ISA ISA – Basics



ISAs (individual savings accounts) offer a flexible alternative to pensions, allowing you access to your money at any time. Whilst pension plans require you to reach a certain age before you can start drawing the money, and even then you can only access 25% in a cash lump sum, ISAs give you the flexibility to get to your money whenever you want. Though if an ISA is to serve as an ‘alternative’ to a pension, it is important you treat it as a long term savings account and you should only withdraw from the ISA if it’s absolutely necessary.

Tax Relief

The main reason for saving for your future with a pension is the obvious tax relief. An ISA affords you less tax relief, but still a relief which is worth looking at. With an ISA you only pay tax on your income before you transfer that into savings. Once the money is in the ISA you don’t pay tax on any interest you earn. You also don’t have to declare any interest or capital gains tax derived from your ISA investment on your tax return.

ISAs also give you the option to withdraw the money, at any time in its entirety. There is however an annual limit to how much you can pay into an ISA including any moneys withdrawn, which currently stands at £11,280 across both types of ISA. With both’ cash and stock’ and ‘share ISAs’ to choose from, there is plenty of choice, but also risk.

Stock and Share ISAs

Whilst you can only save £5,640 a year in cash ISAs, the rest can be invested in a stock and share ISA, where you can invest in stock and shares under the umbrella of an ISA, therefore protecting any investment from the taxman.

One option is to invest shares in individual companies within a self-select ISA, which are usually managed by stock brokers. The other more common option is investing in a collective investment vehicle such as a unit or investment trust. These are pools of investments where a fund manager picks a series of stocks and shares to invest in and managers your investment for you. The value of the investment depends on the performance of the fund manager and how good he is at investing in the market.

Cash ISAs

Cash ISAs are a savings account that protects your interest from the taxman. In fact, higher rate taxpayers could lose as much as 50% of their interest in a standard savings account. You can invest up to £5,640 a year in a Cash ISA and so long as you don’t withdraw this money, it will remain in the ISA building tax free interest every year.

When setting up a cash ISA you have to balance looking for the best interest rate at the time with an interest rate that remains competitive in the future. If the interest rate falls, or fails to rise in line with other markets, you can switch your ISA to a bank or building society that offers you a better rate. Remember not to withdraw the money if you want to do this, as you will lose the tax free benefits. Usually the bank or building society you wish to move your ISA too will help you set up the transfer.

Younger Savers

You have to be 18 to open up an ISA savings plan yet anyone aged 16 can open a cash ISA. Although few 16 or 17 year olds pay tax they may find that keeping an ISA account may help save tax on interest earned in subsequent years.

If you are contemplating setting up ISAs as opposed to setting up a pension it is very important you do your research, take in to account your own circumstances, and it could be a good idea to discuss this with an IFA.

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