As the new tax year just started on April 6th, a new Individual Savings Account allowance is available for most UK residents. For the 2019/2020 tax year, the ISA allowance remains the same at £20,000. That is a lot of money that you are allowed to grow tax free.
And best of all, you can allocate some of your money to buying stocks and shares, keep some in cash, and even opt for alternative finance ISAs which cover a broad spectrum of financial vehicles such as peer to peer lending or a gold and precious metals mining investment.
Let’s have a quick look at the numbers to see what you can expect for your savings over the next few years in term of growth if you allow them to compound tax free.
With the Individual Savings Account, all capital gains are exempt from income tax for as long as you shall leave the money on the account. You can also transfer it to a better paying ISA, but the new provider will have to do that for you, because if you withdraw the money, you lose your allowance.
To keep it simple, let’s assume you max out your ISA allowance for this tax year, and invest your £20,000 in the markets or alternative finance, for an average rate of return of 10% per annum over the next 30 years.
Without adding one cent to your nest egg, at the end of 30 years, you will have £396,747!!! That is over £376,000 in interest you do not have to pay taxes on. If you are in the higher 40% tax bracket, the tax saving amounts to over £150,000!
If you had left the money on a normal market account, the 10% interest rate would have ended up being 6% after 40% taxes are taken off, and your balance would only be £120,451.
That is how crucial tax efficiency is.
Another thing to note is with only £20,000, which just is maxing out your ISA one year and forgetting about it, you can get a pretty sizeable nest egg in retirement.
So this is something to think about if you are just starting your career, like many readers here, and don’t have too many financial obligations yet, such as a big mortgage and family to support. You have more disposable income today than you will likely have in the near future, so make the most of it!
Yes, £20,000 is a lot of money. Maybe half of more of your income. But look at it as a reward for your future self. How awesome would it be to max out your ISA for three years, and retire a millionaire?
You are not depriving yourself, you are gifting your future self the gift of financial stability. And this is priceless.
Saving that much money will be a stretch, but something is better than nothing. And being mindful of where your money goes, so you spend, save and invest according to your values is very important.
If you spend mindlessly on dinners and nights out with your friends, come age 45, you will have a much harder time trying to save for a retirement that is only 15 years away, while sending your kids to a good school and putting a roof over their head.
So start investing today, and become financially secure so you can enjoy life to the fullest.