ISA investing made simple: three options for long-term growth

It’s that time of year again when investors are urged to make the most of their annual Individual Savings Account (ISA) allowance. You only have until midnight on April 5^th to use your £20,000 allocation as unused amounts can’t be rolled over into the following tax year. But are these tax-efficient vehicles right for you – and where exactly should you put your money? What are the golden rules when it comes to these products and are there downsides?

Here we give an overview of how ISAs work, explore the various pros and cons, and highlight some multi-asset investment funds to consider.

What is an ISA?

Let’s start with some basics. An ISA is basically a wrapper that shields savings and investments from some taxes, primarily Capital Gains Tax (CGT) with money withdrawn from an ISA also exempt of any income tax. This means holders don’t pay income or capital gains tax on returns made. ISAs were first introduced back in April 1999 to encourage more saving and they’ve undergone numerous changes over the past 26 years. The tax advantages have made them extremely popular. 

There are now four types of ISA: cash ISAs; stocks and shares ISAs; Lifetime ISAs; and innovative finance ISAs. Your circumstances will dictate which will meet your needs. You need to be at least 18 years old to open one – under 40 years old if it’s a Lifetime ISA – and you can currently put away up to £20,000 in each tax year*.

What are your ISA options?

Cash ISAs are the simplest of the four. These products, which are typically available from banks and building societies, pay interest on money saved. 

Stocks and Shares ISAs allow you to put money into investments such as company shares, corporate bonds, government bonds, unit trusts and investment funds.

Lifetime ISAs are for buying first homes or saving for later life. Up to £4,000 can be put in each year from the £20,000 annual allowance. You can invest in both cash and stocks and shares.

Innovative Finance ISAs, the least common type, meanwhile, are aimed at more sophisticated investors as they can hold a variety of assets, including loans given to other people or businesses without using a bank.

The good news is that you can withdraw your money without losing tax benefits, although it’s important to check with your provider to see if any charges apply. In addition, you can now open multiple ISAs of the same type in the same tax year, thanks to the introduction of new rules at the start of the current (2024/2025) tax year.

Choosing your investments

Deciding where to invest will depend on your longer-term objectives and attitude to risk, so you must be clear about your own financial situation. It’s also important to consider diversification. This means spreading your risk by holding a variety of investments – either individual assets or through a multi-asset investment fund.

As far as funds are concerned, there are thousands of options, so you must take your time to understand what each one’s offering and how they may fit into your broader portfolio. This is where FundCalibre comes in. We’re here to help narrow down the number of choices to a more manageable list, with the knowledge that all the funds available on FundCalibre have undergone a rigorous process. 

Remember: even after you’ve made your selection, it’s important to regularly monitor your portfolio to ensure you’re on target to achieve your investment objectives.

Funds to consider

There is certainly no shortage of potential investment funds you can choose for your Stocks & Shares ISA, so where should you start? Here we spotlight three mixed asset portfolios suitable for different risk tolerances that could be worth considering.

Our first contender is Aegon Diversified Monthly Income, which is a truly diversified multi-asset fund that has exposure to bonds, equities, property and alternatives. The fund sits in the IA Mixed Investment 20-60% shares sector and targets an attractive yield of around 5% per annum, which is paid monthly. Its managers, Vincent McEntegart and Debbie King, will decide how much to allocate to each asset class in order to balance risk and income requirements. We like the fact this fund is well resourced and the duo at the helm are supported in their decision making by a 12-strong multi-asset team.

Next up is the BNY Mellon Multi-Asset Balanced fund that is in the IA Mixed Investment 40-85% shares sector, meaning it can have a higher allocation to equities. The fund, which is run by Simon Nichols, Paul Flood and Bhavin Shah, aims to achieve a balance between income and capital growth over a minimum of five years. We see this as a rock solid global multi-asset vehicle that uses themes to target the forces driving global change in markets.

Our final suggestion, the Liontrust Sustainable Future Managed fund, is also in the IA Mixed Investment 40-85% shares sector. Its managers, Peter Michaelis and Simon Clements, use a thematic approach to identify key structural growth trends that are likely to shape the global economy. We like this well-defined approach that has enabled them to deliver excellent performance through a high-conviction portfolio of 40 to 60 positions. Manager Peter Michaelis joined us recently on the Investing on the go podcast to tell us more about the opportunities in the Sustainable Future Managed range of funds. 

*gov.uk, Individual Savings Accounts