Is the ISA for me?
The ISA, or Individual Savings Account, was launched at the turn of the millennium as an incentive to encourage anyone to save or invest in a tax-free account and as way of makingsaving easier. There are more ISA options these days, but the core idea hasn’t changed. Future goals are important to our lives, and the pandemic has reminded us, in a big way, that rainy days do come, and we need to be ready.
Is it complicated?
Think of the ISA as a box with several compartments, each is a different type of ISA account. One is for ready money saving; the others are for long-term saving and investing. As long as your money is inside the box, you won’t pay tax on the interest that you earn – remember, you’ve paid income tax on the money that you originally put into the ISA already. There’s a maximum amount you can put into the box in each tax year, which is currently £20,000. Whatever you put in can all be in one compartment or split between the different options in any way you like.
Why the different types?
A cash ISA is the compartment for money you may need to get your hands on at any time. It helps you make your cash work harder than if it was in a jar or under the mattress. But it’s not the place for money that you want to put towards your longer-term goals. For that, you really need to consider investment ISAs.
But isn’t investing risky?
A stocks and shares ISA allows you to benefit from the long-term trends of the stock market. They show that the longer you are invested, the less risk you are actually taking and the better chance you have of making decent returns above the rate of inflation.
There are no guarantees (for example these are not covered by the FSCS) and you should never invest money you can't afford to lose. But if you choose a fund, rather than picking individual company shares, you are spreading your risk. The Triodos Stocks and Shares ISA, for instance, will offer you a choice of three funds at different risk levels. In general, more adventurous funds expect to make higher returns, more cautious funds offer more security. You could get your money out at any time, but ideally it should be tucked away for five years or more.
What is an IFISA?
It’s an Innovative Finance ISA, which is the other investing option in the ISA box, alongside the Stocks and Shares ISA. It was introduced in 2016 to encourage alternative investments. The Triodos IFISA, for instance, allows you to invest in pioneering organisations delivering positive change, and designed to make environmental, cultural or social impact. Each investment has its own duration and risk level, but they are all for the medium to long term, to allow for growth. This IFISA can be opened via the Triodos crowdfunding platform. However, these investments are not readily realisable, which means that they may be difficult to sell, and you may not get back the full amount you invested.
Can I move my ISA money around?
Yes. You can switch money from a cash ISA into an investing ISA and the other way round. You can transfer money from an ISA with one bank into the same type of ISA with another bank but watch out for any charges or conditions. Do not move funds out of an ISA yourself, because your money will lose its ISA status. You can open a new ISA account in a new tax year with a new provider. But you can only have one of the same type of ISA active, with fresh contributions, in any tax year.
What exactly are the tax benefits of an ISA?
When interest from your savings or returns from your investment rise above certain levels, decided by the government, you pay tax. At present, those levels are high enough that it will take most people quite a while to have any taxable interest or gains – although the treatment of tax depends on your individual circumstances. However, the whole point of the ISA especially the investment options, is to build up long-term gains. And of course, any future government could decide to change the tax regime, and reduce the current allowances for personal savings, dividends and capital gains. So it makes sense to plan ahead and use the ISA box, where your money definitely can’t be got at.
What does the money in my ISA do?
The money doesn’t sit in a bank vault! In Cash ISAs, the money is lent out and the bank makes interest. In Investment ISAs, the money is invested in the stock market or organisation. It’s worth thinking about whether this aligns with your personal values as well as returns. For example, do you want to make sure that you’re not investing in fossil fuels or tobacco? This is another area that you might like to research.
Iona Bain is a writer, author, speaker, broadcaster and founder of Young Money, the first British website dedicated to young people’s finances. She is a regular presence on TV and radio, and is quoted frequently in national and online press. You can follow her on Twitter.
In her latest book Own It! How Our Generation Can Invest Our Way to a Better Future (Harriman House) Iona aims to demystify savings, pensions and investing for a new generation.
Making a difference
The Triodos Impact Investment Funds focus on driving positive environmental and societal change around the world and work hard to deliver competitive financial returns. You can invest in the funds directly or via the tax-efficient Triodos Stocks and Shares ISA.
Please note that with investment in ethical funds and companies, as with all investments, past performance is not a guide for future returns and you may not get back the amount that you originally invested. The Triodos Impact Investment Funds should be seen as long-term investments (five years or more).
The tax benefits of an ISA are subject to change and depend on individual circumstances.