After pensions, an Individual Savings Account (ISA) is the next most useful tool for both tax-efficiency and investing your money for your future. An individual can deposit up to £20,000 per year into an ISA. Unlike a pension, payments into an ISA are not subject to tax relief, but both can grow tax-free. The interest or growth on your ISA with not be subject to income tax nor capital gains tax.
We can help you to establish why you should use an ISA, which type of account will work best for you and exactly how best to use it. By managing your ISA investments as part of our wider financial strategy in line with your financial plan, we’ll help to provide you with the greatest possible assets for a comfortable retirement.
How will inflation affect my ISA?
Over time, inflation erodes the purchasing power of your money as prices of goods rise year on year. If your cash rests in a bank account paying 1% interest, but the rate of inflation is steady at 2%, then it will lose value at the rate of 1% a year. There are other variables which affect inflation, which is why people need accurate financial planning to work out a picture of the future. You may be aware of the Rule Of 72. This is a method which can be used to estimate the number of years inflation will take to halve the purchasing power of your money. If you divide 72 by the rate of inflation (assuming it stays constant), you will get the number of years until the value of your money is halved. For example, if inflation is 2% (example rate), then the purchasing power of your money will be halved in 36 years.
Are interest rates enough to make an ISA worthwhile?
There are two types of ISA – a cash ISA and a stocks and shares ISA. With the first, the bank simply holds your money (as with any common account) and pays you a rate of interest per year. This is usually relatively low, as they take the risk that the returns they see from use of the funds they hold will be higher than the interest they pay out to account holders. With the second type of ISA funds are invested, so you should see growth rather than simply receive interest. We would usually recommend an investment ISA for this reason, but our choices will always depend on your risk profile. If you are particularly risk-averse, we will go for the stable, low-risk option of the cash ISA.
How many ISAs can I have?
Typically, you can open one new ISA per tax year up to 6th April (the annual limit for ISA investments is £20,000), and continue to do this each year, so you could end up with multiple ISAs. In practice, you can have two ISAs per year – one cash ISA and one investment ISA, although you would not be able to exceed the total £20,000 personal investment limit. You may wish to open different types of ISA for different reasons – for example, to allow easy access to your cash or to get a more favourable rate of interest over a fixed term during which you will not be able to access your money.
What happens if a relative dies and I inherit an ISA?
Remember that an ISA is a tax-free wrapper for an investment. Under the government’s current rules, if you were married, then a husband, wife or civil partner will be able to inherit the ISA – in effect it would transfer to them and this would remain tax-free.
If you were not married, then you cannot inherit the ISA in this way, and the cash value of the ISA would be transferred to whichever account specified to the deceased’s executor, and so would also be likely subject to tax. In either scenario, it is worth talking to someone who can give you detailed advice to ensure you are arranging your finances in the most tax-efficient way possible.
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