What’s an ISA and how does it work?

Business | 02/23/2021

What’s an ISA and how does it work?

An ISA is an Individual Savings Account offering tax-free investment payments – an incredibly powerful way of saving to enable financial freedom and peace of mind. In fact, an ISA is a cornerstone in allowing you to take complete control and live life on your own terms.

By utilising your annual allowances in the most efficient way, your money is sheltered from income tax liabilities – something that is often so crucial in securing your financial goals and helping you reach the future you and your family deserve.

To  ensure you make the right financial decisions, it’s important to understand the different types of ISAs and how they work.

Types of ISAs

The two most popular types of ISAs are;

  1. Cash ISA
  2. Stocks and Shares ISA

In the UK, your annual tax-free allowance for an ISA is £20,000. This limit is for the 2020/21 tax year which runs from 6 April 2020 until 5 April 2021. Any returns you earn on your £20,000 maximum invested, will be completely free of income and capital gains tax.

When a new tax year starts, you have a brand new allowance. However, if you don’t utiilise your full annual allowance before the end of the tax year, it cannot be carried forward to the next and the ability to maximise your tax-efficient savings will be lost.

It’s important to note that even if you withdraw money from an ISA, this doesn’t reset your annual limit.

You also have the opportunity to pay into a Junior ISA – a great way to provide a solid financial foundation for your children and contribute to their long-term financial security. Find out more about JISAs here.

 

What’s a cash ISA?

A cash ISA is effectively the same as a regular savings account, except the returns made on your money aren’t subject to income tax or capital gains tax. Although it’s a risk-free investment, the downside of holding a cash only ISA is that the returns you receive may not necessarily keep pace with inflation, meaning your spending power is reduced.

Anyone can open a cash ISA providing they’re aged 16 or over and are a UK resident for tax purposes. You can only open one cash ISA per year, but it is possible to transfer to another cash ISA or a stocks and shares ISA with a different provider.

Something that makes a cash ISA an attractive prospect is the flexibility associated with this type account. You can either choose to have instant access – withdrawing and depositing funds as often as you wish, or a fixed-term option meaning your money is tied up for an agreed term.

Please note that St. James’s Place do not offer a Cash ISA.

Stocks and Shares ISAs

Also known as an investment ISA, a stocks and shares ISA is placing your money into company shares, government or corporate bonds, property or other assets, all with potential attractive long-term returns.

To be eligible, you must be aged 18 or over and be a UK resident for tax purposes.

Similar to a cash ISA, the money earnt on your funds placed in a stocks and shares ISA is not subject to income or capital gains tax.

When using a stocks and shares ISA you can invest in a portfolio of funds, rather than individual shares. This spreads your money far more widely, offering the benefits of diversification and professional management. By investing in assets capable of generating income and capital growth, a stocks and shares ISA gives you the chance to make the most of the long-term tax benefits of your annual ISA allowance.

A common concern when investing in stocks and shares, is the supposed risk involved. However, what many fail to understand is that there are, in fact, various options to choose from, with varying levels of risk.

In order to maximise the returns you receive from a stocks and shares ISA, you must consider it as a medium to long-term commitment – investing into this type for at least five years. However, in the event that you do need to access your money you are able to make a withdrawal at any time.

 

Our expert advisers will steer you through the decision making process and offer guidance on the most suitable solutions. We’re here to provide the peace of mind you need to ensure you’re making the right financial decisions for your future.

For further advice on ISAs and how to make sound financial investments, get in touch with Pinnacle Wealth Management and our advisers will be happy to help.

 

The value of an ISA with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than you invested.

An investment in a Stocks and Shares ISA will not provide the same security of capital associated with a Cash ISA.

The favourable tax treatment of ISAs may not be maintained in the future and is subject to changes in legislation.

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