Why ISAs should be top of every investor’s shopping list

5 min read 29 Apr 24

Even in the best of times, saving money can be difficult. So, when we do manage to put some money aside, how can we ensure we get the most out of our savings and investments?

Individual savings accounts (ISAs) are a great way to help grow your money for your future. Their main benefit is their tax efficiency. When you invest or save in an ISA, the money you put in grows tax-free. This means that you don’t have to pay any tax on the profits if your investment increases in value. Without any capital gains or income tax in an ISA, you get to keep all of what your investment earns. 

The value of investments can go down as well as up so you might not get back the amount you put in. Please remember that the tax rules for ISAs and Junior ISAs may change in the future, and their tax advantages depend on your individual circumstances.

There are four main types of ISA for you to choose from: cash, stock and shares, lifetime and innovative finance and you can choose to hold more than one type of ISA. Each type offers something slightly different, and the type(s) you choose will depend on your particular needs.

Every year, you’ll have an annual ISA allowance, which is the amount of money that you can invest in your ISA each year. The current allowance for ISAs is £20,000 in total across the ISA types you invest in (age restrictions may apply). 

An ISA is an investment that many people use as part of their overall financial plan. If you think ISAs might be for you, here are some tips to help you maximise your investment potential.

Avoid capital gains tax with a stocks and shares ISA

When you invest in an ISA, you pay no capital gains tax (CGT), which can save you thousands in the long run. For example, if you invest your full ISA allowance of £20,000 in a stocks and shares ISA each year, with an average, annual growth rate of 4%, your investment could be worth £249,727 after 10 years. If you decided to withdraw the investment, you’d pay no CGT. However, if you made the same investment in stocks and shares outside of an ISA, you could face 20% CGT on the gain after your £3,000 allowance – meaning you could lose over £9,300 of your money in tax. Please note, this example is for illustrative purposes only. It isn’t a real life example or a recommendation.

Check your provider’s terms and conditions

You should make sure your provider allows you to transfer your money to another ISA account. This will allow you to move your savings somewhere different should you want to. Not all ISA providers allow for transfers, and some might apply a charge, so it’s good to check this before you transfer your investments.

Look into the Junior ISA (JISA)

JISAs are one of the easiest ways to invest for your children. You can open a JISA when your child is born, and they can hold it until they’re 18 when it can be switched to an adult ISA. You can currently invest up to £9,000 a year in their JISA.

Maximise your child’s savings by transferring Child Trust Funds into JISAs

If your child was born between 1 September 2002 and 2 January 2011, they almost certainly have a Child Trust Fund (CTF) account. CTFs were a government-backed scheme that aimed to ensure that children entered adulthood with some savings. You can transfer your child’s CTF to a JISA – and time the transfer to their advantage.

If you’re unsure whether or not your child has a CTF, or you can’t remember who it’s with, www.gov.uk/child-trust-funds/find-a-child-trust-fund has some useful information to help you track it down.

Unlike a JISA, CTFs don’t work by tax years. The annual investment period starts on your child’s birthday. This means you might have the opportunity to make more than one contribution of £9,000 in a single calendar year.

For example, if your child was born in January, you could contribute the full £9,000 into their CTF on their birthday and then transfer it into a JISA the following month. You could then choose to invest a further £9,000 into the new JISA (after the transfer completes) before 5 April tax year deadline, and then even make a third investment of £9,000 after 6 April when the new tax year begins (using up the full JISA allowance for the new tax year).

The views expressed in this article should not be taken as a recommendation, advice or forecast. We are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser.

By M&G Investments

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