August 27th, 2021
5 important questions about ISAs answered
If you want to be able to reach your financial goals, it’s important to build your wealth in an effective way. One of the best ways to do that is with an Individual Savings Account (ISA).
Despite their benefits, many people don’t know the difference between an ISA and a regular savings account. Here are the answers to five of the most important questions about ISAs.
1. What are the advantages of saving with an ISA?
With such an unassuming name as an Individual Savings Account, it isn’t immediately obvious what the benefit of saving with one is.
The main difference between an ISA and a traditional savings account is that any interest or returns from an ISA are free from Income Tax or Capital Gains Tax (CGT).
Since they are a tax-efficient way to save, ISAs can be a useful way to build your wealth in the long term.
2. How much can I save into an ISA each year?
One of the most common questions that people ask about ISAs is how much they can save into one each year. At this point, it’s important to note that while there is an annual limit, it is for the tax year of 6 April to 5 April.
Since ISAs have tax benefits, you can only save so much into them in any given tax year. For the 2021/22 tax year, this limit stands at £20,000 and applies across all of your ISAs, if you hold more than one type.
It’s also important to be aware that, unlike with some other allowances, your ISA allowance doesn’t roll over. If you haven’t used the full amount by the end of the tax year, you will lose your remaining allowance.
3. What are the main types of ISA available?
If you want to use an ISA to grow your wealth, there are several different types available. Some of the most popular are:
A Cash ISA is one of simplest types of ISA available and are a great way to save for the future. They also typically have a high degree of flexibility. Cash ISAs are a tax-efficient way to save since you don’t have to pay Income Tax on the growth.
However, one potential issue that you may face with this product is that they tend to have relatively low interest rates. If it is below the rate of inflation, then the true value of your savings could be eroded.
Stocks and Shares ISA
Another popular product is the Stocks and Shares ISA. This allows you to invest your money, rather than holding it in cash. This is a tax-efficient way to grow your wealth, since you don’t have to pay CGT on any returns that you get.
While this type of ISA typically has returns that are greater than the rate of inflation, since you are investing your money, there is a risk of losing money.
Another popular ISA product is the Lifetime ISA, which you can open if you’re between the ages of 18 and 40. You can contribute up to £4,000 into a Lifetime ISA each year, until the age of 50. In this type of account, you can save cash, stocks and shares, or a mix of both.
The main benefit of this type of ISA is that the government will top up your contributions with an extra 25%. For example, if you contribute the full £4,000 into it in a tax year, you will receive an extra £1,000.
However, it’s worth bearing in mind that you can only access the funds from the age of 60, unless you are using it to buy your first house. If you make a withdrawal without meeting either of these criteria, you will incur a charge.
If you’re unsure which type of ISA is the right choice for you, speak to us for advice.
4. Can I have more than one type of ISA?
You can have more than one ISA, but you can only open one account in each ISA category per tax year. For example, if you opened a Cash ISA in the 2021/22 tax year, you would have to wait until the 22/23 tax year to open a second Cash ISA.
It’s important to note that you can have several different types of ISA active at once. So, for example, you could pay into both a Cash ISA and a Stocks and Shares ISA in the same tax year.
It’s important to remember that your annual ISA allowance is across all of your ISAs, so you need to careful not to exceed the allowed amount if you’re saving into different types of ISA in the same tax year.
5. Can I transfer to another provider?
Typically, most ISAs have a high degree of flexibility. This means that you can change your provider or switch the type of accounts you own. For example, you may want to change a Cash ISA to a Stocks and Shares ISA.
If you want to transfer money that you’ve put into an ISA in a previous tax year, you can move all of it or just a smaller portion. However, if it’s money that you’ve paid into a Stocks and Shares ISA during the current tax year, you typically have to transfer the full amount.
If you want to be able to avoid any potential tax pitfalls of saving with an ISA, you may benefit from seeking professional advice.
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The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.