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ISA season

It’s the ISA season – why all the fuss?

Why do I need an ISA? – It gives you the freedom to save or invest without paying any UK tax

How much can be invested – The annual ISA allowance is £20,000 per person

Is this just a sales gimmick? – No. Over time your investments should grow better in an ISA

The ISA special supplement that came with the much respected Sunday Times last week (https://www.thetimes.co.uk/past-six-days/2021-03-14/isa-guide) had 10 pages dedicated to promoting the advantages of ISAs.

The advantage of having an ISA pot is that it gives you the freedom to save or invest without paying any UK tax.

Like many people, I am like a butterfly, going from headline to headline scanning the pages without really taking in any of the details. But what interesting reading the headlines were!

They included such gems as “I’m an Isaholic” and on the other side of the coin “Seems that my love affair with Isa has gone a little stale”.

These two headlines seem to sum up many people’s attitude to ISAs. Either they like them so much that they eagerly take their maximum entitlement each year or they have become disillusioned and don’t bother engaging with them.

Like them or not, ISAs are a very tax and cost-efficient way of investing.

ISAs – the basics

ISA is the abbreviation of “Individual Savings Account” and it a special type of tax-efficient account.

Think of an ISA like a pot which has special tax breaks into which you put savings and investments so you can get the best returns.

You can invest up to £20,000 every year into your ISA pot each tax year. Everyone over the age of 18 (16 for a cash ISA) has their own ISA allowance so a married couple can invest £20,000 each i.e., £40,000.

You can also invest either side of the tax year so you could invest £20,000 for the 2020 /2021 tax year before April 5 and then another £20,000 for 2021/2022 after then.

The tax breaks

When you invest money in your ISA pot you will not pay tax on any capital gains, interest and dividend income within the account.

Unlike a pension you will not get tax relief on your contributions, but your money can be withdrawn at any time without paying tax. When you take money out of a pension you pay income tax (except for the 25% tax free amount)

Tax rules can change and benefits of ISAs will depend on individual circumstances.

Types of ISA

There are a number of different types of ISA and the main ones are:

  • Cash ISA
  • Stocks and Shares ISA
  • Junior ISA
  • Lifetime ISA
  • Innovative Finance ISA

The most popular ISAs are the cash and stocks and shares plans. The cash ISA does exactly what it says, i.e., it invests in cash but with low interest rates the returns are very low. The Stocks and Shares ISA is invested in the stock market.

Investing in the stock market can be risky as the value of your shares can go down as well as up so you should make sure you understand the risks and invest in line with your attitude to risk.

The Lifetime Isa is designed to help the under 40’s buy their first home or save for their retirement.. They can invest £4,000 a year and the government adds a 25% bonus up to a maximum of £1,000 a year.

There are strict rules about when you can take money out of a Lifetime ISA without paying a government withdrawal charge.

Junior ISAs are for young people under the age of 18 and an innovative finance ISA is for peer-to-peer loans instead of cash or shares.

Do you want help or advice about ISAs?

If would like any help or advice about setting up a new ISA or manging the investments in your current ISA I will be pleased to help.

Wearing my hat as a regulated adviser at Better Retirement (www.brgl.co.uk) I have access to wide range of ISA plans and sophisticated software to analyse the different options.

William Burrows

About the author

William Burrows

William has been involved with retirement options for nearly 30 years, advising clients on all aspects of annuities and retirement income options.

He is a regulated adviser with Better Retirement where he is the Retirement Director. He has have many years of practical experience in advising clients about all aspects of pension options at retirement and he is passionate about helping people make the right decisions about their pensions and retirement income.

William also publishes guides including the popular ‘You and Your Pension Pot’ and ‘The Retirement Journey’.

He is frequently quoted in the national press and appears on radio, podcasts and videos and writes extensively on retirement income matters.

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