As the end of another tax year approaches on April 5, time is running out to create, contribute or transfer between an Individual Savings Account (ISA) for 2021/22.
ISAs can be a tax-efficient way to save money, especially for those looking to invest or those with significant savings.
Here we explain what to consider when investing money in an ISA.
What is an ISA?
Anyone over 18 can save £20,000 per tax year in a tax-free ISA. This can be placed in one type of ISA or split between the four different types. But you can only have one of each type per tax year.
The best known ISA is cash and it works like a savings account. A cash ISA can be an easy access or a fixed term where the money is locked away for a period of time.
A stock and equity ISA, sometimes called an investment ISA, is where you invest your money in funds or stocks. This carries higher risks but potentially higher returns.
A lifetime ISA is for people between the ages of 18 and 40 and can only be used to buy a first property or for retirement. You can save up to £4,000 a year up to the age of 50 and the government gives you a 25% bonus on top of that.
The fourth, lesser-known ISA is an innovative finance ISA where you invest in peer-to-peer lending, such as lending money to businesses or property, rather than in the stock market.
Separate from these ISAs is the Junior ISA which does not count towards the £20,000 individual allowance. A Junior ISA can have a maximum of £9,000 per child per year and anyone can contribute. The child cannot access the money before the age of 18.
What kind should I get?
The first question to ask is: do you really need an ISA or would a high interest savings account be better?
“Cash ISAs have become a bit less popular in recent years because since 2016 everyone has a personal savings allowance anyway, so you don’t have to pay tax on any account. Only tops income needs a cash ISA,” explained Caroline HughesCEO of personal financial application Life.
The Savings Allowance means basic rate taxpayers can earn £1,000 of interest on their savings tax-free. This drops to £500 for higher rate taxpayers. With interest rates so low, a basic rate taxpayer would need over £100,000 in savings to earn £1,000 in interest a year.
“A low-tax payer is better off looking for a high-interest savings account. You can get a better interest rate with a non-ISA savings account and then switch to an ISA just before the due date. April 5 close,” Hughes said.
If you’re willing to take a risk and don’t need easy access to your savings, a Stocks and Shares ISA is a good medium to long-term investment. This is particularly the case with the Lifetime ISA, if you want to save for a first security deposit or if you are self-employed and want to save for your retirement.
“Equities have historically offered higher returns over long periods, although the price to pay is periods of short-term volatility which can put capital at risk if it were to be recovered quickly. The trick is to make sure the money is only committed to the stock market if it won’t be needed over a short horizon of less than five to ten years,” said Tim Bennett, head of the education at investment firm Killik & Co.
But it’s important to remember that a pension is better for retirement if you’re employed, as the employer contributions and tax benefits are greater than an ISA.
At the same time, an innovative finance ISA is set up for people with prior investment experience.
How to open one?
It is easy to open an ISA online or for regional products in branch. But it may be best to wait very close to the deadline when suppliers offer their best deals to attract customers at the last minute.
Some ISAs can be opened for as little as £1 while others charge a minimum of £500. Each product will have a different set of restrictions, such as whether it allows lump sums, monthly contributions, or a set number of contributions per year.
How do I transfer my current ISA?
Transferring an ISA is a little trickier because you have to go through the formal ISA transfer process rather than withdrawing the money yourself and opening a new account to deposit it. If you transfer it yourself, the tax protection is lost.
You can transfer an ISA at any time to the same type of ISA from another provider or to another type of ISA – as long as you don’t already have one.
In order to transfer, you must contact your ISA provider and ask them to do so.
There are different rules depending on whether you are transferring an ISA you opened in the current tax year or a historical ISA. If it is the current tax year, you must transfer everything, but if the ISA is from a previous tax year, you can choose how much to transfer.
Check if there are any fees or charges you have to pay when transferring, such as platform or management fees on stocks and stock ISAs that are collected for the transfer, or if you have an ISA for a fixed term with an early exit fee.
The transfer may take up to 15 business days for Cash ISAs, but may take longer if you have stocks and shares to sell.
It is also possible to withdraw money from your ISA at any time, but there may be withdrawal charges. You can’t pay more than £20,000 in a tax year, but most products will allow you to withdraw cash and then pay it back as you wish throughout the year until up to the £20,000 cap before the April 5 deadline.