One of the most valuable tools available to investors focused on wealth creation for the long term
Individual Savings Accounts (ISAs) are one of the most valuable tools available to investors focused on wealth creation for the long term. There is no tax on interest payments, no higher-rate tax on dividend payments from 6 April 2016, no tax on capital gains to pay and no need to declare ISAs on a tax return.
An ISA is a tax-efficient investment wrapper in which you can hold a range of investments, including bonds, equities, property shares, multi-asset funds and even cash, giving you control over where your money is invested. It is important to remember that an ISA is just a way of sheltering your money from tax – it’s not an investment in its own right.
You can put money into one Cash ISA and one Stocks & Shares ISA each tax year. The tax year runs from 6 April to 5 April. Currently, you can save up to £15,240 in one type of account or split the allowance across both types. Your ISAs won’t close when the tax year finishes. You’ll keep your savings on a tax-efficient basis for as long as you keep the money in your ISA accounts.
Junior ISA limits
With a Junior ISA, you are free to invest up to £4,080 in the current tax year. You can switch from a Cash Junior ISA to a Stocks & Shares Junior ISA and back again.
Generate a tax-efficient income
When you invest through an ISA, your money is protected from HM Revenue & Customs, so you don’t have to pay personal Income Tax on any interest you receive from your investments. In a Stocks & Shares ISA, interest is generated by bond funds, which many investors choose because they offer the potential for a regular lower-risk income compared with equities.
This feature of an ISA is particularly useful in retirement, as it means you can hold your money in bond funds and generate a tax-efficient income on top of the payments you receive from your pension. It is also very beneficial if you want to generate long-term capital growth from your funds but prefer to take a cautious approach to investing.
Flexible and instant access
Unlike a pension or fixed-term investment vehicle, most Stocks & Shares ISA providers offer you flexible and instant access to your money when it suits you, without losing the tax benefits on the rest of your savings held within the wrapper. You can choose to withdraw some or all of your money at your convenience. However, it is worth remembering that once withdrawn, it cannot be returned.
Managing a potential tax burden
When your investments are held in ISAs, you don’t have to pay any Capital Gains Tax (CGT) on their growth. Of course, this may seem like a minimal benefit if your profits are well within the threshold for CGT, but it’s worth remembering that stocks and shares investments are for the long term. If your funds perform particularly well for several years, holding them in ISAs will mean you have full access to your money at all times without having to worry about managing a potential tax burden.
Freedom from CGT within an ISA can also be useful if you need to take an income from a portfolio of equity investments. Retirement tends to last longer these days, so it may be worth retaining your portfolio’s exposure to the stock market for a longer period.
Consolidating investments under one roof
If you feel that your existing ISA provider is no longer appropriate for your needs or you are looking to consolidate your investments under one roof, with an ISA you are free to transfer your investment between providers to suit your individual needs.
Please note: your current provider may apply a charge when you transfer your investment. While your investment is being transferred, it will be out of the market for a short period of time and will not lose or gain in value.
If you withdraw your ISA, you will automatically lose all of its associated tax benefits. So unless you need to liquidate your cash to spend yourself or to gift to someone else, you should always transfer it between providers to retain its tax-efficient status.
INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.*
THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.*
PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.*
*only applies to Stocks & Shares ISAs