The new tax year is nearly here, and savers and investors are rushing to use up their 2019/20 ISA allowances before 5th April and planning the best way to use their new 2020/21 allowance after 6th April.
But the question is not if, but should you try to use your allowances to the full. The answer is almost certainly yes. If you have cash to invest, for most people ISAs are ideal thanks to their tax-efficient status. They help your money grow faster by protecting it from the taxman.
There is no tax to pay on the interest your savings earn in a cash ISA, no capital gains tax on growth on holdings in a Stock and Share ISA, and no income tax on any ISA when you eventually come to cash them in.
The real question is “which ISA should you choose?” The answer, however, can be complicated, there are many types of ISA, many different providers and many ways to save or invest.
A Cash ISA works like a normal savings account. Most high street banks offer them with fixed returns, and the protection of the Financial Services Compensation Scheme (FSCS), meaning your capital up to £85,000 is safe. However, interest rates are very low, and inflation can eat into your returns. Since personal savings allowance was introduced few people pay tax on an ordinary savings account, so a Cash ISA may be less appealing.
However, cash is good for short-term savings. If you might need it for an emergency a Cash ISA may be a good choice – and you can always use one tactically as a short term solution to ensure you use your full tax allowance, and transfer to another ISA later.
Stocks and Shares ISA?
A Stocks and Shares ISA is not a way of saving – it is an investment. Stocks and shares ISAs, over the longer term, tend to deliver a higher return than a Cash ISA and are more likely to beat inflation.
However, a potentially higher return means a higher risk. In a Stocks and Shares ISA the money you put in is subject to the rises and falls in the value of the underlying assets. This means you can get back less than the amount you originally invested, so you need to make sure you’re comfortable with the risk.
Other ISA types?
There are other types of ISA. The Lifetime ISA is designed to help people save for a first home or build their pension savings but does not offer the flexibility of the more conventional ISA types. The amount you can put in is restricted to just £4,000 per year, and if you want to withdraw for any reason other than buying a first home before the age of 55, they are subject to large penalties.
Saving in a Lifetime ISA may affect your entitlement to current and future means tested benefits.
The Innovative Finance ISA allows you to participate in Peer to Peer lending. When it comes to risk and potential returns it may sit somewhere between Cash and Stocks and Shares ISAs, but it is a relatively new and as yet unproven idea.
Innovative Finance ISA (IFISAs) are not protected under the Financial Services Compensation Scheme (FSCS). This means your money could be at risk if you save with an IFISA company that goes bust.
Getting expert help
When you have decided on the type of ISA that is right for your needs you need to look at the way you want to invest in it.
Getting expert help to find the kind of ISA that is right for you needs, and the most cost-effective provider is essential, as there are hundreds to choose from. Fortunately, at Continuum, we know the ISA market, and can help you find the ISA and the provider that offers the best match for your plans.
Call us today for the help you need.
The Financial Conduct Authority does not regulate deposit accounts.
The Financial Conduct authority does not regulate taxation advice.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
The value of investments can fall as well as rise and you may get back less than you invested. Equity investment do not afford the same capital security as deposit accounts.
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