The enigmatic ISA that is actually a lucrative opportunity when used correctly.
What does it stand for?
ISA = Individual savings account
What is it?
Simply, an account for UK residents to open and use as either a savings or investment vehicle.
What is the difference between a “Cash ISA” and “Stocks & Shares ISA”?
A cash ISA is an account that effectively just holds your cash, whereas a stocks & shares ISA allows your money to be invested into any asset of your choosing.
What are the pros & cons to a “Cash ISA”?
Benefit – it is no different from a savings account so people tend to use it to place their lump sum of money somewhere for safe keeping or for quick access (e.g. Emergency fund or house deposit).
Downside – it will earn very little interest, as the current rate is around a ‘generous’ 0.01%; therefore, although there is no risk of the nominal value of your money decreasing, it is losing value in real terms because inflation is around 8%.
What are the pros & cons to a “Stocks&Shares ISA”?
Benefit – there is a plethora of different ISAs to choose from, allowing you to place your money into shares of a business or index (a basket of businesses, e.g. FTSE 100*), bonds (government IOUs), property and much more!
*Financial Times Stock Exchange 100 Index – tracks the top 100 companies within the UK, so if you invest with this index you can benefit from the profits these businesses make.
Downside – with any investment your money is at risk so there is a chance that you might not get back the full amount you originally put in, however, this is where you need to assess your risk appetite, as there is full spectrum of ISAs that fall along the risk scale. Read my blog post on ‘How Risky are You‘ for more on this.
Why invest in an ISA?
The main reason for investing in an ISA is that any profits gained will not be taxed.
Yes, you read this correctly…it’s TAX FREE!
This is an unbelievably good deal given the fact we are taxed on virtually everything these days. The UK Government do this to encourage people to invest in its economy and businesses to boost GDP (gross domestic product…….throwback to geography GCSEs!!!).
You might have heard ISAs being referred to as a ‘tax-wrapper’ account.
Where can I find an ISA?
I tend to avoid ISAs offered by banks, personally, as they offer a limited choice and the returns (i.e. profit) are quite low.
Look into setting up an ISA with other investment platforms, such as: interactive investor, AJ bell, Vanguard, Legal&General or Hargreaves Lansdown (just to name a few). Remember – this is not financial advice.
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Things to note:
You can only put in a maximum of £20,000 a year into your ISA, which is more than enough for most people but restrictive for a few.
You can either deposit money as a lump sum any time during that ISA tax year or setup a direct debit of a maximum £1,666.67 per month (12 x £1,666,67 = £20k).
Annoyingly, you can only invest in one ISA account each tax year, which runs from March to the following April.
I do appreciate this is a rather dry topic but a lot of people are unaware of what ISAs are and how beneficial they can be when utilised properly!
April 2021 – a new tax year! Hoorah!
Spend less than you earn and invest the difference into your ISA.
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