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Individual Savings Accounts (ISAs)
An Individual Savings Account (ISA) has become many people’s preferred way of saving, mainly due to their favourable tax status. The account is exempt from income tax and capital gains tax on the investment returns, and no tax is payable on money withdrawn from the scheme either.
An ISA is not a pension product, but can be a useful tool for retirement planning.
Cash and a broad range of investments can be held within an ISA, and there is no restriction on when or how much money can be withdrawn.
ISAs were introduced on 6th April 1999, replacing the earlier Personal Equity Plans (PEPs; very similar to a Stocks and Shares ISA) and Tax-Exempt Special Savings Accounts (TESSAs; very similar to a Cash ISA). Over time, these have evolved into their respected ISA.
There has always been a limit to how much could be saved each tax year, with the current annual subscription limit being £20,000. But, if someone had fully used their total ISA allowances since their launch they would have saved £231,320.
With interest rates being held at a historically low level for many years, Cash ISAs have struggled to keep track with inflation, with the majority having rates of 1% per annum or less. While traditionally a Cash ISA may have been intended for short term savings can you really afford to have so much money earning so little?
It is vitally important that if you have saved in this way you are made aware of how your ISAs are performing and other options that are available to you.
ISAs come packaged in many different ways. However, generally speaking the two most commonly used are Cash ISAs and Stocks and Shares ISAs.
A Cash ISA is a cash-based savings account normally offered by banks and building societies, which enjoys a tax free status and receives interest, usually paid annually. These are very flexible but as such do not offer the most competitive interest rates.
With a Stocks and Shares ISA your money is invested in ‘qualifying investments’, which can include, but are not limited to, cash and stock market linked investments.
The returns from Stocks and Shares ISAs will depend on two main factors. Firstly, the performance of the fund manager looking after the investments and secondly the annual management fees and underlying charges associated to the fund. These alone can amount up to 1% each year. Stocks and Shares ISAs are typically for people who are happy to invest their money for 5 years or more.
However, you may find you are surprised by the degree of investment risk associated with these types of investment schemes as there are portfolios designed to cover cautious and aggressive investors (and everybody in between). To this end, reviewing them is an activity well worth undertaking.