Common misconceptions: ISAs
Debunking common ISA misconceptions
Many people think that ISAs (Individual Savings Accounts) are really complicated, or you have to have a large amount of money to open one, or there’s no point having one at all! But they're really not as confusing as they might seem. An ISA is simply a tax-free account for your savings. There are many common misconceptions surrounding the topic and we want to set the record straight.
1. I can’t move my money once it’s in an ISA
It’s true, you can only pay into one cash ISA per tax year but that doesn’t mean you have to stick with that same ISA for the entire year. You can transfer your ISA as often as you like. However you should always refer to the terms and conditions of your chosen account as you could face certain penalties as a result. You need to check that your current provider allows for transfers and your new provider will accept them.
Some ISA products let you transfer any previous years ISA savings that you’ve built up over the years into an ISA account, and you can also open a new one for the current tax year. As long as you don’t contribute to both, it’s perfectly acceptable as your previous savings aren’t governed by the same tax allowance rule.
2. I can open as many ISAs as I want
As with misconception number 1, you can only open one cash ISA per tax year but you do have the option to split your money between a cash ISA, stocks & shares ISA or an innovative finance ISA. So you can choose to put the whole allowance into one ISA or you can mix and match between the three different types. The choice is yours! But your allowance is still capped at £15,240 for 2016/17 tax year and £20,000 for 2017/18, whatever combination you chose.
Here’s an example to illustrate this for the 2017/18 tax year...
You could put the full £20,000 into a cash ISA...
£5,000 in a cash ISA
£5,000 in a stocks & shares ISA
£10,000 in an innovative finance ISA
£10,000 in a cash ISA
£10,000 in a stocks & shares ISA
It’s completely up to you and your personal preference.
But please remember that stocks and shares and any income derived from them can rise and fall in value. You may not get back the full amount of your investment.
3. I don’t need an ISA now the Personal Savings Allowance has come into play
Some people have said that the Personal Savings Allowance will mark the end of the ISA as the majority of people in the UK will be able to earn up to £1,000 a year in savings interest without having to pay any tax on it.
But you should always remember that you never have to pay tax on the interest you make with an ISA. It’s also worth keeping in mind that any interest you earn won’t count towards your personal savings allowance. As long as your money is in an ISA it will have genuine tax-free status and that will never change. Plus higher-rate tax payers get a lower PSA or none at all if they earn over a certain amount. Here are some more reasons why ISAs are still relevant.
4. I can’t touch my money once it’s in an ISA
Access to your money all depends on the type of ISA you have chosen and the individual terms and conditions of that account. Some accounts are very flexible and will allow you to withdraw money as many times as you want. Other accounts are more ‘fixed’ and withdrawing your money could result in a penalty such as loss of interest. It’s important that you understand this aspect of an ISA before you commit to an account.
If you need flexibility, choose one that will give you easy access. If you’re able to put your money away and won’t need to touch it, you could reap the benefits of a higher interest rate.
But what happens if you do need to withdraw cash from your ISA? Again it all depends on the individual product but non-flexible ISAs won’t allow you to return the cash you’ve withdrawn. For example, you put £10,000 into a fixed cash ISA during the 2017/18 tax year. You then decide to withdraw £5,000. Although you only have £5,000 remaining in the account you can only invest a further £10,000 during the 2017/18.
5. I need a large amount of money to open an ISA
Some people believe that you need a large amount of money to open an ISA but that's not necesarily true. Some of our ISAs for example, can be opened from as little as £1. Of course, the more money you contribute to your ISA, the more tax-free interest you will make. If you don't use your full ISA allowance for the current tax year, you'll lose it, so it's always good to aim to maximise the full allowance for each tax year if you can.
6. I should wait for the new tax year to open my account
If you have a sum of money and want to take advantage of a cash ISA then there’s no time like the present. As long as your cash is in an ISA it will remain tax-free. Use it or lose it. If you don’t take out your cash ISA now, you will miss out on the current allowance. Then, when the new tax year begins you may need to take out a new ISA or you may be able to pay into your existing one. It all depends on your chosen product and its maturity date.
Interested in opening a cash ISA? Take a look at our range today.
This guide is intended as a summary only and does not constitute financial or legal advice given by Leeds Building Society. No reliance should be placed on this guide and you must make your own decisions, we recommend that you seek legal and/or financial advice if you have any questions or queries.