An ISA (Individual Savings Account) is a tax-exempt account that can be opened and managed by one person. The funds deposited in an ISA cannot be used as collateral; it should only serve as a savings tool for future use.
ISA accounts include cash, stocks and shares, innovative finance and lifetime individual savings accounts (Lisa). Cash ISAs are the most common type of ISA, with interest rates varying based on whether or not the provider has been granted ‘scheme’ status from the government. Generally, higher interest rates equate to less favourable terms, such as limiting withdrawals to just once annually.
Anyone over the age of 16 can open an ISA account regardless of their employment status. There is no maximum income that one must earn to open an ISA account; however, anyone with a personal income of more than £100,000 annually cannot have a cash ISA as they do not earn enough to benefit from tax-exempt accounts.
Disadvantages associated with having an ISA account
There are several disadvantages associated with having an ISA account, including:
The best-advertised accounts have interest rates below 1%. This means it will take close to 30 years for your savings to double. However, these accounts often come with restrictions such as limiting you from withdrawing funds or charging high fees for withdrawals and deposits into the account outside of those permitted by ISA providers. ·
Unpredictable inflation rate
While the interest rates of ISA savings accounts are fixed, they fail to compensate for inflation. This means your money will buy less than it would in an average savings account.
Not easily accessible
Withdrawing funds from an ISA requires contacting the provider and often comes with high fees. There is also a limit of one withdrawal per year allowed without penalty.
Exposure to market uncertainty
Unlike pension savings, where you can withdraw funds when needed (and penalties won’t apply), withdrawals made before age 60 will forfeit any interest accrued in the account.
Income tax implications
If you do not use all of your allowances in cash ISAs, the remainder becomes taxable income subject to income tax. Coupled with a tax on the interest your money earns, you could be taxed up to 38.1% on any gains.
No quick investments
If you have no savings currently but want to invest your money quickly to start gaining interest, then putting your money into an ISA could be a waste of time as it would take years before anything was earned. Also, if you have to pay a lot of tax, then the returns from ISAs may not be as appealing. In that case, it is better to invest outside an ISA for better returns.
Advantages of an ISA account
Most people use an ISA account as a form of long-term savings, where they earn interest on their money without paying any tax. If you invest £10,000 inside a cash ISA at a 2% rate of return per year, then in theory, after 25 years, your money would be worth £22,942 – which is approximately £12,942 more than if you had paid tax on your earnings. Even though rates had fallen significantly since 2008 when banks were offering accounts with annual interest rates often over 5%, they are still very attractive to savers.
One major reason for this is the wide range of ISA providers. The main ones include National Savings and Investments (which offers Premium Bonds), cash accounts with all banks and building societies, plus stocks and shares ISAs mainly sold by investment brokers – who often provide very competitive rates on these products due to their high availability in the market. All these options allow you to choose what works best for you. Some people, however, believe that Isas are not beneficial to everyone.
ISAs are a good way of getting started with saving. However, many alternatives are available to investors that don’t limit their access to funds or accrue income tax, such as regular savings accounts and easy access to cash ISAs. New investors interested in a uk isa account are advised to use a reputable online broker from Saxo Bank.