What should you do with your ISA money?

This month, the ISA limit goes up to a whopping £15,000 per tax year, which is good news for savers and investors. ISAs are one of the best ways we have to save tax on our investments. If you’re a basic-rate taxpayer, you’ll pay 20p out of every £1 of interest earned on your savings in tax. By saving tax-free in a cash ISA, you get to keep the full £1.

So if you do happen have the spare cash, you have until April 5 next year (2015) to use the limit to the max!

So where should you put your money, and should you do it all in one go or set up a standing order?

The point of an ISA is that it should be part of your retirement fund. It’s supposed to be in addition to your pension. In other words, you should see it as a long-term investment that, ideally, you won’t touch until you retire.

With this in mind, you should look to invest in products that will give you a good, average return each year so that your money can beat (or at least keep up with) inflation.

If we assume inflation will be around 2%–2.5% each year, you should aim for something that gives you at least a 6%–7% return each year. Sadly, cash (savings accounts) tend to return much less than that. Stocks and shares, on the other hand, should bring in more like 5%–6%.

If you see your ISAs as part of your retirement fund, your best bet is to put the money into stocks and shares, assuming you’re not planning to retire for at least five years.

What you actually invest in is the next question! Personally, I find that people who are new to equities (as stocks and shares are also called) would do best to invest in index-tracking funds. These are run electronically and simply “track” one of the FTSE indices such as the FTSE100 or the FTSE All Share. Various companies—including L&G, Scottish Widows, Fidelity and Virgin—offer tracker funds, and you can ask them to “wrap” them in an ISA as you invest. 

If you’re planning on using your ISA for relatively short-term saving, it’s probably best to put your money into a cash ISA. While the Bank of England base rate stays low (and it’s not likely to go up by very much for a while), you will continue to get poor rates on cash ISAs. However, it’s still worth shopping around for the best—or least worst—deal on a site such as moneyfacts.co.uk

The fact that you can put your money into a mixture of cash and shares is helpful for anyone who has different things to save for (part-retirement, part-short-term). 

It can also be a good way for people nearing retirement to “lifestyle” their investments. They can have some stability with the cash investments but still take advantage of potential gains in stocks and shares.

Read more articles by Jasmine Birtles here

At Reader's Digest we have partnered with Unbiased for trustworthy expert guidance and advice on your savings and investment.