There are a couple of other places you can put your money and help it to grow.
Use Your ISA for Breadth
If your pension is for pushing hard for the future, then your ISA is where you can get nuanced, if you want to. Remember the possible need for access, and consider investing some of your ISA money with a view to enabling that access.
As an adviser I will often make sure that some of my clients’ money within an ISA is held in a Gilt fund, for example. This acts as a volatility modifier in the portfolio as a whole, and if the equity portion of a portfolio is down and some money is needed unexpectedly, it also is a useful place to take that from.
I suggest you use your ISA to experiment with, to the extent that you want to. Maybe you’re familiar with the concept of a core and satellite portfolio, where the bulk of your money is in a core portfolio, but there are satellites around the side where you can try new things, or tilt towards a sector that you’re interested in perhaps.
The idea is that the core should get you to your goals, so that if the satellite goes belly-up, you haven’t bet the whole farm on it. This is ideal territory for your ISA, in my opinion, especially when building wealth in the accumulation phase.
Have some fun in your ISA. Use it to broaden your approach, if you want to. Many of my clients are quite happy for the core to be it, and not to do anything fancy round the side, but if you do want to, then use your ISA for that.
Don’t Forget the Humble GIA
If you come into a lump sum, or if you are in a position to be able to invest more than the annual ISA allowance and pension allowances, then don’t forget that a GIA is decent option as a staging area.
I’ve often had to explain to clients that even though they can only put £20k each into an ISA each year, that doesn’t mean that their investing stops there. If, say, you had £200,000 to invest as a couple, you could add £20k each to your ISAs which then leaves £160k.
Rather than leave that in the bank doing nothing, this should still be invested, just inside a GIA so at least the money is working, while it’s waiting to be added to your tax-efficient accounts. Yes, you may pay some income tax if there’s enough in your GIA to drive more dividends than your annual dividend allowance. And you may pay CGT if you just leave it in there and don’t manage that.
Every year you could do a so-called bed-and-ISA transaction, which essentially shifts money out of your GIA and into your ISA. You have to sell the assets in the GIA down to cash and contribute the cash into the ISA – you can’t usually just shift the funds or shares or whatever into the ISA directly.
Given the amounts involved, there are very unlikely to be capital gains tax issues in doing so, unless you’ve made gains elsewhere in your financial life – if so, tread carefully. You should progressively try to shift as much money as possible into tax-efficient accounts, so don’t neglect this.
I have an inheritance coming shortly of about £300,000 in cash. I anticipate using an online platform to invest it. It would seem sensible to also fund a stocks & shares ISA each year by selling shares and reinvesting in the ISA – possibly using a ‘Bed and ISA’ arrangement – progressively moving shares from the dealing account into ISA protection. Obviously, initially I can put the full allowable amount (£20,000) into an ISA account and the rest into a general dealing account. After the first year (or so), I will then be able to raise enough cash by selling shares up to the CGT allowance (gain <= £3000) to fully fund an ISA. So far, so good.
However, as time goes on (assuming good growth of the investment), there will soon come a point where selling shares without exceeding the capital gains tax-free allowance will not fully fund the ISA. The question is: if I wish to maximise the total usable value (ie, remaining dealing account after any CGT + ISA) at some point in the future, is it better 1) to limit myself to only realising shares within the CGT allowance and pay no tax at the time (but transfer rapidly dwindling numbers of shares into ISA protection each year), or 2) to realise just enough cash to fully fund the ISA each year and also pay the capital gains tax each time?
There are lots of online recommendations to fully utilise the CGT allowance each year and transfer the proceeds to an ISA (which is obviously beneficial), but I have found nothing regarding the benefit (or not) of paying CGT each year in order to maximise ISA contributions.
I have done some simplistic calculations myself and it seems that, somewhat counter-intuitively, it is actually significantly worthwhile to pay the early CGT (albeit losing some shares in the process) in order to maximise the ISA transfer values – assuming that, at some point in the future, the aim is to cash in (and put to other use) the total investment (when any shares still remaining in the dealing account will then be subject much greater CGT because of growth, whereas the ISA shares won't). Could it be that, in this case, paying tax early on is better than paying tax later? I'm worried that this seems too good to be true…