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What Is An ISA?
An ISA is an Individual Savings Account that gives you tax-free interest. There is a limit to the amount you allowed to put into an ISA each year. This is currently £20,000 (2020/2021).
There are two main types of ISA:
- a Cash ISA which is like an ordinary savings account where you pay cash in and it earns interest
- an Investment ISA (also known as stocks and shares ISA) which invests your money in things like stocks and shares, bonds and gilts.
- Lifetime ISA – You can use a Lifetime ISA to buy your first home or save for later life
- Innovative Finance ISA – peer to peer lending investments
Who can save in an ISA?
You have be resident in the UK to be able to open an ISA.
You can open a cash ISA from age 16 or over and you can open an investment ISA from aged 18 or over and a Junior ISA from birth.
What’s the difference between a cash ISA and an investment ISA?
Cash ISAs are a good way to save for the short-term normally less than 5 years. They rates of interest similar to bank and building society accounts with the added bonus that you don’t pay tax on the interest.
Investment ISAs are for stock market investments. They are worth considering if you are saving for the longer term over 5 years and are willing to take a greater level of risk with your money.
Investing in the stock market is a riskier way to save because it’s possible to lose money as well as make it. However, the longer you invest for, the more likely you are to make more money than if you had saved with a bank or building society and more likely to at least keep pace with inflation.
You can have both a Cash ISA and a Stocks and Shares ISA. However you cannot invest more than the total annual allowance between them.
Can You Transfer Your ISA?
You can transfer the your ISA from one provider to another at any time.
You can transfer all or part of your ISA’s that you have from previous years to a different provider but if you want to transfer the money you have put in during the current year then you would have to move all of it.
Be sure to check with your provider if they have any restrictions on transferring and any charges they make for doing this.
We are happy to review any savings you have and help you decide whether a transfer may be the right choice for you.
Cash can form a good basis for a portfolio – unlike stock market investments, cash savings can offer immediate access and the capital is secure.
Cash ISAs operate just like a normal savings account except all the interest is tax free. The interest rate offered in a Cash ISA will vary based on which provider you choose. Therefore, it’s essential to shop around for the best deal using the best buy tables which can be found in the press or online. Watch out for headline-grabbing introductory rates or temporary bonuses though, as when these disappear you could be left with an unattractive rate.
However, with such meagre interest rates available at present, there is a high price to pay for security. In the long term opting for this security can be a bad move, because low-risk, low-return investments will be disproportionately hit by inflation. Even historically low inflation of 3% will almost halve spending power over 22 years. Once some cash savings have been built up ‘for a rainy day’, investors could consider investing in riskier assets which offer higher potential returns, although they will fall in value as well as rise and don’t offer the same security as cash.