Whilst the idea of getting rich off the stock market may seem out of reach, or a little risky, there’s no reason to write off investing altogether. It’s useful to approach your investment options as a game of small, long-term gains. If you make thoughtful investment decisions based on logic, rather than emotion, there’s little room for error.
ISAs complement this patient, logical approach perfectly. Here’s a brief guide to these unique financial products:
What is an ISA?
An ISA, short for ‘Individual Savings Account’, is a tax-free account containing either savings or stocks and shares. They were introduced by the UK Government in 1999 as the replacement for two similar financial products, Personal Equity Plans (PEPs) and Tax-Exempt Special Savings Accounts (TESSAs).
An ISA that contains savings is known as a ‘Cash ISA’. An ISA that contains stocks and shares is known as a ‘Stocks and Shares ISA’, or an ‘Investment ISA’.
In a typical instant-access savings account, 20-45% of what you earn in interest goes to the Government as tax. However, with a Cash ISA, the interest isn’t taxed at all. The catch? There isn’t much of one – however, you are limited to the number of withdrawals you can make during the fixed term and, for the 2013/2014 tax year, you can only invest up to £5,760 in a Cash ISA.
An Investment ISA functions in the same way as a Cash ISA, except it’s your shares that benefit from tax-breaks, rather than actual cash savings. With Stocks and Shares ISAs, you don’t have to pay tax on any profits made from share price increases, you can reclaim the tax you pay on bonds, and your dividend income is taxed at only 10%. However, you are limited to a maximum investment of £11,520.
If you choose to also invest cash savings, the total investment must add up to only £11,520. For example, if you choose to invest £3,000 in savings, that leaves £8,520 to invest in stocks and shares.
What are the benefits?
The most obvious benefit of ISAs is the way they allow you to earn more from your money (or from your stocks and shares). What you would usually pay in tax lands back in your account. It’s as simple as that.
The other main benefit of ISAs, particularly Cash ISAs, is that they’re relatively risk-free. Unlike with financial trading, you don’t stand to make incredible gains, but the smaller gains you do make come guaranteed.
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