Individual Savings Accounts – most commonly referred to as ISAs – offer a way for everyone to enjoy putting some money aside without having to pay tax on it. If you have an amount of money that you’d like to put aside for a rainy day, an ISA could offer you just the security and return on investment that you’re looking for. However, as with all financial products, it may not be the best choice for you.
Have a look at some straightforward guides and resources that could help you determine what an ISA could do for you and whether it’s a potential choice for your savings plan.
A basic guide to how ISAs work
These accounts were first introduced by the government in 1999 and were part of an initiative that hoped to encourage people to save more. ISAs allow all adults in the UK to save up to £11,520 a year completely tax free. With other savings accounts, you are required to pay tax on any interest that you earn. It sounds simple, but there are many different ISA products to choose from with banks and building societies offering a full suite of different ways to save.
For a good grounding on how ISAs work, you might want to have a look at the ISA guide available from Money.co.uk. BBA, the voice of banking and financial services, also offers impartial information about ISAs that may prove useful.
Of your eligible £11,520 of savings per year, only £5,760 may be saved as a cash ISA. The remainder must be made up of stocks and shares. You can choose whether to make full use of your allowances or whether to invest a small amount. It’s also possible for you to take out a cash ISA with one provider and turn to another to handle your shares. For a clearer picture on the differences between cash and shares ISAs, have a look at this factsheet from The Guardian.
Top tips for understanding ISAs
By letting you save a certain amount of money free from income and capital gains tax, ISAs can help you maximise your savings investment. However, they are best suited to savings that you are confident that you won’t need to access on a regular basis. Many ISAs will penalise you if you need to take your money out of your account before the agreed date. This could be in the form of a small fee or a percentage of the interest earned.
There are also some specific rules for transferring investment funds. Find a useful breakdown of these rules on the ISA website.
If you’re hoping to put some money aside for the younger members of your family, you might also want to investigate junior ISAs. These allow you to transfer trust fund money into ISAs to enjoy better returns. You can find out more about this new development from The Guardian.
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