The Benefits of Saving in an ISA
If you are looking for a home for existing savings or want to start putting some money away for the future, an ISA should be your first port of call. There are many benefits to saving in an ISA, so what are they and why should you use one?
What is an ISA?
ISA stands for Individual Savings Account. Whilst they may seem complex at first, they are actually very simple. In each tax year, you can invest a maximum of £11,520 in an ISA. Up to £5,760 can be invested in a Cash ISA, which operates in a similar way to a traditional savings account. The balance of your ISA allowance, or the whole of it, can be invested in a Stocks and Shares ISA, which is more of an investment product and has a greater degree of risk, although returns can be higher.
What are the main benefits?
The main benefit to placing your savings in an ISA is the tax advantages that this brings. For most people, whether they are making their own financial arrangements or using the services of independent investment advisors, an ISA will provide them with a higher level of return than alternative savings products.
The interest earned on money held in a Cash ISA is not taxed. With a standard savings account, interest earned is taxed at 20% for basic rate taxpayers and 40% for higher rate ones. As a result, it is uncommon to find a standard savings account that provides a better return than a Cash ISA.
There are similar tax advantages to be had by putting your savings into a Stocks and Shares ISA. Any profits that you make won’t attract capital gains tax and any tax on bonds can be reclaimed. If you are a higher rate tax payer, dividend income is taxed at a much lower rate – 10% – than would otherwise be the case.
The range of ISAs available on the market also makes them an attractive proposition. Those available include instant access Cash ISAs, fixed rate ones, those with penalty-free withdrawals, internet only accounts or ones that accept transfers.
If you’re interested in a Stocks and Shares ISA, you can choose between a Pre-Selected Fund ISA or, if you’re a seasoned investor, a Self-Selected Fund ISA. Under the latter, you can choose to invest in any company that is listed on a recognised stock exchange or any fund or trust that meets the Revenue’s ISA rules.
Who can open an ISA?
ISAs are open to UK residents who are over 16, for a Cash ISA and over 18, for a Stocks and Shares ISA. Even if you’re not currently paying tax, investing in an ISA will protect your savings from attracting tax in the future when you do.
Katrina Stone writes about financial products for a number of independent investment advisors. She is particularly interested in savings products, such as ISAs, that help to maximise returns on savings.
Category: Investing, Retirement
It seems as though your ISA is very similar to an Individual retirement account or IRA in America. The accounts take different forms such rollover, regular IRA and Roth IRA but they are all pretty much the same. The rules are vast and can be complex and are probably very similar to the rules that you have to deal with your ISA accounts.