Happy Leap Year: three ISA resolutions for your extra day

What you’ll learn:

• How ISAs protect your savings from tax
• Why drip feeding contributions can help smooth your returns
• Why you need to act soon to take advantage of this year’s ISA allowance.

This year is a Leap Year so why not use this extra day wisely to get your money matters in order - and consider how an ISA might help meet your financial aspirations.

Whether your idea is to open an ISA for the first time, top one up or give your existing ISA a spruce up, this additional day could be the perfect opportunity to shape up your savings goals.

Here are three resolutions for sorting out your ISA.

1. Kick-start your savings with an ISA

You might be considering an ISA as a means to kick-start your savings routine. Think first about what it is you want to save for. Maybe you want to build a nest egg for your children? Or do you have wedding plans? Perhaps you’re plotting to propose to your loved-one on Leap Day!

It could be that you need a house deposit or alternatively want to build your wealth to boost income in your retirement years. Whatever your goals, ISAs might be able to help.

Importantly there is nothing scary about ISAs. Millions of people save for the future this way. An ISA is simply a tax-efficient shelter for your money. This means whether you choose to put your hard-earned savings in to cash, funds, bonds or shares – or a mixture – you won’t need to pay tax on any income you may earn or from gains in the value of your pot.

Using tax-friendly ISAs is one way that can end up keeping more of your money for yourself, if you choose to diversify away from savings. This can improve the chances of meeting your financial goals sooner. Plus you don’t have to mention ISAs on your tax return. Anything that reduces paperwork is a plus.

Learn more about ISA flexibility and the allowances that apply when saving outside an ISA.

It’s up to you how much you save in your ISA, up to a threshold of £20,000 this tax year (April 6 2019 to April 5 2020). That would be up to £40,000 for a couple – a significant sum – but even with more limited sums an ISA could help you reach your goals sooner.

Remember this is a ‘use it or lose it’ annual allowance. You can’t carry over any unused portion of this year’s allowance into the new tax year, albeit that you might get a new allowance for the next tax year. Tax rules can change in future. Their effects on you will depend on your individual circumstances, which can also change.

People often take their first savings steps using a cash ISA. This is ideal for your short-term goals - and for emergency money.

But if you have time on your side (at least five years) and you’re happy to ride out uncertainty in return and accept the risk of loss of and the possibility of higher returns, then an Investment ISA could be the right place to start growing your wealth.

Even if you feel unsure about which investments to pick at first, don’t worry. You can normally open an Investment ISA with cash to take advantage of the annual allowance and decide later where exactly to put the money - safe in the knowledge that any returns on this sum are sheltered from tax.

Take a look at the Barclays Smart Investor Funds list for ideas. Alternatively, there are Barclays Ready-made Investments. These are where fund experts have done the hard work and chosen a different mix of investments to match different investment goals.

You don’t need to commit a large sum all at once either. Consider setting up monthly contributions into your ISA. This ‘little and often’ approach could also help reduce the effect stock market wobbles might have by helping smooth out the price you pay for your investments.

2. Top up your ISA

Why not use the extra day to check whether your money is working hard enough. If you discover you’ve cash to spare and haven’t put the maximum allowed into your ISA yet for this year, think about topping up which could help you achieve your savings targets faster.

There is just over a month left of this tax year (ending 5 April 2020) to make the most of this year’s £20,000 allowance before it disappears forever.

3. Dust down your ISAs – and diversify

The longer you have been putting money into ISAs without giving them a wealth check, the more likely they’ll need sprucing up.

Let’s say you’ve been saving just in cash and now have more than enough set aside to cover your needs, both expected and possibly unknown.

You could think about making the extra cash work a bit harder, if you are prepared to accept the risk of getting back less than you put in. One option is to divert a portion into investments such as shares or bonds. A popular and easy way to access these can be through a fund where the expert fund manager does the hard work and chooses the actual companies that are invested in. There are costs involved in holding Investment ISAs but over time the returns might outpace interest on cash though there is no certainty on this.

Even if you have been squirrelling away into Investment ISAs over the years you may now find you have too many eggs in one basket. It could be time to diversify. Perhaps you fancy adding some international flavour to your investments or want to switch to a type that generates income?

Remember that the value of international investments may be affected by movements in the value of sterling.

The good news is, it’s usually straightforward to switch between investments when you hold them in an ISA . You can also move from cash to shares, bonds or funds – and the other way around – whatever matches your needs.

That way you can be flexible and keep your financial goals on track.