The majority of people are aware of ISAs as a good way to save money in a tax-advantaged environment. But there are a number of other positive aspects of ISAs that are not as widely known about.
Here we look at some of the less commonly known benefits of ISAs.
ISAs for all
Saving into ISAs can start from birth in the form of Junior ISAs (JISAs). Deposits can be made annually up to the maximum Junior ISA limit for that particular tax year – which for 2022/23 is £9,000. ISAs can be contributed into by anyone, although any amount over £3000 could be caught under inheritance tax rules. Children are able to access the funds within an ISA in their name from the age of 18. JISAs provide an excellent opportunity to invest for a child’s future and the earlier you can start to accumulate savings in ISAs, the greater the opportunity compound interest will have to work its magic.
Cash ISAs can be opened from the age of 16 and so ages 16 and 17 can utilise both a cash ISA and a JISA.
Lifetime ISAs (LISAs) are another option available to those aged between 18 and 50 (although you must be under 40 to open a Lifetime ISA.) You can save up to £4,000 every tax year in a LISA to use towards a first home or to access in retirement above a defined age (currently 60), with the government adding a 25% bonus on top of any investment you make up the maximum amount. One potential drawback of LISAs is that outside of these reasons, or other very limited exceptions, a charge of 25% will be applied if you need to withdraw cash at any other time.
It goes without saying that in order to obtain the best chance of investment growth and build your pot over a shorter timeframe, you’ll need to invest in stocks and shares ISAs rather than holding funds in a cash ISA.
When investing in stocks and shares ISAs, we would always advise taking a long-term view, continuing to invest and stay invested to ‘ride out’ any periods of volatility. However, one of the benefits of ISAs over other forms of long-term savings is that they can usually be accessed at anytime should the funds be required. (This is not the case with LISAs – see above). ISAs are often therefore a popular choice for reaching a long-term savings goal – such as building up a deposit for a house. Withdrawal from ISAs are free of income tax or capital gains tax.
Drawing an income in retirement
Most people associate pensions as the ‘go to’ source of income in retirement. However, any amount taken from a pension over and above the tax-free allowance for that tax year becomes taxable. Considering the annual tax-free income allowance is only £12,570 for the 2022/23 tax year, the majority of people will pay tax if relying on an income from pensions alone. Savvy investors (or those that followed the advice of a financial adviser!) that have built up their ISA funds over the years could have a sizeable pot from which to take income from that is free of any income tax or capital gains tax.
In this way, it is possible for individuals to use a defined contribution pension alongside ISAs in retirement, accessing funds from both pots, therefore potentially giving themselves a regular retirement income with no tax, or only basic rate tax, payable.
ISAs are a powerful tool for sheltering money in a tax advantaged environment, and those with the means should consider maximising the ISA contributions of their spouse, and potentially also their children. For more information on how to use ISAs as part of a financial plan, please get in touch.