With many diffferent types of ISA (individual savings account) available, and it has become abundantly clear that this is the government’s favourite way of encouraging people to save.
Junior ISAs allow parents and grandparents to put money aside for children; Help to Buy and Lifetime ISAs incentivise young people to save for a first home; while the standard ISA lets anyone put money into tax-free cash accounts or stock market-linked investments.
ISAs have a lot to offer, but before you decide whether any of the options are for you, it's useful to dispel a few potential myths and concerns.
Myth 1: Your money is locked up in an ISA
Whether you invest in cash or shares, there are no more limits or restrictions on withdrawing money from an ISA than from any other type of account.
If you choose a fixed-term cash ISA, over two or three years, say, you may be penalised if you take money out before the term is up.
But there are plenty of instant-access ISAs available.
Myth 2: ISAs are risky
ISAs are as safe or as risky as you want them to be: saving in a cash ISA with a company that is part of the Financial Services Compensation Scheme means that the first £85,000 of your money (per institution) is guaranteed by the government.
Alternatively, you may choose to seek higher returns by investing in riskier shares – but this is entirely up to you.
Myth 3: ISAs are better than pensions
Both ISAs and pensions have pros and cons which should be considered when choosing between the two forms of saving. Both have tax benefits, for example, but there are greater restrictions on when and how money can be taken out of a pension.
On the other hand, by joining a company pension scheme, you are likely to benefit from contributions from your employer.
And with a pension, there is not as much risk of accessing your funds early, thereby leaving less for retirement. Pensions can also be easier to pass on to beneficiaries.
Can I inherit an ISA from my spouse?
Myth 4: There’s no point saving via cash ISAs any more
Interest on cash ISAs is tax free – and this has in the past been the main reason for choosing them over normal savings accounts.
But interest rates are very low at the moment, and in 2016 the government introduced a new personal savings allowance that means people can earn up to £1,000 interest a year tax-free (£500 for higher-rate taxpayers), regardless of what type of account the capital is in.
These factors have certainly reduced the appeal of cash ISAs – but bear in mind that, in the ISA system, returns are always tax-free regardless of their size.
If you were to build up a large ISA holding and rates were to improve, you may be in a position in the future where your annual returns exceed the £1,000 annual exemption by some distance.
Next article: Annie Shaw spring clean savings and ISAs >>>
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