Published on: 23rd December 2019
Earlier this year, Individual Savings Accounts (ISAs) celebrated their 20th birthday. And despite the introduction of the Personal Savings Allowance, they should still be an important part of your financial plan. They can be an excellent tool for saving and investing.
ISAs were introduced in 1999 by then Chancellor Gordon Brown. The aim was to encourage people to save more by making it simpler and more efficient. Whilst they’re a common tool now, they weren’t an instant hit. In fact, they were branded a ‘colossal failure’ by one Labour MP. Luckily, they did catch on and they’ve evolved over time to offer even more choice.
In 1999, the ISA allowance was just £7,000 annually. Today, you can save up to £20,000 each tax year in an efficient way by depositing it into an ISA. According to HMRC figures, 10.8 million adult ISAs were subscribed to in 2017/18. In total, £69 billion is held in ISAs across the UK, with the average subscription in 2017/18 standing at £6,409.
Your ISA options
There are essentially two options when saving into an ISA:
- Cash: With a Cash ISA, you earn interest on your deposits. Assuming you stay within the limits of the Financial Service Compensation Scheme, your money is safe. However, the downside is that interest rates are typically below inflation. This means that spending power is reduced over time. Cash ISAs make up around 77% of all ISA subscriptions.
- Investing: On the other hand, a Stocks and Shares ISA gives you an opportunity to invest for potentially higher returns. But there is a risk that your investments will decrease in value and you could lose money.
You can hold both Cash ISAs and Stocks and Shares ISAs, but your total subscription level cannot exceed £20,000 per tax year across all accounts. Which option is right for you will depend on your goals and risk tolerance. Over the last two decades, other ISA products have launched and can be useful in certain circumstances:
- A Help to Buy ISA is a type of Cash ISA that can provide a 25% bonus on contributions for first-time buyers up to a maximum of £3,000
- A Lifetime ISA can also provide a 25% government bonus on contributions up to £33,000 for those saving for their first home or retirement. A Lifetime ISA can be either a Cash or Stocks and Shares ISA
- An Innovative Finance ISA can hold peer-to-peer loans and crowdfunding services. It offers investment benefits but is typically only suitable for investors with a high capacity for loss
4 reasons to use ISAs
So, ISAs are popular and there are several different options, but that’s no reason alone to use them. Here are four reasons why ISAs could be right for you.
1. They’re tax-efficient
Being tax efficient is one of the main incentives to use an ISA since they launched 20 years ago. You don’t pay tax on the interest or returns earned. It means your gains can go straight into your pocket.
The Personal Savings Allowance (PSA) introduced in 2016 mean this benefit isn’t as important as it once was. The PSA allows you to earn interest up to £1,000 tax-free. But this isn’t the case for everyone, which leads us on to the next point.
2. You may have a reduced Personal Savings Allowance (PSA)
Some have claimed that ISAs aren’t as important since the PSA was introduced. But the £1,000 interest tax-free only applies if you’re a basic rate taxpayer. If you cross the £50,000 income threshold to become a higher rate taxpayer, your PSA is halved to £500. Move into the additional rate tax bracket and you don’t have a PSA allowance at all. As a result, an ISA is still an important way to save tax efficiently.
3. They can offer you higher rates of interest
In the current environment of low-interest rates, shopping around could help your money stretch further. Some ISA products can offer competitive rates of interest, particularly if you choose an ISA that locks your money away for a defined period of time. ISAs don’t automatically mean the best interest rates but you shouldn’t cut out part of the savings market when searching.
4. Stocks and Shares ISAs can offer a solution for building investments
If you’re just starting to build an investment portfolio, a Stocks and Shares ISA can provide an easy way to start. With the ability to invest as little as £1, you can gradually build up your investments at a rate that suits you. For new investors, an ISA that invests in a fund is often the simplest option. Make sure that you fully check the different risk profiles of the funds on offer, and how they align with your goals, before deciding where to place your money.
Don’t forget ISAs can be used for children and grandchildren too
ISAs, or more specifically Junior ISAs (JISA), can be an excellent way to save for children and grandchildren too.
You can open and start paying into a JISA as soon as a child is born. You can deposit £4,369 into a JISA for the 2019/20 tax year. And, like their adult counterparts, it can be held either in cash or stocks and shares. One thing to keep in mind when using a JISA is that you won’t be able to make withdrawals. Once the child turns 16, they will be able to take control of the account, for example, deciding how the money is invested. However, they won’t be able to make withdrawals until they turn 18.
Whether you want to discuss your own ISA or saving for the next generation, please get in touch. We’d be happy to talk about how an ISA can fit into your plans.
Please note: The value of your investment can go down as well as up and you may not get back the full amount invested. Past performance is not a reliable indicator of future performance.