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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 The account is exempt from income tax and capital gains tax on the investment returns, and no tax is payable on money withdrawn from the scheme either.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.
ISAs were first introduced on 6th April 1999, replacing the earlier Personal Equity Plans (very similar to a Stocks and Shares ISA) and Tax-Exempt Special Savings Accounts (very similar to a Cash ISA). Over time, these have evolved into their respective ISA. There is a limit to how much could be saved each tax year. The current maximum is £20,000. If someone had fully used each annual allowance since the launch they would have put in a total of £231,320.
The two most commonly used ISAs are Cash ISAs and Stocks and Shares ISAs.
A Cash ISA is very similar to an ordinary savings account offered by Banks and Building Societies with the advantage you don’t pay tax on the interest you earn. Interest is usually paid annually and your funds are very flexible and easily accessible but generally they do not offer the most competitive interest rates.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?
Stocks and Shares ISAs are typically for people who are happy to invest their money for longer time. A Stocks and Shares ISA can invest your funds in a range of different investments. These can include individual shares, bonds, unit trusts and stock market linked investments. The returns from Stocks and Shares ISAs will depend on two main factors. Firstly, the performance of your investments and secondly, the annual management and underlying charges associated with them. Investments will be tailored to the level of investment risk you are comfortable with.