Here's Why You Should Be Planning Your ISA Now!
Hang on now, the new ISA allowance won't be taking effect until 6 April and it's only February, so why am I banging on about it already?
Well, although it's true that you won't be able to invest any of your new £15,240 allowance, and save tax on the proceeds, until April rolls around, how many of us have fully used up our allowance for the current 2015/16 tax year? If you've invested your full current allowance and your investment plan for your next chunk is already in place, well done you -- you need read no further.
Use it or lose it
But if your current allowance has not been fully utilized, then don't forget -- you use it or lose it. That's right, if you still have a few thousand you can invest from this year's allowance on 5 April, it will disappear overnight and you'll have to wave goodbye to some potentially nice tax savings.
So, you've got six weeks left to use up the rest of your 2105/16 allowance -- where are you going to invest it?
You could always put it in a cash ISA and not pay tax on any interest earned. But honestly, what's the point of that? Most of them are offering only around 1.5% per year in interest, which would net you about £230 over a year -- so a 20% taxpayer would save something like £46 in tax.
Shares are best
But if you invest in shares, you can get annual dividends that alone beat the pants off a cash ISA, and you'll have the prospect of tax-free capital gains on future share price rises too.
Lloyds Banking Group (I have some in my pension but not my ISA) is on a forecast dividend yield of 5.1% (more than three times the interest rate from a cash ISA), and with its shares on a very low P/E rating of around eight (with the FTSE long-term average around 14), I just don't see how they can't rise significantly in the coming years.
Or perhaps something like National Grid, which is also offering cash-busting dividends of around 5%, and whose share price has risen by 71% in the past five years!
Then you could possibly go for an out-and-out growth candidate like ARM Holdings, the designer of many of today's smartphone chips. ARM doesn't pay much of a dividend, but its massive profit growth has pushed its share price up seven-fold in 10 years!
And if you're thinking that it might be a good idea to spread your £15,240 investment (or as much of that as you can comfortably afford) across a mix of such shares, spreading the risk across different companies and sectors, then you've got my support one hundred percent.
I reckon that if you spread your ISA investments over the course of the year to help even out the ups and downs of the stock market, and spread them across a basket of FTSE 100 shares in different sectors, you'll stand a much better chance of enjoying a profitable retirement than those who go for 1.5% cash ISAs.
It's hard to beat the idea of putting your money into top dividend-paying companies with progressive cash-handout policies that have the potential to lift your income year after year. Our newest report, A Top Income Share From The Motley Fool, reveals a company that might just fit that bill.
It's a company with a market cap of around £500m, so it's not a high-risk tiddler, and dividends have been growing very strongly over the past few years.
Want to know more? Click here to get your completely free copy of the report delivered to your inbox today.
Alan Oscroft owns shares in Lloyds Banking Group. The Motley Fool UK has recommended ARM Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.