Saving for the next generation

Question 1 for £100: What is an ISA?

An ISA – or Individual Savings Account – is your ticket to tax-efficient savings and investments. There are several types, including Cash ISAs, Stocks and Shares ISAs, Innovative Finance ISAs and Lifetime ISAs Each has their own benefits and rules, but they all share one key attraction: you will not pax tax on any interest, dividends or capital gains earned within an ISA.

Question 2 for £1,000: Can I hold multiple ISAs?

Yes, you can! But there are some rules to keep in mind. You are allowed to open as many stocks and shares and cash ISAs as you want in a tax year. You can only open one Lifetime ISA and the Lifetime ISA has different rules to the other ISA types so this needs to be considered. The total amount you can invest across all ISAs in a single tax year is capped at £20,000 and this includes the allowance for a Lifetime ISA which is £4,000. If you are making ISA contributions, you need to make sure you do not exceed your £20,000 allowance.

There are pros and cons to different types of ISA, so we recommend seeking professional advice to find out which is best for you depending on your personal objectives.

Question 3 for £4,000: Why a Stocks and Shares ISA?

All ISAs have their benefits, but we believe the crown jewel of ISAs – and the one that gives you by far the best chance to become an ISA millionaire – is a Stocks and Shares ISA.

Unlike a Cash ISA, a Stocks and Shares ISA allows you to invest in stocks, bonds and funds. These have the potential to yield higher returns in the long term, and any income or capital gains you make in the Stocks and Shares ISA will be free from tax. When we look at particular longer term goals, such as  school fees and university fees planning, with these rising, Stocks & Shares ISA’s with the potential for higher returns might be the way to go.

Quilter Cheviot Financial Planning cannot provide advice on innovative financial ISA'S. ISA investors do not pay any personal tax on income or gains, but ISAs may pay unrecoverable tax on income from stocks and shares received by the ISA managers.

Question 4 for £16,000: How can I manage risk and improve the chances of strong returns?

Diversification is key. Investing in a diverse range of assets can help manage risk that may arise in one area by balancing it out in another. It is also important to regularly review and adjust your portfolio over time, to ensure it continues to align with your financial goals and risk tolerance.

Question 5 for £32,000: Is there a secret to maximise returns?

It’s compounding! Compounding is the process where the returns on your investments generate their own returns. Over time, this can lead to exponential growth. If you were to invest £20,000 annually (the current ISA allowance) and achieve a 5% annualised return, with compounding you could reach £1m in about 25 years – and could make all the difference in reaching your goals.

Question 6 for £125,000: How consistent do I need to be?

Regular contributions are crucial. If you maximise your allowance each year to fully benefit from tax advantages and compounding will likely boost your portfolio over time.

Whether you decide to make a lump sum or monthly contributions. By periodically investing money, you’ll buy fewer shares when the market is up and more when is it down. This strategy – known as ‘Pound Cost Averaging’ – helps to smooth out the effects of market volatility.

Question 7 for £250,000: Long term or short-term investing?

Long-term investing is the answer. While short-term gains are possible, market volatility makes them harder to attain. Historically, markets rise over time, so stay invested and avoid reacting to short-term fluctuations.

Staying invested through market ups and downs can help you avoid the pitfalls of trying to time the market. By maintaining a long-term perspective, you can ride out temporary market dips and take advantage of the overall upward trend, ultimately building a more robust and resilient portfolio. Remember, patience and consistency are key to achieving your financial goals.

Question 9 for £750,000: What about a JISA?

Junior ISAs (JISAs) offer a smart, tax-efficient way to save and invest for your child’s future. Set up by a parent or guardian, the funds are securely locked away until your child turns 18, at which point they gain full access to the money.

The Junior ISA allowance in the current tax year is £9,000 and this can be split between a cash Junior ISA and a Stocks and Shares Junior ISA.

A  Stocks & Shares JISA allows you to invest in the stock market on behalf of a child, but with the added benefit of parental control. This can be a powerful tool for building wealth for your child’s future, whether it’s for school fees, university costs, or simply a financial head start when they turn 18.

As well as offering a valuable learning experience in a child’s financial education, a JISA also typically means an earlier start to their investment journey. This increases their chances of success, lengthening the investing time horizon and allowing the power of compounding to work its magic.  

Question 10 for the £1m question: Can I become an ISA millionaire?

It won’t happen overnight, but with the right approach, yes. Understand the benefits of ISAs, harness the power of compounding, make consistent contributions, diversify investments, maintain a long-term perspective, and take expert advice, and you can set yourself on the path the achieving this impressive milestone and joining the ranks of ISA millionaires…

Tax treatment varies according to individual circumstances and is subject to change.

Stocks and Shares ISAs invest in Corporate bonds; stocks and shares and other assets that fluctuate in value.

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.

Sources:

It’s a Woman’s World: Survey Finds That Women Control Household Finances (yahoo.com)

Financial Education Report 2024.pdf (ukfinance.org.uk)

Can I Put £20000 in an ISA every year | Moneyfarm