Think of the ISA wrapper as a little like a Tupperware pot, protecting your lovely investments – stocks, shares, cash – from all sorts of germs and nasties. In this analogy, the nasties would be tax bills. Within an ISA, any increase in the value of your investments and any income you receive, is largely tax-free. Good stuff.
In the 2016/17 tax year, you can put in £15,240. It’s due to go up to £20,000 from April 2017.
Where can you invest?
ISAs are hugely flexible in terms of what you can put in them. You can put cash in them, sometimes earning a little more than a savings account. For those willing to take more risk, you can put in investment funds, stocks and shares, government bonds or even very high-risk investments such as AIM stocks.
Investors can invest in one stocks & shares ISA and one cash ISA each tax year, and can split the £15,240 allowance between them as they see fit.
What are the benefits?
There is really no downside to keeping your investments in an ISA wrapper. They are mostly free. They are flexible, so money can be taken out at any time. Investors can put almost anything in them and they allow you to build up a nice income stream, or a capital pot without ever having to trouble the tax man. You don’t even have to put it on your tax return. Easy.
NB pedantic people in the finance industry will be grumbling that you can’t claim back the tax credit on dividends – so it’s not technically totally tax-free – but these are small iddy bits of money and your profits and dividends in ISAs can basically be thought of as tax-free to avoid the three million pages of small print required to explain a 23p impact of tax credits on dividends! To be clear ISAs are not exempt from inheritance tax either AND when estate planning, do check the rules about how your spouse can inherit your ISA allowance. Search our YouTube channel and you’ll see Holly on the BBC explaining this to an enthralled audience ;0)
Who might it suit?
Most of us. In fact, it’s difficult to think of any reason why you wouldn’t use it as your first port of call for long-term cash savings, or for dipping a tentative toe in the stock market. You do have to think about the ISA versus a pension trade-off.
ISAs are handy and you can get your money at any time. Pensions are locked away until you’re at least 55 BUT the Government pay you a sort-of bonus when you save into a pension, which is a nice way to ‘pimp your savings ride’. As it were.
This video from Aberdeen explains the trade-off between the two.
Where Can I Get One?
There are plenty of options. The most flexible way is to sign up with an investment platform (see our handy guide here). This gives you a range of investment options. Minimum investment levels are usually around £25-£50 per month for regular savings, or £100 as a lump sum.
Our Boring Money Menu below shows our top picks for stocks and shares ISAs.
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