Seven ISA mistakes to avoid

Anyone who has an ISA will know they are a great way to protect your savings and investments from tax, and to grow your wealth over time. But even the savviest of savers can slip up when it comes to the rules or make some common ISA mistakes that may cost them. Here are seven ISA mistakes to avoid.

1. Picking the wrong type of ISA

There are six types of ISA, which means a clear ISA mistake to avoid is picking the wrong one. It might be that you’ve opted for a cash ISA, but you’re saving for the long-term and an investment ISA would be a better option. Or you may have picked a Stocks and shares ISA to save for the deposit for a first home, but you could have benefitted from the government bonus available on the Lifetime ISA. Equally, if you’re saving for your child you will want to consider a Junior ISA, rather than automatically saving the money in your own ISA.

Not every option will be right for you, and you need to check the details of each account. Check out our article on which ISA is best to help you decide.

2. Paying unnecessary costs

Paying some fees is part and parcel of investing, but one ISA mistake to avoid is paying out too much in fees and charges, as ultimately this will eat into your returns. There are some easy ways to cut your costs, without cutting the investments or service you get. The first is to make sure you’re not buying and selling investments too often. Each time you buy and sell with AJ Bell, it will cost you money: £5 for shares and £1.50 for funds. If you’re investing small amounts and trading often, these fees could quickly take a chunk out of your investment pot (unless you're using our regular investment service, which we discuss further down).

Another way to cut charges is consolidating investments. If you have ISAs scattered all over the place you may find you can reduce fees by consolidating them in one place. That may be a result of moving to a lower cost platform or simply avoiding trading in the same investment across multiple accounts. For example, if you hold BP shares in two separate ISAs and decide to sell out, then you will find yourself paying two lots of dealing fees.

Holding your ISAs in one place will also make them easier to manage as a portfolio. Read about all the different charges you may pay to invest to make sure you’re up to speed.

See tips on how to cut your ISA costs

3. Not using your allowance

Everyone over the age of 18 can pay up to £20,000 into their ISA each tax year. Make sure you’re maximising this as much as possible, as if you don’t use it, you lose it – you can’t carry forward any unused allowances to future years. An ISA protects your investments from capital gains, dividend and income tax, so it’s the best place for your investments. Those aged 18 to 39 can open a Lifetime ISA and save up to £4,000 each year. Investors with spare money they plan to save and any unused ISA allowance for the current tax year should consider using it before the 5 April deadline.

4. Thinking you can only have one ISA at a time

An easy ISA mistake that you can avoid is not being aware that ISA rules have changed in recent years. Now you can have more than one ISA, and more than one of each type of ISA. The only exception is with Lifetime ISAs and Junior ISAs, where you are more restricted. You can also pay into more than one of each type of ISA each year too. Check out all the rules and restrictions on multiple ISAs.

5. Paying too much in

While everyone has a £20,000 ISA allowance, you need to make sure you don’t pay in more than that each tax year. This allowance is split between all types of ISA and all your accounts, which may be with different providers. Because you can have accounts with different providers, there’s no way for them to know everything you’re paying in, which means it’s down to you to keep track of your total contributions. Read more about ISA allowances, to avoid making this ISA mistake.

6. Losing track of your old ISAs

It’s easy to lose track of accounts, log-in details or savings pots over time. But it’s important that you take time to track down these accounts. Firstly, it’s your money and you want to get your hands on it. And secondly, if it’s in a cash ISA it will likely be earning little interest and if it’s in investments you need to make sure those investments are right for you. Dig out old paperwork, reset passwords and dive back into the accounts to see how much you have saved. Once you’ve done that you should consider transferring the money into one ISA, to make it easier to keep track of and reduce your admin.

7. Not drip-feeding money into an ISA

If you often invest but do not use a regular investment service, you’re not just wasting time, you’re wasting money. Many platforms, including AJ Bell, offer significant discounts on dealing charges when you set up an automatic monthly investment instead of trading ad hoc.

All you need to do is choose the investments you want to buy each month and how much to invest, and the platform takes care of the rest. At AJ Bell, for example, dealing fees drop to just £1.50 per trade, compared to the usual £5 for share dealing.

Investing regularly could also boost your returns over time. Since you’re buying at different points each month, when markets may be up or down, you naturally smooth out price fluctuations, reducing the impact of market swings.

Open an ISA

An AJ Bell Stocks and shares ISA is an easy, efficient way to invest. It’s completely tax free, so more of what you make stays in your pocket.

See our Stocks and shares ISA Open an ISA

Transferring an ISA

We do the heavy lifting when you move your portfolio to us.

Read about transfers