What is an ISA?

How can you do more with your money through an ISA?

Let’s start with the basics. An ISA is an Individual Savings Account, but why is it different from a normal savings account? Essentially, an ISA is a tax-free savings account. Every tax year you have an ISA allowance that allows you to save or invest money up to a certain amount without paying income or capital gains tax on your returns.

The ISA allowance for the current 2020/21 tax year is £20,000, and the tax year runs from the 6th April to the 5th April the following year. Whether you’re able to use up your full allowance, or want to invest a regular amount, an ISA can help you to grow your money and shelter it from tax.

There’s no tax on withdrawals but you should check with your provider as some, unlike True Potential, might charge an exit fee or pay a lower interest rate if you withdraw early.

There are four types of ISA:

  • Cash ISAs
  • Stocks & shares ISAs
  • Innovative Finance ISAs
  • Lifetime ISAs

You can put money into one of each kind of ISA each tax year.

Today we will focus on the difference between Cash ISAs and Stocks & Shares ISAs.

Cash ISAs are linked to interest rates, and Stocks & Shares ISAs are linked to the performance of the funds they are invested in.

A factor to consider when deciding between a Cash ISA or a Stocks & Shares ISA is that Interest rates are low right now. When inflation is higher than interest rates, money in a Cash ISA can be losing its buying power.

If prices are going up quicker than your money grows, the cash in your Cash ISA buys less over time. For example, if inflation is at 2% and your Cash ISA pays 1% interest, you’re falling behind.

A Stocks & Shares ISA is linked to the performance of the funds they are invested in, over the longer term there could be more potential to grow your money. You have to keep in mind that with investing your capital is at risk and the value of your investment may fluctuate, but if you invest in a Stocks and Shares ISA for the long term and in a diversified portfolio, you have the opportunity to realise greater growth than in a Cash ISA.

With this in mind, a Stocks & Shares ISA could be good for investment goals that are at least a few years away, such as paying off a mortgage or covering university fees.

Keep in mind that although you can withdraw from a Stocks & Shares ISA at any time, it makes sense to stay invested for as long as you can. This is because your investment could benefit from compound growth, which is where you get growth not just on your original investment, but also growth on the growth, but of course it isn’t guaranteed.

An ISA can be a great place for your money as it’s sheltered from tax. The type of ISA you choose depends on your goals – for short term targets a Cash ISA can play an important role, and for longer-term goals a Stocks & Shares ISA may be a better option.

So, we can see how an ISA can be a great way to do more with your money.

1. You can save and invest up to £20,000 in the 2020/21 tax year in your ISAs. You won’t pay tax on interest on cash, or on income or capital gains from investments.

2. A Cash ISA is linked to interest rates, which could be below inflation with cash losing its buying power, whereas a Stocks & Shares ISA is linked to the performance of the investment. Your capital is at risk and the value of your investment may fluctuate.

3. You can withdraw your money at any time without any tax penalties, but the longer you are invested for, the more opportunity you’ll have to grow your money.

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With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Past performance is not a guide to future performance. Tax rules can change at any time. This blog is not personal financial advice.

ISAs