In today’s modern world, people are very aware of money matters may it be investing, savings, or anything else. Saving is definitely an important part of anyone’s financial life as it helps one to be ready for any uncertainties that may arise and also inspires confidence to overcome those times. One recent example can be the Covid-19 crisis where a lot of people were rendered jobless. But, when it comes to savings, a lot of us tend to get confused as there are a lot of options that are available on the market. ISA is one of them. We know that you might have a lot of questions and we’re going to answer all of them for you. So, let’s start:
So in our article, we’re going to tell you about ISA, when they were introduced, types of ISA’s, and what are the requirements to be eligible to open an ISA,. Find them out below:
What is an ISA?
An ISA is an Individual Savings Account is a kind of a Tax-Free savings account that allows the user to keep the interest accrued during the time period. The owners of an ISA, unlike a regular savings account, are exempted from any kind of a personal income tax up to a specific limit that may accrue during a certain time period. ISA is popular tax-free savings in the UK.
The ISA’s were introduced in April 1999 which replaced the PEP’s (Personal Equity Plans) as well as TESSA’s (Tax Exempt Special Savings Account) and were available to the citizens of the UK over 16 provided that they have a national insurance number. Junior ISA’s were also introduced in 2011 to encourage savings for people who are below the age of 16.
The biggest difference between an ISA and a normal savings account is that an ISA offers interest payment which does not attract any kind of taxes which inspires confidence among investors that they’re getting more for the money that they’ve invested.
Is there a capital gains tax on ISAs?
Profits from shares held in an ISA are not subject to capital gains tax. Any increase in the value of the investments in your stocks and shares ISA are free of Capital Gains Tax. Investors can not use losses made on investments in their ISA stocks to offset capital gains on their other investments.
Types of ISA:
Cash ISA: A cash ISA is an account on which the investor never pays taxes. One can deposit an amount of over 20,000 Euros. Cash ISA’s are offered by building societies or Banks but certain investment firms also have the allowance to offer them to an investor.
One should remember that they can open only one ISA per financial year but they have the option to transfer the money to any other kinds of ISA’s. Like any other Savings account, Cash ISA also come in different kinds which help to provide flexibility to the customer like easy access (one where the customer can withdraw money provided they do it in the same financial year), a regular saver (where the customer gets a fixed rate of interest as long as the customer is depositing a fixed amount every month) or a Fixed one (where the customer gets a fixed rate of interest but the money is locked in for a specific time period)
Stocks and Shares ISA: A stocks and shares ISA, unlike a Cash ISA, helps one to invest the money in a range of different qualifying investments such as cash, stocks and investments, bonds, etc. the qualifying limit, however, remains the same at 20,000 euros. Just like a cash ISA, one can only open a single Stocks and Bonds ISA per year. These kinds of ISA’s are suitable for the people who are ready to risk their investments for a higher (or lower) rate of returns.
Also, it is mandatory that the money held in stocks and shares to be made available within 30 days so as to avoid any zero-interest penalty on the funds.
Innovative Finance ISA: Innovative Finance ISA was introduced in April 2016 and unlike before, were more suitable to be used for peer to peer (lenders which are ready to invest in businesses or individuals) lending investments. Innovative finance ISA can only be offered by the financial platforms which have an FCA (Financial Conduct Authority) certification.
The financial limit for Innovative Fund ISA stays at 20,000 Euros.
Lifetime ISA: A lifetime ISA is more suitable for individuals who are looking to invest in the long term. The best thing about these ISA’s is that the person can plan for both, retirement as well as property purchase using these ISA’s. Only a person who is in the age bracket of 18-40 can open a Lifetime ISA. these types of accounts earn 25% on the contributions of up to 4000 euros of the investor after every financial year. This makes it perfect for the people who are looking for something long term.
As soon as the investor reaches the age of 50, they cannot add any money to these accounts and the interest bonus is also revoked but however one can withdraw the money either at the time of buying a first home or by reaching the age of 60.
Junior ISA: A junior ISA is an account that is available to investors who are below the age of 18. These were introduced with a limit of 3600 Euros, further increased to 4368 Euros recently. Junior ISA’s are available in both cash as well as stock and bonds type. Money cannot be withdrawn in a junior ISA unless and until there is a terminal illness claim or there is a closure of the account after the death of the child. A Junior ISA converts to an adult ISA as soon as the investor turns 18.
Eligibility Criteria for ISA’s:
In order to open an ISA, an investor should be:
- 16 years or older in order to open a Cash ISA
- 18 Years or Older in order to open a Stocks and Shares ISA
- 18 years or older but under the age of 40 in order to open a Lifetime ISA
- The investor should be a resident of the UK
- A crown servant or their spouse or civil partner
So now that we have a simple Idea about Individual Savings accounts and which one is suitable for you, it’s time for you to save and invest!
So, this was our take on the ever so essential individual Savings Account! This seems like a lucrative option to opt for long-term investments. We did our part, you also do your bit! Research, observe and analyze, and get to invest!