These days ISAs are much simpler and more accessible than they used to be and should be the first consideration for people looking to make of the most of their money – especially in the current climate where interest rates on savings accounts are actually lower than inflation.
1. MYTH: ISAs are only for people with lots of money
Not at all. Some companies will ask for a minimum investment in return for a higher interest rate but, for the majority of ISAs, there’s no minimum required. The maximum allowance for the current tax year, which runs from 6 April 2014 to 5 April 2015, is £15,000. You can invest all of that in either a cash or stocks and shares ISA.
2. MYTH: If I open an ISA my money is locked in for at least a year
Not necessarily. Some ISAs will offer higher interest rates if you commit to locking your money in for one or more years, but with most ISAs you can withdraw your money whenever you want. It’s worth making note of any exit charges or restrictions that may apply to withdrawals before you pick your ISA. Also, look out for when the interest is accrued and paid - some pay interest annually, others monthly.
3. MYTH: You can only have a cash ISA or a stocks and shares ISA
You can actually have a cash ISA, a stocks and shares ISA, or both. With the new ISA rules which came into force in 2014, you can put your whole ISA allowance into either a cash or stocks and shares ISA, or you can split it any way you choose between the two. Once the new tax year starts on the 6 April, you can open another ISA for the new tax year. The allowances for 2015/16 will be slightly higher, at £15,240.
4. MYTH: Cash ISAs deliver better interest rates than other savings options
Last month, the best interest rate you could get on an instant access cash ISA via Moneysupermarket was around 1.35 per cent. And according to data from the Bank of England the average cash ISA rate is currently a lowly 1.05 per cent. When looking at general savings accounts the rate is very similar, and some current accounts are offering as much as 5 per cent. But remember, there are long-term tax benefits of an ISA that a standard savings or current account won’t have.
Last year, average savings rates were below inflation for every month except December, meaning many savers were actually losing money in real terms. This makes stocks and shares ISAs more appealing to some people. With stocks and shares ISAs, as with any investment, your capital is at risk as your money can go down as well as up – but the potential rates of return can be far higher than the fixed rate you can get through a cash ISA.
5. MYTH: Stocks and shares ISAs are for seasoned investors
Having a stocks and shares ISA doesn’t mean you need to keep tabs on the financial markets and manage your investment as global stock market prices fluctuate. Typically, with a stocks and shares ISA, your money will be invested in a fund that tracks a stock market or group of companies.
‘Stocks and shares ISA’ is actually a confusing label. A stocks and shares ISA can, in fact, be invested in anything from equities to corporate bonds, gilts to gold, unit trusts to wheat futures.
6. MYTH: ISAs are complicated
They were, but they’re not now. ISA replaced its predecessors PEPs (Personal Equity Plans) and TESSAs (Tax Exempt Special Savings Accounts). Neither were particularly simple. We’ve also had the brief era of mini and maxi ISAs to further confuse the landscape. They were discontinued in 2008. The current ISA framework is much easier to understand and needn’t be feared by anyone new to saving or investing.
7. MYTH: ISAs are tax-free
Very nearly but not quite. ISAs are what we call ‘tax-efficient’. Strictly speaking, it depends what tax bracket you’re in. If you have investments outside an ISA, any share dividends you receive are liable for tax – 10 per cent for basic rate taxpayers, 32.5 per cent for higher rate taxpayers, and 37.5 per cent for additional rate taxpayers. Share dividends from an ISA are still taxed but only at the rate of 10 per cent for everyone (before tax credits).
8. MYTH: Once you’ve opened an ISA you can’t transfer it
The rules around ISA transfers used to be more complicated than they are now – there were restrictions on what kinds of ISA you could transfer and how much. That all changed in 2014, and now all restrictions have been lifted on ISA transfers – you can transfer your ISAs from cash to stocks and shares, and vice versa, in any way you choose.
Making a transfer is easy – you typically just need to fill out a simple form with your new ISA provider and they’ll take care of the details.
10. MYTH: The end of the tax year is the best time to open an ISA
You can open an ISA at any time. The term ‘ISA season’ has emerged because so many people leave it to the last minute, just before the end of the tax year, to use up their ISA allowance. After the deadline has passed, you lose the tax-efficient allowance for that year for good. Banks and building societies have often used this time to offer improved interest rates to lure the army of eager savers through their doors.
But, the sooner you open your ISA, the sooner you could be earning interest on your savings or investment. Interest on an ISA is typically accrued daily but paid monthly or annually. It’s worth checking the details before opening your ISA to check it’s in line with your expectations.
Nick Hungerford is chief executive and founder of Nutmeg. The views expressed above are his own.
