How to invest your ISA allowance before April’s deadline

The clock is ticking if you want to save or invest a bit of money this financial year and take your returns free of tax for life. 

It's possible to do that by using your annual individual savings account (ISA) allowance, which allows you to invest in cash or shares free of HMRC interference.

Every adult can invest up to £20,000 this tax year, and take all of their returns free of income tax and capital gains tax for life. They can even pass their savings free of tax to a spouse or civil partner, when they die.

Yet you have to act fast. The ISA allowance is issued on a "use it or lose it” basis. If you do not use yours before the annual deadline of midnight on April 5, you have lost it for good.

While most people can’t afford to invest anywhere near £20,000 as living costs rocket, much smaller sums can still grow over time.

There are two main types of ISA—the cash ISA and stocks and shares ISA. The first allows you to invest in a cash savings account, while the second is for individual company stocks or funds that can invest in a range of shares from all over the world.

Typically, seven in ten play safe with a cash ISA, typically sold by banks and building societies.

As interest rates rise, it is now possible to get around 3% with instant access to your money and 4% a year from a fixed-rate bond, which rolls up free of tax. Yet this is still well below the current inflation rate, and your money could work harder in stocks and shares.

Investing in the stock market may be higher risk, but it also brings bigger returns

Most savers are wary of the stock market, as they think it is too volatile. Yet history shows that over the long run, shares deliver far superior return to cash.

Somebody who invested £10,000 into the FTSE All-Share in 1985 would have had £200,000 by the end of 2022, figures from Standard Life show.

Left in a savings account paying an average annual return of 2% a year over the same period, it would have grown to just £27,000.

It's a matter of personal choice and depends on your attitude to risk.

Probably the best way to set up a stocks and shares ISA is directly from an investment platform, such as AJ Bell, Bestinvest, Chelsea Financial Services, Hargreaves Lansdown or Interactive Investor.

They let you build your own portfolio from a choice of hundreds of company stocks and thousands of investment funds covering every conceivable market.

A little goes a long way with Junior ISAs, because they have 18 years to grow

Remember that children get a tax-free allowance, too, known as the Junior ISA. This allows parents, grandparents and others to save or invest another £9,000 a year, either in cash or stocks and shares.

Many stick to Junior cash ISAs but again, shares may be the better option. That's because money invested in a Junior stocks and shares ISA has up to 18 years to grow, before it belongs to the child and they can access it.

Over such a lengthy period, shares should deliver a superior return to cash, but there are no guarantees.

Whatever your decision, the biggest mistake is failing to invest your ISA allowance at all. Putting away something is always better than saving nothing.

Read more: What should you do with your ISA money?

Read more: How to be an ISA millionaire

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