest, you’ll be missing out. 

2. Putting all your eggs in one basket

 

When it comes to saving or investing, diversification is key. If you put all your money into one type of ISA you might not be achieving the best returns available, plus this may not be the most flexible option if you need to access the money. 

 

There are lots of options when it comes to ISAs and generally it’s best to have a mix. You can pick from:


  • Cash ISA (easy access or fixed-term accounts)
  • Stocks and shares ISA
  • Innovative Finance ISA (IFISA)
  • Junior ISA (JISA)
  • Lifetime ISA (LISA)

 

If you put all your money in one type, such as an investment ISA, you run the risk of not having access to the money, losing it if there is a stock market jolt, and having to lock it away as the majority of investments are for the long term. Similarly, if it’s all in a cash ISA, the returns will be very low so while you can access the money at any point, and there’s no risk of losing it, you could be missing out on watching your money grow.


3. Picking the wrong type of ISA


It’s important to find the ISA (or ISAs) that work for you. If you choose the wrong type, you could be locking your money away, risking losing it altogether, or using an account that isn’t right for you. 


If you opened a LISA, for example, to save for a house deposit, you won’t be able to use it for properties worth more than £450,000 - which makes buying in a city such as London tricky.

 

The combination you pick will be based on your own circumstances, your budget, and your savings and retirement goals. 

 

For example, you might have an easy-access cash ISA which you can get money out of at any point for emergencies such as if your car breaks down, an IF-ISA where you’re likely to get a higher return but there are no guarantees you’ll get your money back, and a LISA with a house deposit in or your retirement fund. 


4. Taking money out in the wrong way


There are strict rules about how to move money from one ISA to another. If you don’t follow these, you could lose out on some of the tax benefits or be penalised with a drop in interest. 

 

Before taking money out, check with the ISA provider to see what its rules are. Some fixed-rate ISAs will only allow a certain number of withdrawals per year, if any, before you lose interest on the account.

 

If you want to transfer money from an older ISA into a new account, you’ll also need to do this the official way, with your new provider. If not, and you take the money out manually and move it, you won’t be able to reinvest that part of your tax-free allowance again.

 

If you want to transfer cash from an IF-ISA to another provider you can do but you may not be able to transfer other investments from it so always check first. 


5. Forgetting about children

 

ISAs can be a great vehicle for saving for your family and putting money away for your child’s future. 

 

That could be used for something like a house deposit or their university fees. 

 

Junior ISAs (JISAs) are a popular way to save for a child, there’s a limit of £9,000 each year, and when the child turns 18 they then have control of it. 

 

Before you open one it’s worth comparing cash and investment JISAs. You’re likely to get a much better return if you invest the money as it’s a long-term option, usually over 18 years.


With any kind of investment there is also risk consider and the fact investments can go up and down. Please remember you may not get back the full amount you put in. Your capital is at risk if you invest and not protected by the Financial Services Compensation Scheme (FSCS).
 
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All the facts and figures presented are accurate at the time of posting.
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