Choosing an ISA: short guide
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincolnshire or other local offices.
An ISA is still one of the most powerful tools for tax-free savings and investments in 2023-24. Yet choosing the right option is not always straightforward. Which type of ISA(s) should you choose and how much should you contribute? Which features should you look out for, including benefits and pitfalls?
Below, our Grantham financial advisers here at Castlegate offer some answers to the key questions. To discuss your own financial plan with us, please get in touch to arrange a no-obligation financial consultation, at our expense:
01476 855 585
info@casfin.co.uk
An overview of ISAs
An ISA (individual savings account) is a type of savings or investment account – or “wrapper” – which allows an individual to shield the contained assets from various taxes. All interest, dividends and capital gains within an ISA are tax-free.
There are many types of ISA. A Cash ISA is similar to a regular savings account, except any interest earned will not count towards an individual’s Personal Savings Allowance (PSA). A Stocks & Shares ISA lets you invest in a range of shares, bonds and other investments without paying tax on the returns or income.
Some other notable ISAs include the Junior ISA (where a parent can save/invest tax-efficiently on behalf of a child), the Lifetime ISA (focused on first-time buyers and retirement savers) and the Innovative Finance ISA (higher-risk peer-to-peer lending).
Many of these ISAs may be offered by your bank and others, as well as by investment platforms. The benefits, terms and rates they offer may vary. For instance, one provider may offer better interest rates than others for Cash ISAs. Another may offer a wider range of investment choices for its Stocks & Shares ISAs compared to competitors.
Therefore, it is important to do your research before committing to an ISA – especially one which ties you into a longer commitment (e.g. a fixed-term Cash ISA). You do not need to choose the option(s) offered by your bank. Indeed, better deals may be available in the wider market.
Choosing the right ISA
The first step when choosing an ISA is to consider your financial goals and situation. What are your main priorities right now? Which “weak points” need to be addressed urgently in your financial plan?
For instance, one person may be early in their career and primarily concerned with getting on the property ladder. In which case, a Lifetime ISA may be a more pressing consideration.
Another individual, however, may have depleted their emergency savings due to some unfortunate recent events (such as a major home repair). In which case, perhaps they need to focus on rebuilding these savings – e.g. via a Cash ISA.
Your investment “horizon” – the amount of time before you expect to need the money in your ISA(s) – is also very important. For instance, do you hope to put down your first mortgage deposit in the next 3 years? If so, then focusing a Lifetime ISA towards cash and other “lower-risk” investments (e.g. government bonds) may be more appropriate than investing heavily in company shares. If a stock market crash happens within the 3 years, there might not be sufficient time for your investments to recover.
Please note that a Lifetime ISA must have been held for at least 12 months for the bonus to be valid on the purchase of a first home. Other limitations also apply (e.g. the property must have a purchase price of £450,000 or less.
Conversely, if your financial goals are longer-term (e.g. saving for retirement in 20+ years) then you could be more “aggressive” with your investment strategy if you are comfortable with the risk involved – e.g. concentrating more on shares. In this case, there is more time for your Stocks & Shares ISA portfolio to recover from market falls and surpass previous valuations.
Final thoughts
As you can see, choosing an ISA is not as simple as it may seem! Yet there are still other matters to consider. In particular, have you considered your “liquidity risk”? In other words, how much money can you afford to lock away in fixed-term investments (e.g. Cash ISAs)?
Whilst these options may offer better interest rates compared to easy-access ones, you could face penalties if you close your account(s) early or transfer the full balance to another ISA. So, make sure you have other assets to fall back on if you suddenly need money in an emergency.
Another important – and less obvious – topic is inheritance tax (IHT). In 2023-24, IHT is typically levied at 40% on the value of a deceased person’s estate once it exceeds £325,000. However, savings and investments held with ISAs are not usually exempt from IHT in the way that, say, pension savings are.
Therefore, it is important to ensure that your ISAs are integrated into your wider estate plan appropriately. For instance, a newly-retired person may wish to focus their withdrawals more on their ISAs rather than pensions. The latter can be bequeathed to beneficiaries without IHT upon death, thus potentially allowing more wealth to be transferred to loved ones.
Invitation
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585
info@casfin.co.uk
