Individual Savings Accounts (ISAs)
An ISA is an excellent way to put money aside without paying UK personal taxes on your subsequent investment growth or returns and interest. To put it simply, in the UK there are two main types of ISA: cash or stocks & shares.
For the 2018/19 tax year, which ends on 5th April, HMRC has set the tax-free ISA allowance to £20,000. It is up to you and your personal circumstances – you can take advantage of your entire allowance for the tax year or you can subscribe partially.
This annual allowance can be used for a single ISA product or, if you have multiple ISAs, the amount can be split amongst them. Bear in mind that if you want to open a new cash ISA you can only open one per tax year.
Let’s go over those two main types of ISA so you can decide which might be best for you.
The Cash ISA
A cash ISA is like a normal personal savings account and are available through most high street banks and building societies in varying forms.
Some cash ISAs offer instant access to your funds, but others have a fixed term period. ISAs that offer instant access are great for those who want to save but feel more comfortable knowing they can access the funds in case of emergency or leaner times.
Fixed-term cash ISAs only allow (penalty-free) access to the funds when the term ends, which can be helpful if you are comfortable with locking your savings away for a fixed period.
It is also important to ensure that your cash ISA provider is covered by the Financial Services Compensation Scheme (FSCS) so that your capital (up to the FSCS limit of £85,000) is protected should your provider default. This protection is like that offered by a standard saving or current account.
One drawback to cash ISAs is that the interest rates on offer are quite low, typically varying up to 2% annual equivalent rate (AER). You might want to also consider the rates available on non-ISA cash savings accounts.
The Stocks & Shares ISA
A stocks & shares ISA, on the other hand, involves investing your cash into the stock market. By investing your money over a longer term, a stocks & shares ISA is likely to deliver a higher return than a cash ISA and, importantly, you are more likely to keep pace with inflation; however, remember that past performance is not necessarily a guide to the future.
You do need to keep in mind that for a potentially higher return there may be a greater level of risk to your money. A stocks & shares ISA is an investment and the capital you contribute is not protected from rises and falls in the value of the underlying assets. This means you may ultimately receive less than you originally invested, so make sure you are comfortable with this risk before committing.
In terms of protection, should your ISA provider go into default but are covered by the FSCS (as mentioned above), up to £50,000 of your capital will be protected.
Why Would I Choose a Cash ISA?
A cash ISA is best if you want to save for the short term.
If there is a possibility that you may require the money for an emergency or you are saving toward a specific goal within the next few years, keeping your money in a cash ISA may be a better option.
Why Would I Choose a Stocks & Shares ISA?
A stocks & shares ISA offers the possibility of better returns over the longer term.
Therefore, if you are planning for your future and want to make the most of your money over the longer term, you might want to invest in a stocks & shares ISA. It is, however, important to note that there is a risk that you may lose some money.
Use It or Lose It
HMRC sets the ISA allowance for each tax year and it is not possible to carry forward any unused ISA allowance from one tax year to the next. As an example, if you use £15,000 of your £20,000 ISA allowance in 2018/19, you cannot carry over the remaining £5,000 into the 2019/20 tax year.
If you can, it is advisable to use your full ISA allowance every year.
With the personal tax year-end rapidly approaching on the 5th April, now is the time to put your ISA plan into action if you haven’t done so already. If possible, take advantage of your full ISA allowance of £20,000 for this tax year.
If you would like to talk to the team at Investment Quorum about subscribing to your ISA before the end of the tax year, please call us on 020 7337 1390 or send us an email. We would love to hear from you.
This article does not constitute specific advice and investors should bear in mind capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.
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