It’s a challenging time for savers and investors, for all sorts of reasons – but there are always opportunities too. If you don’t already have an ISA, now is the time to explore the benefits. Even with the current challenges, the core reasons for owning an ISA as well as investing principles remain the same. Here’s a few very good reasons to invest in an ISA:
Tax breaks
There is no tax to pay on gains on money held within an ISA, and you don’t need to declare ISA savings on your tax return. In particular, it’s become even more important for investors to maximise their use of tax-free wrappers that offer shelter from CGT. The main rate of CGT has been increased from 10% to 18% for basic rate taxpayers and from 20% to 24% for higher and additional rate taxpayers, and the annual allowance has dropped from £12,300 in the 2022-23 tax year to the present level of just £3,000.
You will also avoid the tax usually charged on any dividends that would be applied on income-paying investments outside an ISA above the annual £500 limit per investor. For cash ISAs you pay no tax on interest earned. Be sure to know how ISAs compare with taxable savings accounts.
Free government cash
The Lifetime ISA comes with a compelling offer of free cash top-ups when you save. Designed for those building a deposit for a first home or for retirement, you can pay in up to £4,000 a year in a Lifetime ISA (which forms part of the £20,000 yearly allowance) and bank up to £1,000 in government hand-outs. The money can be used to buy a first property worth up to £450,000. Alternatively you can withdraw it from the age of 60 to boost your income in retirement and maximise your retirement savings. If you take the money for any other reason there’s an exit penalty of 25%.
You must be between 18 and 39 to open a Lifetime ISA which can be opened as a cash or stocks and shares account. Beware of the £450,000 limit – anyone hoping to buy a property in London in particular could struggle to meet this requirement.
ISAs are a valuable long-term investment vehicle
You can use your ISA to buy shares in individual companies or investment funds. Historically, stock market returns outweigh those from cash. While cash is regarded as risk-free, there is a great risk of the value being eroded by inflation.
Calculations from Brewin Dolphin, the wealth manager, found that depositing £100 in cash from 2011 to the end of 2020 – when interest rates were persistently low – would have seen its value fall in real terms to £87.82, as inflation picked up and interest rates remained low following the financial crisis of 2008. Meanwhile, investors in the UK’s FTSE 100, 250, and All Shares markets saw real returns of 33.87%, 93.68%, and 43.65% respectively over that period.
ISAs are flexible
Investors rushing to use their annual allowance before the end of the tax year might be worried about hurrying an investment decision. You can pay into your stocks and shares ISA and opt to keep in cash until you can decide where it is best invested. Just make a note not to leave it too long.
You can have several different types of ISAs
Rules that took effect in April 2024 mean you can open – and pay into – multiple ISAs of the same type within the same tax year without losing your allowance. In the past, you could only contribute to one ISA of each type per year.
Right now, if you wanted to, you could open four different types of ISAs. It means that in the 2024/25 tax year you can spread your £20,000 annual allowance across any of the following: cash, stocks-and-shares, Lifetime ISA (LISA) and Innovative Finance ISA (IFISA). Being able to open four different types can be a help if, say, you want to hold separate ISAs for different savings goals. You might, for example, want to squirrel money away into one ISA for home improvements and into another for retirement.
You don’t need much to get started.
Not everyone can afford to save as much as they would like each and every year, but putting a little something away every month is better than doing nothing. You can start investing in an ISA with as little as £25 per month with many platforms. Over time even small contributions could build up to a sizable fund, due partly to the power of compound interest.
Invest for good using your ISA
Many investors prefer to use their money to back companies that adhere to goals under the environmental, society and governance (ESG) banner. Those passionate about improving society, climate change and stamping out boardroom greed can choose ISA funds that target these areas. For example some funds only invest in companies that are contributing to the decarbonisation of the world economy. You can find funds that look to improve areas you feel most passionately about and look more into ESG and responsible investing.
ISAs are not just for grown-ups
A Junior ISA offers parents a chance of building up a meaningful fund for their children. It allows you to stash away £9,000 each tax year in a cash or investment version of the account. The money is locked away until the child reaches 18 and earnings are tax-free. Children can start managing their account on their own from the age of 16. Once a Junior ISA has been set up by a parent or legal guardian, anyone can contribute to it. Those aged 16 or 17 can have a Junior ISA allowance plus a cash ISA allowance.
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