Andrew Marker from Vanguard offers some advice on saving for your and your family’s future through ISAs.
As the end of the 2022-23 tax year approaches, many investors will be looking to take advantage of the tax breaks available to them – particularly on individual savings accounts (ISAs). Introduced by the UK government in 1999 to encourage people to save or invest some of their disposable income, there are two main types of ISA – cash ISAs and stocks and shares ISAs.
Here are some tips you need to know about investing in an ISA:
1. There is an annual limit to the amount you can invest in ISAs
£20,000 is the most you can currently invest in an ISA in a tax year, which runs from 6 April to 5 April the following year. This overall ISA allowance covers the different types of ISA, so if you invest £10,000 in a cash ISA in a single tax year, you can only invest a maximum of £10,000 in your stocks and shares ISA in the same year. As the limit refreshes in early April each year, you can’t carry over any unused allowance into the following tax year.
2. There are tax advantages to investing in ISAs
Investments held outside of an ISA in a general account are subject to income tax if they generate dividends or interest, and you could also be liable for capital gains tax (CGT) if you make a profit when you sell any of these assets.
In the 2022-23 tax year, everyone has a tax-free CGT allowance of £12,300, but this will fall to £6,000 from April 2023 and just £3,000 the following year. Given that investments held in stocks and shares ISAs are exempt from CGT, it can be beneficial to invest some of your disposable income in an ISA.
3. Costs matter
Investing through an ISA means saving on tax. However, there is still the not-so-small matter of your costs, which includes the ongoing charges figure (OCF) of the funds you invest in as well as the account fee of your provider. While a difference of one or one and a half percentage points might not seem like much at first glance, over time it can bite deep into your returns as it.
4. ISAs can be transferred between providers
If you have an ISA with another provider, including a cash ISA you can transfer its holdings to a stocks and shares ISA. Just remember that transferring from a cash ISA to a stocks and shares ISA involves taking on more risk with your money. When transferring between different stocks and shares ISAs, you may also have to sell some holdings into cash first before initiating the transfer. You may be out of the market for a time during a transfer.
5. You can withdraw your money from a flexible ISA at any time
In a flexible ISA you can withdraw cash and then put it back in during the same tax year without reducing that year’s allowance. There is no minimum withdrawal amount or minimum account balance. ISAs are designed for longer-term saving so, if you withdraw any money, you are reducing the amount you have invested in the market. This could limit the potential for that money to compound over time so it may not generate the expected returns.
6. The earlier you start investing, the better
Even if you are unable to take advantage of the full £20,000 annual allowance, it is worth investing as much as you can afford. Through the power of compounding, you will get returns on the money you invest as well as on any gains you make, so the sooner you set up your stocks and shares ISA, the greater the potential benefits.
7. Junior ISAs are available for anyone under the age of 18
Junior ISAs must be set up by an adult with parental responsibility for a child and have an annual allowance of £9,0000. They are a great way for them to fund themselves through higher education, or to start saving for a deposit on a house. When the child turns 18, the Junior ISA automatically converts into an adult cash or stocks and shares ISA in their name.
8. ISAs can be inherited after you pass away
ISAs can be left to a surviving partner without forfeiting the tax benefits, and they can add the funds to their own ISA without being subject to the annual £20,000 allowance. The surviving spouse or civil partner is entitled to an additional permitted subscription up to the value of the deceased person’s ISA. It’s worth noting that ISAs may be subject to inheritance tax.
*Andrew Marker is head of UK direct retail and pensions, Vanguard, Europe.