What is an ISA and how do you invest in it?

What is an ISA?

An ISA, or Individual Savings Account, acts as a protective layer for some of your investments. This wrapper helps you avoid having to pay tax – on dividends, interest and more.

The government has specified a maximum of £20,000 that can be placed within your ISA for the year 2023/24.

There are also several different kinds of ISA available to UK citizens:

Cash ISAs

Cash ISAs are relatively simple and act like savings accounts. Your funds will be held in cash and earn interest, tax-free. There are flexible cash ISAs available too, which allow you to withdraw money and add it back in. However, cash ISAs typically have interest rates lower than inflation, so you may want to invest in other ISAs as well.

Stocks and shares ISAs

With a stocks and shares ISA, you can invest your money in the stock market. This increases the potential returns, as well as the potential risk as the stock market is volatile and unpredictable. Some providers also enable you to choose which shares your money is invested in, giving you greater control over your investment.

For stocks and shares ISAs you can also take advantage of flexible ISAs. With us, our ISAs are flexible and you can even use up your allowance over both our Share Dealing ISA and Smart Portfolio ISA.

Innovative finance ISAs

Using an innovative finance ISA loans your capital to individuals and businesses without the need for a middleman. These accounts tend to earn higher interest rates than other savings accounts. However, your capital is at risk because these lending schemes can collapse and aren’t protected by an external financial authority.

Lifetime ISAs

Lifetime ISAs are built to help you save for important elements of your future, like buying your first house or your eventual retirement. You can only open one if you’re under the age of 40 and you’re limited to investing £4000 of your yearly tax-free allowance into this kind of account. However, the government will add a 25% bonus of what you pay in, every year.

Junior ISAs

You can save and invest for your children more efficiently with a junior ISA. These accounts were introduced to replace Child Trust Funds and can be opened by the parent or legal guarding of any child under the age of 18 years. The government stipulated allowance for these is £9000, and the child in question can only withdraw the money when they turn 18.

How do ISAs work?

An ISA works similarly to other bank accounts, enabling you to set aside some of your money. You entrust your capital with a financial institution in the hopes that it will grow. However, unlike other accounts, your ISAs will not be subject to tax. This protects any capital gains you might make.

You can open an ISA with organisations, such as:

• Banks
• Building societies
• Friendly societies
• Credit unions
• Stockbrokers

Depending on the institution you choose, different kinds of ISAs will be available to you. You can opt to put your entire allowance into one or spread it across several different accounts.

For example, you may choose to put £10,000 into a stocks and shares ISA and another £10,000 in a cash ISA. However, you can’t open two ISAs of the same type and spread your capital across them.

If you don’t use this allowance before the tax year ends, it won’t roll over. However, it’s important to note that tax rules are subject to change and depend on your individual circumstances.

How you deposit funds into or top up your ISA will also depend on your provider. Many enable you to complete these transactions online if your funds remain within the government allowance. Some grant you further flexibility to deposit or withdraw your funds at any time as well.

Transferring your ISA from one institution to another is also possible. To transfer your ISA to us, you’ll need to open a share dealing account. Then, fill out our transfer request form and we’ll take care of the rest. Usually, it’ll take about 14 days, but this depends on your transferring broker.

Why invest in an ISA?

There are several reasons why investing in an ISA might be worth your while. First and foremost is that they shield some of your money from taxation. This means that any interest or capital gains earned by your money won’t be affected.

ISAs can also be flexible. Depending on which kind you invest in, you’ll be able to deposit, withdraw and transfer your capital as needed.

You may also have greater control of how your money is put to work – selecting which stocks to invest in or which companies to lend to.

While the current annual allowance is only £20,000, this amount does renew every year.

What is a cash ISA?

Cash ISAs enable you to earn interest on your savings but your ability to withdraw your funds will be limited to certain times of the year. To invest in one of these, you need to be a UK resident and 16 or older.

If you’re set on opening a cash ISA and focused on maximising your returns, you might choose to use a fixed-rate variation. You’ll only be able to transfer or deposit money into this account on specific dates or periods.

On the other hand, a variable or flexible ISA gives you the power to withdraw your funds at any time and then replace it within the same tax year without it counting towards your allowance.

Here are some of the pros and cons associated with investing your money in a cash ISA.

Pros of cash ISAs

• A profit is made through the interest earned on your holdings
• You’ll have easy access to funds to pay for unexpected expenses
• Your money and any interest you earn on it will be protected from tax
• Opening a cash ISA requires an initial investment of as little as £1

Cons of cash ISAs

• Not all cash ISAs allow you to withdraw your money whenever you want to
• They can be outperformed by equities over the long-term
• Interest rates are typically low, and often can’t keep up with the cost of living and inflation rates

Find out more about how to beat inflation

What is a stocks and shares ISA?

A stocks and shares ISA is also known as an investment ISA. These accounts form a protective layer around your portfolio against any tax.

To open a stocks and shares ISA, you’ll need to be a UK resident and 18 years or older.

Depending on your provider, you’ll be able to choose which equities you want to invest in or opt for a ready-made selection.

Let’s look at some of the pros and cons of stocks and shares ISAs.

Pros of stocks and shares ISAs

• Provides a tax-efficient form of investment, guarding your portfolio from taxation on capital gains and dividends
• There’s a wide range of assets you can invest beyond equities, like ETFs and bonds
• Offers the potential for higher returns than cash ISAs because of the volatile markets
• You can transfer your holdings to another provider if you’re unhappy with the performance or management of your current one

Cons of stocks and shares ISAs

• Your profits aren’t guaranteed
• The increased risk means that you could lose money and end up with less than you started
• If your provider manages your investments for you, their account fees might diminish any profits

How do you invest in an ISA with us?

There are two ways to invest in a stocks and shares ISA with us: with a share dealing account or a Smart Portfolio.

In fact, you can open one of each and they’ll fall under a single ISA.

Invest in a share dealing ISA

1. Learn more about ISAs
2. Open a share dealing account
3. Log in to MY IG dashboard
4. Click 'add another account', then select 'add ISA'
5. Deposit money and place your deal

Invest in a Smart Portfolio ISA

1. Learn more about ISAs
2. Open an IG Smart Portfolio and select 'ISA' as your portfolio type
3. Answer a selected set of questions and determine your appetite for risk
4. We’ll help you find an IG Smart Portfolio that’s right for your risk profile
5. Deposit some money into your portfolio and we’ll invest it on your behalf

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