Considering Investing in an ISA? Read this first.

Much of the discussion and commentary around ISAs is positive, particularly comments that come from the government.

However, is an ISA the best place to invest your hard-earned money? What interest can you expect to earn?

Here’s what you need to know.

What is an ISA?

ISA stands for Individual Savings Account, a title which describes the account very well. The crucial difference between an ISA and a personal savings account, however, is that, the interest you earn on your ISA savings is tax-free, whereas in a personal savings account the interest is only tax-free up to a limit. ISAs therefore, are tax-efficient.

Any UK resident over 18 can open an ISA (UK residents over 16 can open a cash ISA). The only exception to this rule is when opening a Lifetime ISA. To open a Lifetime ISA, you must be over 18 and under 40 years old.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

Savings Limits

There is another key point to remember when looking at ISAs. In addition to the fact that they are a tax-efficient savings account, ISAs have a maximum savings limit. Currently, the most you can save in an ISA is £20,000 per tax year.

A maximum limit is for each tax year and across all your ISA accounts. Therefore, you could have £15,000 in one type of ISA, but if you then open another ISA, the most you will be able to put into that is £5,000.

Cash ISAs and Interest

One of the most popular types of ISA is a cash ISA. Almost all banks offer them as they are straightforward to understand and use. There are also multiple options. For example, some ISAs allow you quick access to your money when you need it and others lock in your money for a set period of time.

What about the interest you can expect on cash ISAs? Currently, and for the past several years, the interest you can expect on a cash ISA is very low.

If you have cash ISAs, it may be prudent to transfer them to an equity (stocks and shares) ISA*. You won’t lose your current allowances and you could earn more on your savings. Although there is no fixed term, you should consider stocks and shares ISAs to be a medium to long term investment of ideally five years or more.

Types of ISA

• Cash ISA – for saving cash, similar to a traditional bank savings account
• Stocks and shares ISA* – your savings are invested in the stock market so returns on stocks and shares ISAs are typically variable
• Lifetime ISA – allows you to save up to £4,000 a year, with the government adding 25 percent on top
• Junior ISAs – parents can open junior ISAs for their children who are under 16
• Help to Buy: ISA – allows you to place savings which the government tops up. It is exclusively for first-time buyers and the money should only be used as a deposit for your first home.

Conclusion

ISAs may be, depending on your personal circumstances, an excellent savings choice because they are tax-efficient. There are lots of options to choose from with interest rates that vary greatly depending on risk factors and investment terms.

Before you decide, it’s important to get financial advice. To speak to a financial adviser in Dartford about investing in an ISA, or transferring your existing ISAs, please contact us today.

*Although there is no fixed term, you should consider stocks and shares ISAs to be a medium to long term investment of ideally five years or more.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.