Understand the issues to find the right Individual Savings Account (ISA)

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When considering an ISA, a key point to take on board is that ISA’s are not investments themselves, but wrappers which allow investments to be made tax-free.

By putting money into an ISA, it is possible to shelter the proceeds from capital gains tax and income tax.

Wayne Slater, Principal Adviser, Spectrum Independent Financial Services

A failure to distinguish between the wrapper and the investment itself causes a lot of unnecessary confusion about ISAs among new investors. When someone is putting money into an ISA, they are actually doing two things at once.

They are investing in some kind of financial asset and putting a wrapper around it to protect it from the taxman. So, any investments made within the ISA are, subject to various annual allowances, tax-free. For example, an investor who wanted to put money into assets that paid out income could quite legally avoid tax on that income.

It is therefore just as important to understand the differences between the various types of ISA that currently exist to help you decide which is best for you:

CASH ISA

• You have to be aged 16 or over and a UK resident for tax purposes. You will earn tax-free interest on your cash savings; the maximum contribution is £20,000 for the tax year 2021/22.
• You can only open one Cash ISA a year, but it is possible to transfer to another Cash ISA/Stocks and Shares ISA with another provider during the tax year.
• You can also have a combination of Cash & Stocks & Shares, within your allowance.
• Viewed as safe as normally taken out with a Bank or Building Society and have no investment risk.

BENEFIT Suitable place to hold cash on deposit, safe & secure.

BE AWARE Cash interest rates are currently exceptionally low.

JUNIOR ISA

• Set up by parents/guardians and the child must be under 18 years of age.
• You will earn tax-free growth.l Parents, Guardians and Grandparents can pay in.
• Contribute up to £9000 per year, into either Cash or Stocks & Shares.
• A child can have control at age 16 but cannot access it until age 18.

BENEFIT Excellent way of setting up long-term tax-free savings for children. Visit our website to read more about how to make the most of a Junior ISA nest egg.

BE AWARE The child has access at age 18 and control over how money is spent.

LIFETIME ISA

• You must be over 18 and under 40 years old.
• You will earn tax-free growth and can be either cash or stocks & shares.
• Maximum contribution of £4000 per year and funding stops at age 50.
• The Government will add a 25% bonus up to a maximum of £1000 per year.
• Cannot access until age 60 unless for First Time Buyer purchase.

BENEFIT Great way to save for house deposit with Government bonus or to complement existing retirement plans.

BE AWARE You must stop funding at age 50 and the Government bonus will also stop.

STOCKS & SHARES ISA

• You must be aged 18 or over and a UK resident for tax purposes.
• You will earn tax-free growth on your investment, with a maximum contribution of £20,000 for 2021/22.
• You will have a choice of which funds to invest into as well as environment-friendly and sustainable funds and choose your level of risk.
• You can choose to invest for growth or income or a combination of both.
• You can pay regular premiums or lump sums or both.

BENEFIT A great way to invest medium to long term and gain tax-free growth and income to supplement pension savings and draw income from.

BE AWARE Value in stocks & shares can rise and fall.

One of the best ways to review your existing ISAs or to invest for the first time is to consult an Independent Financial Adviser who can look at the whole market to ensure you get the right balance between cash and risk and reward. Read more about savings at moneyhelper.org.uk

Investment values can go up or down and you could get back less than you invest. If you are in any doubt about the suitability of a Stocks & Shares ISA, you should seek independent financial advice. The tax treatment of this product depends on your individual circumstances and may change in future. If you are uncertain about the tax treatment of the product you should contact HMRC or seek independent tax advice.

B1 Business Centre, 25 Goodlass Road, Liverpool L24 9HJ
0151 448 2777 / mail@spectrum-ifs.co.uk / spectrum-ifs.co.uk

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