Using ISAs as part of your financial planning can make a real difference to helping you achieve your saving goals. Here’s our guide to understanding ISAs, and the key things you need to know.
What is an ISA?
An ISA, or individual savings account, is a tax-efficient account for your investments or savings.
There are 2 types of ISA:
- A cash ISA which is tax-free.
- A stocks and shares ISA, which is tax efficient.
With a stocks and shares ISA you are investing; this could be in funds, shares, corporate or government bonds. You can choose a platform and trade the shares yourself, or choose an online service to invest on your behalf. If the investments held within your ISA make a profit you are exempt from capital gains tax, and you’ll also receive preferential tax treatment on dividends and interest.
Who can open an ISA?
You must be a UK resident, and be aged 16 or over to open a cash ISA. You must be 18 or over to hold a stocks and shares ISA.
How much can I put in an ISA?
This tax year runs from 6th April 2015 to 5th April 2016, and you can save up to £15,240 during this period. You can either put your entire allowance into a cash ISA or put it all into a stocks and shares ISA. Alternatively, you can split your annual allowance between one cash ISA and one stocks and shares ISA. You can’t open more than one ISA of each type in a tax year.
What if I want to invest more than £15,240?
You can only invest a maximum of £15,240 in an ISA but some providers will offer you a stocks and shares ISA plus a general investment account on top. That way you can see your complete portfolio in one place, making it easer for you to see how your investment is performing.
If I haven’t used my full annual allowance can I carry it forward to the next year?
No, if you haven’t used your annual allowance then you can’t carry it forward – you either use it or lose it.
Can I move existing ISAs to a new provider?
Yes, you can move your existing ISAs, although you will need to check that your new provider allows you to do this. It’s important to let your new provider organise the transfer for you, so your assets remain sheltered from tax.
Could I get a better interest rate from my bank or building society account instead of a cash ISA?
Interest rates on most bank and building society accounts are low at the moment, so some current accounts offer a higher interest rate on your balance to encourage you to switch. It’s important to look at all the options, and consider your saving goals.
If you’re putting money away on a short-term basis, such as for a holiday, then you may be better off leaving it in your bank account. Any interest you earn will be subject to tax though, so the more you earn, the more you’ll be taxed. Therefore, for basic rate taxpayers, 20% of the interest earned will be paid in tax, and for higher rate taxpayers that will be 40%, with additional rate taxpayers paying 45%. If the money is put in an ISA it remains tax free year-on-year, so it’s usually a better option for mid and long-term saving.
Is a cash ISA a safer investment than a stocks and shares ISA?
A cash ISA is a secure place for your money as you are not exposed to risk and volatility in the same way that you can be with a stocks and shares ISA. However, interest rates for cash ISAs are typically very low at present.
You also need to consider the effects of inflation upon your savings. Inflation risk is a hidden threat to any investment and the rising cost of living means £100 will buy you less in ten years’ time than it does today. So, for your investments to be safe from the effects of inflationary erosion, you need to ideally make sure they are earning more than the rate of inflation.
How do I invest in a stocks and shares ISA?
There are number of ways you can invest in a stocks and shares ISA. You can do it yourself and pick your own stocks and shares, or you can use a professional service. If you choose a professional service there are many options, from investing in a fund via a platform to an online service which creates a portfolio designed to suit your appetite for risk, and then manages it for you.
What is investment risk?
Put simply, investment risk is a measure of how much uncertainty there is about the level of return that an investment may deliver. The more risk you take, the wider the range of potential outcomes -if you want high returns you will need to accept a greater risk of loss.
You should ensure that whatever investment options you choose are suited to your lifestyle, financial goals, attitude to risk and capacity to withstand financial loss. There’s always a risk when investing as investments can go down as well as up. Generally speaking if you are investing in anything other than a cash ISA, you should look at investing for 5 years or more, rather than seeing it as a short-term option.
Can I withdraw money from my ISA?
You can take money out of your ISA whenever you want. You should remember, however, that when you withdraw money from your ISA, current rules do not permit you to replace the funds at a later date. This means, for example, that if you reach the ISA limit and then make a withdrawal, the money cannot be put back in.
How do I find out more?
You can view more details about ISAs on the GOV.UK website or you could consult a financial adviser. We have a comphrensive set of Investment FAQs at Lucas Fettes Online that you may find helpful too.
This article is intended as an overview, and does not constitute financial advice. The value of investments may fall as well as rise, and the income from investments may fluctuate and is not guaranteed. Lucas Fettes & Partners offers a Stocks & Shares ISA, and does not offer a Cash ISA.