The ISA – or Individual Savings Account – first started in 1999 as an initiative from then Chancellor Gordon Brown. The aim was to encourage people to save using a brand-new, tax-free savings approach. We look at the benefits of holding an ISA when it comes to tax-efficient savings, along with some recent changes.
It’s estimated that around 22 million adults hold an ISA with a total value of £750 billion. However, it’s thought that around 60% of British people aren’t making the most of this valuable tax-efficient savings strategy.
How do ISAs work?
ISAs replaced the previous personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs). When ISAs were first introduced, the annual savings limit was only £7,000, which didn’t make them particularly attractive to many savers. However, over the past two decades, ISAs have been reformed and the current annual threshold is £20,000. This means that savers can add up to £20,000 into their account tax-free every year.
ISAs are available as Cash, Stocks and Shares, Innovative Finance or as a Lifetime ISA. For the first three types, you need to be 18 years or over and a UK resident. An ISA can only be held in your name. There are also Junior ISAs, which have a £9,000 limit and are available to under-18s living in the UK. A child can take control of their account at age 16, but they cannot access savings or open an Adult ISA until they’re 18.
Lifetime ISAs (LISA) are available to those aged 18 years or over, but you have to be under 40 years. Also, savings must be used for buying a first home or for retirement. LISAs have a £4,000 limit, and you can save up to the age of 50, as long as your first payment is made before the age of 40. In addition, the government adds a 25% bonus to your savings up to £1,000 a year. You can choose Cash, Stocks and Shares, or a mix of both types.
What are the recent changes to ISAs?
There have been no changes to annual ISA contribution limits in the Autumn Budget, and the current limits have been frozen until April 2030. Also, due to mixed responses, the recent consultation to launch a ‘British ISA’ have been scrapped. There were concerns that a ‘British ISA’ would have both complicated and limited the investor market.
However, before April 2024, there were limitations on how much you could transfer between ISAs and how many you could hold. Previously, an ISA transfer would need to constitute the whole amount and savings interest from that financial year. Now you can move part of one ISA across to another ISA without having to identify the relevant financial year.
Although before you could hold both a Cash ISA and a Stocks and Shares ISA, you could not hold more than one of each type. Now you can maintain multiple ISAs in each type without losing the tax-free status on your savings.
Are ISAs worth it?
Put simply, yes! ISAs are one of the safest ways to save and you won’t have to pay tax on your savings. They are a key component of most financial planning strategies. The recent changes to flexibility in holding multiple ISAs have made this an even more viable way to both save and invest. Savers can take advantage of better Cash ISA interest rates and other Stocks and Shares ISAs to diversify their investing strategy.
ISA income doesn’t count towards income-related tax thresholds, such as the personal allowance. ISAs can be used to take gains from a portfolio subject to Capital Gains Tax (as long as share matching rules are observed). As you reach retirement age, you might be able to use ISA savings to help boost your pension savings. Always speak to a professional financial planner before you consider moving savings to other accounts and pensions.
At a time when first-time buyers are struggling to purchase, Lifetime ISAs are a helpful way for people to get onto the property ladder. And Junior ISAs are a useful way to save towards your children’s future, as well as providing them with essential financial education.
Financial Advisor West Bridgford, Nottingham
It’s thought that out of the 22 million adults who hold an ISA, only 1.6 million are utilising the full £20,000 limit for their savings. According to HMRC, its estimated that people tend to invest double the amount of savings into Stocks and Shares ISAs when compared to Cash ISAs. The average amount of an ISA account varies by age and is over £30,000.
Our financial planning team can carry out a financial review to see if you are making the most of your current savings. Together we will look at all the viable options available to you in terms of your savings accounts, investments, and pensions. Our aim is to ensure your savings strategy is tax efficient and minimises any charges that could eat into your wealth.
For a financial review of your ISAs and savings strategy, get in touch to speak to our financial planners.
https://professionalparaplanner.co.uk/the-low-down-on-isas-top-facts/
https://www.brewin.co.uk/insights/uk-autumn-budget-2024-what-does-it-mean-for-your-money
https://www.hl.co.uk/news/25-years-of-isas-whats-changed-and-whats-next-for-isas
https://www.gov.uk/lifetime-isa
https://www.gov.uk/junior-individual-savings-accounts
