Benefits and Drawbacks of ISAs

Benefits and Drawbacks of ISAs

An ISA is a type of account that allows the investors to save and grow their money over a period of time without having to pay tax on the interest. Other types of savings accounts charge an income tax on the interest that the money accumulates. Furthermore, the holder does not have to pay capital gain tax, regardless of the growth rate of the investments, or the amount withdrawn.

Types of ISAs

As an investor, you can select either of two ISAs. You can either choose to save your money in a Stocks and Shares or Cash ISA. In both accounts, the returns are not taxed.

Cash ISA

It is also referred to as the basic ISA. It’s further divided into three sets;

Fixed rate account
This type of account is meant for account holders who would like to keep their money locked up for quite some time, ranging from two to five years, thereby attracting a high interest rate. Basically, the longer your money is tied up, the higher the interest rate.

Instant account
A saver using this account has the ability to either deposit or withdraw from the account at any time.
This type of account however, does not offer constant interest rates. The value of the savings will increase once the rates increase, but as they drop, the savings will also be affected negatively.

Regular savings account
The interest on these accounts is normally constant over a period time, a year for instance, provided that the saver makes monthly deposits into the account.
However, on average, the interest rate on the account is too small, at around 1%. Savers, hence, miss out on making more money using other avenues.

Stocks & Shares ISA

This type of account is targeted for savers who wish to tie up their money for periods of up to five years without making withdrawals in between that duration. It’s structured in a way that enables the individual holders to take part in the investment, like performance of the stock market. There is a wide range of investments that this account offers its holders.

In the event that a saver withdraws before the stated period, the money will no longer have the tax free privilege of being considered as an ISA. If the holder makes a new deposit after withdrawal, it is considered as a new subscription.

An account holder with a Stocks and Shares ISA has to keep a close eye at his investments due to the fluctuating money value, which brings about a rise or a drop in the interest. He/she has to know when it’s best to sell or to buy shares, unlike a person with a Cash ISA, whose annual interest is constant.

Due to the tax-free nature of ISAs, there is a limit to how much a holder can save in one financial year, also known as annual allowance. The allowance for the current financial year stands at £20,000.

It is possible for an individual to have both ISAs, provided that the total amount of money saved up in both accounts does not exceed the financial year’s allowance.

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