As a tax-efficient way of investing, ISAs are second-only to pensions. The ability to grow your money free from income and capital gains tax, coupled with the flexibility they offer, the range of investment options available within an ISA and the fact that every eligible adult has the same annual ISA allowance, regardless of whether they’re a higher rate taxpayer or a non-taxpayer, means they are, quite rightly, the first port of call for anyone wanting to grow their hard-earned money.
However, despite the fact that ISAs have been around now for 18 years, many investors are still a little unsure of some of the rules around them. Here are some of the most popular myths surrounding ISAs - and the facts you need to know.
1. You have to choose between cash or shares
No, you can have both and mix them up however you like, as long as you stay within the annual allowance, which is now £20,000. You can also change your mind and transfer money from a cash ISA into your stocks and shares ISA and vice versa. So if your hard-earned cash is languishing in a cash ISA you can always transfer it into stocks and shares instead. The golden rule is to keep the money inside your ISA. As long as the money stays within the ISA wrapper you can save or invest it as you choose and it will retain its tax-free benefits.
If the end of the tax year is fast-approaching and you’re unsure about where to invest, but you don’t want to lose your annual allowance, then some ISA providers give you the option of ‘parking’ cash with them, safely within the tax-free ISA wrapper, until you’ve decided how you want to invest it.
2. You have no control over what you invest in within your ISA
You actually have total control. There are numerous ISAs on offer that let you choose exactly what you invest in and even where in the world you invest. So whether you want to invest in gold, Japanese equities, US small caps or FTSE 100 giants you can, or you can opt for a mix of all of the above. It’s entirely up to you.
3. You can only have one ISA with one provider
It’s true that you can only pay into one Stocks and shares ISA in each tax year, but you can open a new ISA with a different provider each year if you want to. However, it can be easier to keep track of your investments and possibly cheaper too, if you consolidate them into one.
4. You need a lump sum to invest
Wrong again. While investing a lump sum is a great way to make your money grow, you don’t need a lump sum to get started. You can often invest as little as £50 a month. That regular investment will soon grow and better still, you can keep adding to. It’s a great way to save with no great sacrifice required.
If you think you can’t afford to save, think again. It’s easy to trim over-spending and divert the cash that you would otherwise fritter away. Switch your habits and make a few changes to your routine spending and you’ll easily claw back potentially thousands of pounds that you can put to far better use, inside your ISA. For more take a look at Give your ISA a £2,500 boost (without spending a penny).
5. Once investments in your ISA hit the annual allowance you start paying tax
This is totally incorrect. This year’s annual ISA allowance of £20,000 refers to the maximum amount you can invest within your ISA in the current tax year. That figure though doesn’t include any growth in your investments, nor does it include any money you’ve invested in previous tax years.
In fact, with ISAs having been around for 18 years now - and if you include figures from holdings in Personal Equity Plans (PEPs) which were the forerunner to ISAs - there will be plenty of canny investors who have sums of upwards of £1 million in their ISA account(s) now - all of which has been able to grow tax-free and will continue to do so, as long as it’s held within their ISA.
Eligibility to invest into an ISA and the value of tax savings depends on personal circumstances and all tax rules may change.
The value of investments and the income from them can go down as well as up, so you may not get back what you invest. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment or action. You should regularly review your investment objectives and choices and if you are unsure whether an investment is suitable for you, you should contact an authorised financial adviser.