ISA guidelines change on a regular basis, so what you’ve heard in the past is not necessarily true today. And if you’re put off from opening an ISA by one of the myths below, you could be missing out on some great tax benefits. So check now to make sure that you’re up-to-date on the latest features and regulations.
Myth 1: You can only pay into one ISA in any tax year
People are often surprised to learn that you can pay into two ISAs in one tax year – or even three or four, in some cases. The truth is you can only pay into one ISA of any type. So you can’t pay into/subscribe to two cash ISAs in the same tax year, but you can subscribe to one cash ISA and one stocks and shares ISA. You could also have a lifetime ISA and an innovative finance ISA. There are a range of different ISAs with different characteristics.
The important thing to remember is that your ISA allowance – the amount you’re entitled to pay into an ISA or ISAs in any tax year – remains the same no matter how many ISAs you have. For example, in the current tax year (2018/19) your ISA allowance is £20,000, and this can be split as you wish between the ISAs you hold.
So, if you currently have a cash ISA, the good news is that there’s nothing stopping you opening a stocks and shares ISA, if you still have some of your ISA allowance left to use. If you’d like to do so in this tax year, remember that the 5th April is your deadline.
Myth 2: ISAs only offer low returns
It’s true that interest rates - not just for ISAs, but generally – are lower in this decade than previous decades[i] - as a result, cash ISA returns are low. But the returns offered by other types of ISA are more promising.
For example, a Lifetime ISA offers a government bonus of 25% on all payments (though your payments are capped at £4,000 a year, and you’ll sacrifice the bonus – and more – if you don’t meet the withdrawal requirements of this type of ISA).
Stocks and shares ISAs also offer better growth potential than cash ISAs, although, as with all investments, your capital is at risk and you may get back less than you put in. Over the 2017/2018 tax year, the average stocks and shares ISA delivered growth of 4.8%, compared to 0.97% for the average cash ISA[ii].
Would you be better off with a stocks and shares ISA? To help you decide, we’ve compared the benefits of cash ISAs vs stocks and shares ISAs.
Myth 3: The end of the tax year is the best time to pay into an ISA
You might notice an increase in conversation about ISAs every year in March and April, as the end of the tax year approaches. This is because your ISA allowance expires on the 5th April, and can’t be carried over to the next tax year, so it’s a case of ‘use it or lose it’.
But this isn’t necessarily the best time to pay in. In fact, there’s an advantage to paying in at the beginning of the tax year, giving it longer to grow. Imagine if you paid in during the first month of the tax year, and your investments grew by month two. If you were to reinvest those returns, you’d already be better off than if you made a payment of the same size at the end of the tax year – and you still have ten months to go.
Myth 4: You can’t replace money once it’s withdrawn from your ISA
For many years this was true, and you could be losing out if you’re not aware of the change. Flexible ISAs were launched in April 2016, and they work differently, giving you more control over your money.
If you make a withdrawal from a flexible ISA, that amount is restored to your ISA allowance. It’s only counted against your allowance if you replace the money in the same tax year. This applies to flexible cash ISAs and flexible stocks and shares ISAs, such as the ISA offered by Click & Invest.
But the danger is that not all ISAs are flexible. It’s the decision of the ISA provider whether to offer this feature or not, and some still choose not to. It’s in your best interest to check whether your current ISA provider offers flexibility, and to consider this when you open a new ISA.
Myth 5: You can’t transfer an ISA to a different type of ISA
You might think that money you have in a cash ISA has to remain in a cash ISA to retain its tax-efficient status. That’s not the case; you can actually transfer it to another ISA type if you feel you’d benefit from the change.
In some cases you might decide that a different type of ISA is a better fit for your financial goals. For example, if you have a child and decide to start a university fund for them, you may decide that the money in your cash ISA would work harder for you in a stocks and shares ISA. If so, it can be easy to transfer.
Myth 6: Only experienced investors can benefit from a stocks and shares ISA
A common myth that blocks beginners from opening a stocks and shares ISA, and investing more generally, is that it’s only possible to make money if you know a lot about the stock markets.
Some stocks and shares aISAs are known as “Do-it-yourself” investments, and for these it is advisable to have some background and understanding of how to select funds and assets. Other platforms offer advice, known as “Do-it-with-me” services, where you can select your own funds as recommended by a platform. There are other services, such as the ISA offered by Click & Invest, which are known as “Do-it-for-me” platforms. In these cases, you could benefit from all the advantages of being an investor with none of the hassle, as investment professionals build and manage your portfolio for you.
When looking to select a “Do-it-for-me” investment platform, some useful pointers to look out for include:
- The number of funds available
Many investors agree that diversification is a good way to help spread the risk of your investments. By not putting all your eggs in one basket, your investment portfolio could potentially feel more balanced during times of market fluctuations. Factoring in the number of funds available to the manger, and the quality of these funds could give you an indication of how diversified your portfolio could be.
- Experience of the managers
Talent can only get you so far. When considering a managed platform, consider the investment company and their level of experience. While some investment platforms are very established in the industry and feel confident in asset selection, others may be new in the field. While there is not necessarily any right or wrong way to judge the experience of a manager, it may be worthwhile to find out who will be managing your money and how.
- The past performance of the platform
Although past performance is no guide to the future, you may wish to look at the track record of your provider to get a better understanding of how the market can fluctuate and the impact this can have on investments across different risk levels.
Sorting the ISA fact from ISA fiction can be almost like a job in itself. At Click & Invest, we hope that this simple breakdown of ISA myths empowers you to make informed decisions for your financial future. Please let us know your ISA myths or questions in the comments below, and our investment specialists will get on the case.
With investment your capital is at risk. The tax advantages of ISAs may change in the future and also depend on your individual circumstances.
This article is not intended to constitute personal advice and no action should be taken, or not taken, on account of information provided. Opinions given within this article are the speakers’ own personal views. The views and opinions are effective from the date of publication but may be subject to change without notice.