The most popular held misconceptions about Individual Savings Accounts (ISAs)
ISAs are complicated
If you’re already familiar with how savings and investments work, all you need to know about ISAs is that they are simply a wrapper that shelters any gains from tax.
There are two types of ISA: Cash and Stocks & Shares. A Cash ISA works in the same way as a savings account, except you pay no tax on any interest earned. With a Stocks & Shares ISA you pay no further tax on the income and no capital gains tax on any profits.
The ISA allowance has increased to £11,520 for this tax year (6 April 2013 to 5 April 2014). Up to £5,760 can be saved into a Cash ISA, with the balance (up to the £11,520 limit) invested in a Stocks & Shares ISA.
ISAs are expensive
For many investors, owning funds is no more expensive in an ISA – the tax wrapper and the tax benefits therefore come free.
I can’t easily withdraw my money from an ISA
Unless you have chosen a fixed term ISA, you can normally withdraw your money at any time. Remember: if you choose a Stocks & Shares ISA you should be investing with at least five years in mind.
ISAs aren’t worth the effort
Why wouldn’t you want to pay less tax? If you already have cash savings or stock market investments, you can use your ISA allowance to ring-fence your profits.
You are only allowed to have one ISA
Your Cash ISA and Stocks & Shares ISA do not have to be with the same company. In fact, each new tax year you can choose to save or invest with any company you like, regardless of whom you may have opened an ISA with previously.
But holding different ISAs with different companies can make them difficult to manage.
It is better to wait until the end of the tax year to open your ISA
Investing at the start of the tax year means that you will receive up to 12 months more tax savings on the interest, or income, and growth from an ISA than if you leave it until the end of the tax year. Less tax should mean higher returns for you.
Opening ISAs means investing in the stock market
If you do not wish to invest in the stock market now, you should still make full use of your ISA allowance. Invest in a stock market ISA that has a cash option, so you can wait and make your investment decision later.
Opening an ISA means completing a tax return
ISAs do not have to be recorded on your tax return, so not only do they save you tax but they also make your life easier.
Tax rules are subject to change over time, and the value of any tax benefits will depend on your personal circumstances. Also, the value of investments can fall as well as rise, so if you invest in a Stocks & Shares ISA you could get back less than you invested.