ISAs are likely to be in the media a lot over the coming weeks in the run up to the end of the tax year on 5th April. So I thought I’d go back to basics and explain what ISAs are, and why stocks & shares ISAs in particular should be the bed-rock of any medium to long-term savings plan.
ISA stands for Individual Savings Account, and there are 2 types – cash ISA, and stocks & shares (or equity) ISA. They exist to encourage us all to save for the future, by offering significant tax incentives. There is a maximum amount you can save in an ISA each tax year, and this was raised by the government last July to £15,000 per person, a 30% increase. If you fail to use your allowance, it cannot be carried forward to the next year, so use it or lose it!
Cash ISAs are still the most common ISA, maybe because they are simpler to understand. They are essentially a way of saving cash whilst earning a small amount of interest – often for a fixed period of 1-3 years at a fixed rate of interest. The interest you earn is free of income tax and capital gains tax, unlike in a conventional bank or savings account where 20% tax is deducted.
However, with interest rates continuing at historically low levels, the average rate of return on a cash ISA is just 1.08% (as at 8/1/15). So it may be tax-efficient, but it’s only worth pennies versus a conventional bank account.
Stocks & Shares ISAs are investments in which your money is pooled with other people’s money and invested in funds run by professional fund managers. There is a vast choice of funds, over 3,000 in the UK, which is one big reason why people can feel overwhelmed and not sure where to start in selecting the right ones for them. The funds have different risk ratings, from lower to higher risk, and again, this can cause uncertainty. The net result is often inaction.
However this is where a good financial planner can help. They can help you identify the risk level you are comfortable with, based on the time frame you want to save for, the purpose of the savings, what proportion of your total wealth you are wanting to invest. Investing in a Stocks & Shares ISA is higher risk than a cash ISA, as the return of your original money is not guaranteed.
So I encourage you to take the plunge before the end of this tax year!
There is an initial charge to pay on a Stocks & Shares ISA, unlike a cash ISA, but for those willing to take some risk with their capital, the potential growth and return on your investment is usually significantly higher over the long term, so the charges can be off-set. For most people who are UK resident, it is the most tax-efficient way to grow your money over the medium to long-term.
So I encourage you to take the plunge before the end of this tax year! Work with a financial planner to identify what is right for you, become an ISA investor, and make the most of the tax incentives available.
Remember that the value of a Stocks & Shares ISA can fall as well as rise, and you may get back less than the amount invested. An investment in a Stocks & Shares ISA will not provide the security of capital associated with a cash ISA.
The favourable tax treatment given to ISAs may not be maintained in the future as they are subject to changes in legislation.
To receive a complimentary guide covering Wealth Management, Retirement Planning or Inheritance Tax Planning, please contact Amanda Redman on 07801 045587, email [email protected] or visit www.amandaredmanfp.co.uk