IS A TAX-EFFICIENT ISA A WORTHWHILE INVESTMENT?
As advocates of lifestyle financial planning, we recognise that each of our clients has different long-term aspirations and, therefore, had different financial requirements to help reach them. Whatever your goals though, managing investments in the most tax-efficient way is always going to be a key priority and we often recommend an ISA (Individual Savings Account) as an effective way to do this.
ISAs are undeniably a highly effective way to shelter your savings from tax, but how much do you know about them? Are they a good option if you are looking at how best to manage your investments? Is there any risk involved? Are they suitable for everyone and are there any drawbacks?
FIRST THINGS FIRST – WHAT EXACTLY IS AN ISA?
investments. These might include bonds, property shares, equities, multi-asset funds and even cash. By combining where your investments sit, you have greater control over where your money is allocated.
There is no Income Tax payable on interest earned from an ISA and no Capital Gains Tax on any profits, making them highly tax-efficient.
LIKE WHAT YOU’VE HEARD? THERE’S MORE!
ISAs are popular for good reason – there really are a number of benefits to them. Amongst others, these include:
- There’s no income tax to pay on any interest
- Money can be accessed at any time if you need it. (It cannot be returned though – if you withdraw from your ISA you will automatically forfeit any associated tax benefits.)
- Your personal allowance or age-related allowance is unaffected by any income you earn as a result of your ISA
- You won’t have to pay any Capital Gains Tax on any growth you may achieve
IS AN ISA A RISKY INVESTMENT?
The great thing about a cash ISA is that the value of your initial investment cannot decrease. That being said, we are currently experiencing low rates of interest and this could result in the return on your investment failing to outpace inflation. A Stocks & Shares ISA is a slightly different story – the potential for long term returns is greater, but you need to be aware that the value of your investment can go down as well as up, meaning that there is a chance you might not get back as much as you have paid in. It is also important not to view an ISA as an investment in its own right – it’s more a way of sheltering your money from tax.
This article does not constitute financial advice and should not be construed as such.