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BLOG: ISA investments for every stage of life

BLOG: ISA investments for every stage of life
Your Money
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Investing is a lifelong pursuit that can reap big rewards – and Individual Saving Accounts (ISAs) are a great way to get involved. Crucially, all investment growth in an ISA is tax-free.

Those who have been investing in ISAs since their launch in 1999 will have done pretty well. An investment in the MSCI World index (global equities) would have delivered a comfortable return of 457% in that time.

That is in spite of plenty of bumps on the way – the technology boom and bust, the global financial crisis, and a variety of geopolitical crises.

This would mean that a £7,000 investment 25 years ago (the maximum allowed back then) would be worth almost £40,000 today – that’s a chunk off the mortgage, university fees for the kids or, more realistically for someone like me, a really nice car and a good few holidays!

Here we look at how you can best use the different types of ISAs available for each stage of your life, and which funds to consider.

Junior ISA

If you’re able as a parent, and lucky as a child, Junior ISAs (JISAs) should be the first stop on your generational investing journey. JISAs are long-term savings accounts for under-18s living in the UK.

Parents or guardians can open a Junior ISA and manage the account, but the money belongs to the child, who can take control of it when they’re 16, but cannot withdraw the money until they turn 18.

A total of £1.5bn was put into Junior ISAs in 2021/22, across 1.2 million accounts, but interestingly almost half (42%) of this was in cash, not invested in a stocks and shares JISA (source: HMRC).

This is a wasted opportunity, in our opinion. In the 2024/25 tax year, the savings limit for JISAs is £9,000. Given the long time horizon of the product, assuming you open one when your child is born or soon after, this annual allowance would be much better invested in higher-risk, higher-return funds for the almost two decades available for investment growth.

Small-cap funds, like abrdn Global Smaller Companies, are ones to consider. Small-cap funds can be more volatile than their larger-cap rivals, but across longer time periods, like the full 18 years of a JISA, they also tend to outperform them. Another area to consider is emerging markets, such as the Invesco Global Emerging Markets fund.

Lifetime ISA

The next step on your ISA investment journey will likely be a Lifetime ISA (LISA). Anyone aged over 18 and under 40 can open a LISA. You can put in up to £4,000 each year until you’re 50, and the Government will add a 25% bonus to your savings, up to a maximum of £1,000 per year. This bonus of ‘free money’ makes a LISA a very attractive savings method.

The LISA serves a dual purpose; to help first-time buyers save for a deposit, and as a retirement nest egg. You can only withdraw from a LISA (without a penalty) if you are buying your first home, or are over 60. How you invest your annual Lifetime ISA allowance will depend on which of these two purposes you are using it for.

For first-time buyers, the instinct may be to stay in cash. But the average time taken to save a deposit is now nearly 10 years, with those living in London the worst-affected, at an astonishing 18 years of saving.

That’s a long time to miss out on investment growth, even with the higher interest rates now available on cash. Even over five years, being invested in the market could significantly increase your deposit size.

A balanced risk fund with a medium-term time horizon is a good choice here, like Aegon Diversified Monthly Income. A multi-asset fund, it invests across equities, fixed income, property and specialist income sectors (such as infrastructure and renewable energy) to spread the risk and balance the sources of income, which can then be reinvested for better returns. It can only invest a maximum of 60% in shares, making it lower risk than some of its counterparts.

On the flip side, if you are using your LISA as additional pension savings, we’re probably talking about a much longer time horizon, over a number of decades, maybe with a cautious twist as you approach retirement.

In this case, a buy-and-hold fund would work well, like JOHCM Global Opportunities, a core holding that has returned over 160% for investors in the past 10 years (source: FE Analytics).

Stocks and shares ISA

The most popular option is the standard stocks and shares ISA. Anyone over the age of 18 can open an investment ISA, and can invest in it for life. In the 2024/25 tax year you can invest up to £20,000 (or you can split your allowance across a Cash ISA, LISA and Innovative Finance ISA).

A good foundation for younger investors who are happy to lock their money away for the medium to longer term (five to 10 years) is a multi-manager fund like the Jupiter Merlin Balanced Portfolio, which sits in the mixed investment 40-85% shares sector, meaning it can invest up to 85% in riskier (but potentially higher-returning) equities.

For a core holding for life, the Capital Group New Perspective fund has a 50-year track record of investing in some of the world’s largest multinational firms that are able to benefit from transformational changes in the global economy. The fund has a unique multiple manager structure, with each of the nine named managers running their ‘sleeve’ in their own way. Their best ideas are blended together for a diversified portfolio.

Soon-to-be retirees may be more interested in creating a stable income-generating portfolio, while also preserving capital. A fund like Guinness Global Equity Income can help.

It aims to provide investors with both income and long-term capital growth, and invests in high quality companies that have consistently outperformed in their sector, and are growing their dividends.

We think this is a core global income holding. Meanwhile, those preferring to stick to the home market may consider the likes of the Artemis Income fund.

Darius McDermott is managing director of Chelsea Financial Services and FundCalibre