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Pass the bread and butter - How ISAs can work for you

Pass the bread and butter

Is an ISA right for you?

17 July 2018

4 minute read

How to get the most out of your ISA and decide whether it’s the right choice for you.

ISAs are savings and investments staples, but investors need to make sure they meet wider portfolio objectives

As simple, accessible and efficient vehicles go, Individual Savings Accounts (ISAs) are the bread and butter of the savings and investments world. The tax breaks afforded to ISAs are generous with savers receiving an allowance of £20,000 for 2018/19.

ISAs can make a real difference to investment portfolios, too. However, individuals still need to make sure they are suited to their own personal circumstances before committing any funds.

ISAs have plenty of potential benefits, but they’re not necessarily ideal for everyone. As with all investment decisions, the starting point is to establish your overall objective – what do you want your money to achieve and when? Consulting a financial planner and talking through goals, attitude to risk and investment time horizons will determine whether ISAs are the right course of action.

In many cases, ISAs complement other savings and investment options, with investors making the most of their flexibility and tax breaks.

For example, used in conjunction with pensions, savers and investors can meet long-term and shorter-term goals. Pensions offer more attractive breaks than ISAs, especially for higher earners, since contributions are made before tax.

Pensions are also treated more favourably than ISAs when it comes to inheritance tax. However, pensions are more inflexible than ISAs because they’re only accessible from age 55 (and rising to age 57 from 2028), whereas you can withdraw from an ISA at any time. By combining savings in both pension and ISAs, it might be possible to meet several objectives while making the most of all the tax breaks available.

Bear in mind that these tax rules can change in future and their effects on you will depend on your individual circumstances. We don’t offer tax advice. You should seek that independently.

Stocks and shares

It’s important to remember – not all ISAs are offer the same options and there are different types to choose from.

Cash ISAs account for 77% of all ISA accounts,1 but these might represent poor value for money in the current low interest rate environment. However, unlike investment ISAs, cash ISAs will not fall in nominal value so you can’t lose money.

Stocks and shares ISAs, meanwhile, offer the chance to grow capital based on equity returns though these can fall in value as well as rise. They also present an opportunity to access different stock markets around the globe, as long as the shares meet ISA eligibility investment rules. However, these incur management fees. A financial planner can help find good value investments for ISAs that operate within an investor’s risk tolerance.

Act now

ISAs are subject to a £20,000 annual subscription limit – this might not seem significant against a large estate but investing this much every year can result in gain.

Today’s ISA millionaires started early, and they’ll likely have saved as much as the personal allowance permitted every year, and reinvested dividends. A lot is made of beating the ISA tax deadline – in other words hitting the £20k limit by 5 April – but leaving it until the last minute to pay into an ISA means missing out on the potential positive impact of compounding growth during the tax year. However, there is also a chance the ISA might make a loss.

Revisit your plan

Even if you’re an old hand at ISA saving and investment, the rules change and it might be worth revisiting the plan. Consolidating ISAs in one place can also be beneficial.

While ISAs are given no special inheritance tax treatment, they can still be valuable as part of estate planning. Since December 2014, the spouse or civil partner of an ISA saver can benefit from the value of that ISA on death. It is not an inheritance, rather the partner is afforded a one off extra allowance – the additional permitted subscription allowance (APS). If the deceased ISA saver amassed £100,000 in their ISA, the surviving partner could save an additional £100,000 tax free into their own ISA on top of the current allowance.

However, until April this year, the money held in the ISA and any growth becomes taxable during the probate process. Following a rule change, the deceased’s ISA now becomes a continuing ISA and will enjoy the same tax benefits of a regular ISA until the estate is closed or three years after death, whichever is sooner. So, while they are still treated less favourably than pensions on inheritance tax, ISAs can still play a role.

ISAs can form the basis of a healthy savings diet, but they need to be part of a wider menu. A wealth planner can help you get the most from these accounts as part of a long-term strategy.

Quick guide to ISAs

  • Tax free limit of £20,000 per tax year, from 2018/19
  • The total UK savings in ISAs was £62bn in 2017/181
  • Junior ISAs for under 18s have a tax-free limit of £4,260
  • There are lots of types of ISA, including cash, stocks and shares, lifetime, Help to Buy and innovative finance
  • ISAs are part of the taxable estate
  • The sooner you invest, the sooner you can benefit from tax-free compounding growth

Barclays is not providing you with financial, legal or tax advice, so nothing contained in this article should be construed as constituting legal, financial or tax advice. Tax rules and legislation can change and the benefits and drawbacks of a particular tax treatment will vary with individual circumstances. We recommend that you take professional advice where required. You have sole responsibility for the management of your tax, financial and legal affairs, including making any applicable filings and payments, and complying with any applicable laws and regulations.

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