Busting 10 ISA myths: How to make the most of your money
By Boring Money
17 Jan, 2025
ISAs (Individual Savings Accounts) are tax-efficient savings and investment accounts available to UK residents. While banks often overcomplicate their explanation, the concept is straightforward: ISAs protect your money from tax on interest, dividends, and investment gains.
At Boring Money, we believe ISAs are an essential tool for maximising your savings and minimising your tax bill. Let's clear up the common misconceptions about these accounts with 10 key facts about how they really work.
1. You can't open more than one ISA
Actually, you can. There are 4 main types of ISA UK adults can choose from, and you can mix and match which ones you have (as long as you keep your overall contributions below the £20,000 annual allowance!).
Innovative Finance ISA (IFISA - these are less common and higher risk)
However, you can only ever have one Lifetime ISA, which you have to open before you turn 40 - so if you're nearing that milestone and you don't have one already then you'd better get cracking. If you're aged between 18-39, a LISA can give you a bonus of up to £1,000 each year until you're 50! If you paid in £50 a month for 10 years, you'd get yourself £1,500!
For the parents out there, there's also another type of ISA you can open on behalf of your kids - the Junior ISA. Note that you can only open one JISA for each child though. But as JISAs are actually registered in the child's name, they don't affect your ISA quota for the year, so you're free to spend all of your £20,000 allowance on yourself.
2. There's no point in opening an ISA if the tax year is almost over
The main advantage of ISAs is that they're tax-free, so everyone with an ISA can put away up to £20,000 every year without paying a single penny of tax. This makes them a great tool for building large savings pots over longer periods of time, as you'll continue growing your savings and accumulating interest without having to worry about tax - as long as you don't exceed the annual allowance.
If the tax year is coming to an end, you might be wondering if it's worth putting any money into it. The answer is quite simple really: If you haven't used up your £20,000 annual allowance, then it's absolutely worth it! Remember that your allowance doesn't roll over into the next tax year, so if you haven't used it up by 5 April, any money you put in after this date will count towards your allowance for the next year.
3. You can't transfer your ISA to another provider
You can easily transfer your savings from one ISA account to another at any time - even if they're not by the same provider. In fact, you can even transfer money to a different type of ISA! If you want to transfer cash you've put in this tax year, you'll usually need to transfer all of it to the new account. But if those savings are from a previous tax year, you can choose to transfer all or part of your earlier savings.
It's a bit different for Innovative Finance ISAs, however. You can transfer cash to another provider, but you may not be able to transfer other investments from it, and doing so could take longer than the usual amount of time it takes to transfer other types of ISA. Also, bear in mind that whatever kind of ISA you have, some providers may charge you for the cost of a transfer.
To transfer money from one ISA to another, you'll have to contact your existing ISA provider. They'll give you an ISA Transfer Form to fill out, but once you've done that, the providers will handle the rest for you. The entire process of transferring money between ISAs should take no longer than 15 working days for Cash ISAs or 30 calendar days for other types of ISA. If the transfer takes longer than it should, get in touch with your existing provider to find out what's causing the hold-up.
4. You don't have enough money to open an ISA
Unlike other types of savings accounts, most providers will let you set up an ISA with as little as £1-£25 per month (some don't even require a deposit!). To put that in perspective, £25 a month is less than the average cost of 10 takeaway coffees, or just over 6 Tesco meal deals! It needn't be a lot, but if you're struggling to set money aside for your savings, consider making yourself a budget - learn more about how to get started here.
If you're able to put money into an ISA but you're finding it can be a bit of a headache transferring money from your current account every month, why not set up a direct debit and get your bank to do it for you? You can make it completely automatic! Plus, if you're the type of person that's partial to a bit of impulse spending, you might want to arrange a monthly direct debit into your ISA the day after you're paid - that way, you've tucked it away and you won't be tempted to spend it on other things throughout the month!
5. You don't need an ISA because you already have a Personal Savings Allowance
Your Personal Savings Allowance enables you to earn up to £1,000 in interest each year without having to pay tax on the following types of income:
Bank and building society accounts
Savings and credit union accounts
Unit trusts, investment trusts and open-ended investment companies
Payment protection insurance (PPI)
Government or company bonds
Life annuity payments
You can read more about how your Personal Savings Allowance works here.
So any interest you earn from these types of income over the £1,000 allowance is subject to taxation. But that's where ISAs are useful, because you can tuck away up to 20x the Personal Savings Allowance every year without paying a single smidgen of tax! It's a no-brainer.
6. It’s pointless opening an ISA when savings rates are still high
You would have to have been living under a rock to not know that interest rates have been pretty high in recent years, and despite inflation being broadly back under control, many savings accounts are still offering very competitive rates. So you might be wondering if there's any point in investing if cash is still so attractive.
The answer to this is that these high interest rates won't last forever, so anyone with long-term goals for their money should still consider investing (rather than sitting in cash) to avoid inflation eating away at the value of your savings over time.
And even if you're partial to cash or you're going to need your money in a short period of time - let's say less than 5 years - opting for a Cash ISA means any interest generated in the account is shielded from the taxman! So you don't need to worry about tax on savings interest.
7. If you're not a UK citizen, you're not eligible to open an ISA
This one is just fake news. As long as you are resident in the UK for tax purposes, you can open and pay into an ISA and benefit from the same tax-free allowance as a UK citizen. Simple as.
8. Pensioners are too old to open an ISA
Nonsense. Seriously, since when is anyone too old to take advantage of a £20,000 tax-free allowance? There’s no upper age limit on opening a Cash ISA, Stocks & Shares ISA or an Innovative Finance ISA. However, you must open a Lifetime ISA by the time you're 40, and you won't be able to pay into it after you turn 50.
9. You can’t open a Lifetime ISA if you already have a mortgage
You can open a Lifetime ISA or continue paying into one if you already have a mortgage, but you won't be able to use it to purchase another property - that's because you have to be a first-time buyer to use a LISA to buy a house.
However, LISAs can also be used to save for retirement, so as long as you're under the age of 40 then you can still open a LISA and use your savings for later in life. Remember that you can only withdraw money from a LISA for these two purposes. If you take your cash out for any other reason, you'll incur a hefty 25% penalty - effectively wiping out the government top-ups you got in the first place!
10. Stocks & Shares ISAs are always high risk
Stocks and Shares ISAs do carry more risk than Cash ISAs, by virtue of the fact that they invest in the stock market, where the value of your investments can go up as well as down. That's why Stocks & Shares ISAs are better suited to longer-term investing, preferably 5 years+, so that you have time to ride out any short-term market volatility and you don't find yourself cashing in when your investments are low.
Fortunately, if you want to invest in the stock market but you're cautious about risk, many providers offer Stocks & Shares ISAs at different 'levels' of risk to suit how much you are - or aren't - willing to take on. Everyone from the big banks to the fancy fintechs have Stocks & Shares ISAs across a range of risk profiles - usually 'low' to 'high', but sometimes called things like 'cautious' to 'ambitious' - so make sure to shop around and see what's out there.
If you're not sure where to start, make sure you head over to our ISA comparison tables to browse the market, see which providers have our - and our readers' - stamp of approval, and learn more about fees, interest rates and more! Dig in by clicking the link below.
