A Guide to Independent Savings Accounts (ISAs): How much could you save by utilising an ISA?
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As we have just finished the end of the 2016/2017 tax year, it is now time to fully utilise your 2017/2018 Individual Savings Account (ISA) allowance. The ISA limit for 2017/2018 has risen to £20,000. An ISA is a tax-efficient investment wrapper in which you can hold a range of investments, including bonds, equities, property, multi-asset funds and even cash, giving you control over where your money is invested tax-efficiently.
SHELTERING YOUR MONEY FROM TAX
ISAs are becoming an integral part of financial planning. However, it is important to remember that an ISA is just a way of sheltering your money from tax – it’s not an investment in its own right.
They offer a unique range of benefits, as there is no Income Tax on interest payments (which are made by bond funds) or dividends (which are paid by equity funds), and you don’t lock your money away, so you can still access it whenever you need to.
WITHDRAWALS TO INCREASE YOUR INCOME
Income from an ISA doesn’t affect your personal allowance or age-related allowance, and there’s no Capital Gains Tax (CGT) payable on any growth you may achieve. This means you could use withdrawals to increase your income when necessary. However, any losses made in the ISA cannot be used to offset gains made elsewhere.
When you invest through an ISA, you don’t have to pay personal Income Tax on any interest you receive from your investments. In a Stocks & Shares ISA, interest is generated by bond funds, which many investors choose because they offer the potential for a regular lower-risk income, compared with equities.
VERY USEFUL IN RETIREMENT
This feature of an ISA is particularly useful in retirement, as it means you can hold your money in bond funds and generate a tax- efficient income on top of the payments you receive from your pension. It is also very beneficial if you want to generate long-term capital growth from your funds but prefer to take a cautious approach to investing.
When your investments are held in ISAs, you don’t have to pay any CGT on the growth. Of course, this may seem like a minimal benefit if your profits are well within the threshold for CGT, but it’s worth remembering that stocks and shares investments are for the long term. If your funds perform particularly well for several years, holding them in ISAs will mean you have full access to your money at all times without having to worry about managing a potential tax burden.
SIMPLIFYING YOUR FINANCIAL ADMINISTRATION
You don’t have to declare any investments held in ISAs on your tax return. This may not seem like much, but, if you have to file an annual tax return, you’ll know that any way of simplifying your financial administration can be very helpful.
If you feel that your existing ISA provider is no longer appropriate for your needs or you are looking to consolidate your investments under one roof, with an ISA you are free to transfer your investment between providers to suit your individual needs. Please note: your current provider may apply a charge when you transfer your investment. While your investment is being transferred, it will be out of the market for a short period of time and will not lose or gain in value.
WITHDRAWALS FROM AN ISA ARE TAX-EFFICIENT
ISAs can give you control over your retirement income, as you can take as much money out as you like, whenever you want. Savings in an ISA and withdrawals from an ISA are tax-free. If you are a pension saver, you can generally also take out as much money as you like, whenever you want from age 55. However, at present only up to 25% of the pension can be withdrawn tax-efficiently, with withdrawals taxed at the applicable marginal rate of Income Tax. Separately, a test against the Lifetime Allowance may also be applied, which could result in additional tax becoming payable.
EXPERT PROFESSIONAL INVESTMENT ADVICE
Choosing between a Cash ISA or an investment ISA such as a Stocks & Shares ISA will depend on the level of risk you are comfortable taking with your money, as well as factors such as how soon you will need to access your money. If you require individual expert professional advice, please contact us to review the most appropriate options for your particular situation.
Remember, the value of investments and income from them may go down. You may not get back the original amount you invested. Stocks & Shares and innovative finance ISA investments do not include the same security of capital which is afforded with a Cash ISA.
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All of us at Vizion Wealth are committed to our client’s financial success and would like to have an opportunity to review your individual wealth goals. To find out more, get in touch with us – we very much look forward to hearing from you.
This blog and its attachments or links should not be relied upon as advice, except to the extent that advice is set out in an attached bespoke Suitability Letter. Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change. The value of investments and income from them may go down. You may not get back the original amount invested.Past performance is not a reliable indicator of future performance.