With the help of Slater Financial I can relax safe in the knowledge that my savings are working hard for me.
As independent financial advisers, at Slater Financial we’re often asked about ISAs – what are they, how do they work, why should I have one, how many am I allowed and so on. So in this article, we’ll try to answer as many of those questions as we can – and specifically, explain why having a number of ISAs can be an excellent long-term investment option.
What exactly is an ISA?
Individual Savings Accounts – ISAs – were introduced in 1999 as a tax-exempt way to help people build up their savings. Originally there were two types: Cash ISAs available through high street banks and building societies with lower, fixed interest rates, and Stocks & Shares ISAs that invest your subscriptions in the stock market for variable, often higher, returns (Check out our complete guide to Stocks and Shares ISAs for more information!).
Over the years, ISAs have proved so popular that other types were introduced, including Lifetime ISAs designed for those under 40 years of age and Innovative Finance ISAs, which allow you to invest in peer-to-peer lending rather than cash or stocks and shares.
What are the benefits of having an ISA?
First and foremost, it’s that any interest your ISA investments earn is tax-free – there’s no income tax on dividends or interest income, and no capital gains tax on any profits you make.
In return for that tax-free status though, there are two key rules you must abide by:
Can I have more than one ISA?
While there are limits on how much you can invest overall, you could in theory open one of each type of ISA in any tax year if you wanted to – although in reality that wouldn’t usually make much sense.
Having said that, it’s well worth building up a portfolio of multiple ISAs over time, with the returns all exempt from tax. Because you’re paying no tax on the returns your money earns, it can grow and mount up faster. All ISAs have this tax advantage, but they work in different ways – so you can create a balanced ISA portfolio to best suit your plans and your attitude to investment by splitting your annual ISA allowance across some, or all, of the three main types of ISAs.
That’s where a good independent adviser like Slater Financial can help – we can review your financial situation, recommend the most suitable ISAs for you and help you manage all of your investments with transparency and oversight.
Can I open both Cash and Stocks & Shares ISAs?
Yes, you can open one of each type of ISA every tax year, with different providers – the only restriction is that you only invest £20,000 maximum across all your ISAs in that tax year.
With interest rates currently remaining at an all-time low and the stock market performing relatively well in recent years, many people have found Stocks & Shares ISAs an attractive proposition, with an average annual return between April 1999 and April 2020 of 5.14%1 (although past performance is no guarantee of future results).
Can I switch ISAs?
Interest rates vary from provider to provider, so if you find an account that pays a higher rate (and it accepts transfers) you can switch all your funds into it if you want to (usually subject to a fee).
You can also transfer some or all of your funds from previous years’ ISAs into a new ISA account to get a better interest rate – as long as you don’t top it up – and the transfer won’t count as part of the current year’s allowance.
These rules also apply to switching from Cash ISAs to Stocks & Shares ISAs, which may offer a better return (depending on stock market performance) compared with the current historically low interest rates available.
Will taking money out affect my ISA allowance?
You can withdraw money from an easy access ISA at any time, while fixed term ISAs only allow withdrawals with penalties. New flexible ISA rules mean any money you withdraw from a cash ISA can be replaced the same tax year without affecting your annual ISA allowance.
If you have further questions about ISAs and whether they’re the right investment for you, simply talk to the team at Slater Financial – we can undertake a free 90-minute review of your current financial situation and the options available. Just call us on 01298 212444 or email firstname.lastname@example.org to make an appointment.
As with all investing, your capital is at risk. The value of your portfolio with Slater Financial can go down as well as up and you may get back less than you invest. Tax treatments apply and may be subject to change in the future.