ISA stats released by the Government show a record £57 billion was invested in the April 2012 to April 2013 tax year. UK investors’ appetite for ISA is growing and using ISA to reduce the amount of tax paid on savings and investment is one of the easiest ways to make more of your money.
With all this talk of austerity, you might question why ISA investing is on the increase. As interest rates continue to fall on savings accounts, savers are struggling to find decent rates of return on their cash so it makes sense to improve returns, either by reducing the tax paid on the interest or by taking more risk in the stock market.
ISAs are a great success story – 24 million people in the UK now hold an ISA account – because their tax benefits are great, yet they are simple to understand and, unlike pensions, governments don’t keep messing around with the rules
It is important to remember that an ISA is simply a tax wrapper that shields any investment return from your savings from the taxman. Any risk comes from the investments you have chosen to hold within the ISA, not from the ISA itself. The key is to pick the type of investments with which you are comfortable and then ensure you invest in them through an ISA wrapper to make the most of the tax advantages the ISA offers.
Most people will hold some money in a Cash ISA, partly as an emergency fund, and partly to meet short term expenditure. At least 6 months expenditure or £10,000 is a good starting point. Cash ISA is a good choice of account here since the interest will be tax free and therefore give you a higher return than taxable cash deposit accounts.
For longer term investment, a stocks and shares ISA is likely to produce a better return than a Cash ISA, albeit with greater risk.
Please remember however, tax rules change over time and the benefit of sheltering your investments from tax will depend on your circumstances
Junior ISAs are also starting to see some of the success of the adult ISAs. Junior ISA as the name suggests, is the children’s version of the adult ISA launched in 2011 as the long term replacement to the Child Trust Fund (CTF). 295,000 new accounts were opened in the tax year 2012/13 showing that Junior ISA is starting to gather some momentum.
At present, those 6.4 million children who have a CTF cannot also have a Junior ISA. There are plans in the Treasury to consider changing this to allow the transfer of savings from CTFs to Junior ISA. I expect the take up of Junior ISA to accelerate once transfers are allowed although this is not likely before April 2014.
Visit the Hargreaves Lansdown website for more information on Junior ISA, other Junior ISAs are available.