Opening a savings account needn’t be a complex task – but it is for many, particularly when the sheer volume of potential banking options can be confusing for the less financially literate. The term ‘ISA’ is bandied around a great deal in talking about savings, but what exactly does it do? What could an ISA benefit you as a saver?
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#1 – Tax Exemption
The primary draw to the ISA as a general concept is its core purpose – tax exemption. Simply put, any interest earned or capital gained through an ISA is rendered exempt from Income or Capital Gains Tax respectively. Cash ISAs are the most common form of ISA, and resemble conventional savings accounts – but enable users to earn interest above their Personal Savings Allowance without being liable to pay Income Tax.
#2 – Variety
Cash ISAs are not the only form of ISA, though. There are numerous different kinds, which offer different specific benefits to different people. For example, the Stocks and Shares ISA takes the tax exemption principle and applies it to stock portfolios; if you profit from the purchase and sale of stocks within a Stocks and Shares ISA, you can keep the gains without being taxed on them. There are also Lifetime ISAs, for first-time buyers or people planning for retirement.
Even within a given ISA bracket, there is a wide variety of options available for consumers to choose from. Some offer higher rates of interest in exchange for limited access to funds, in a similar capacity to bonds; others have lower interest rates but no boundaries on withdrawal or deposit at all.
#3 – Easy Transfer
What with ISAs being somewhat trammelled by annual savings limits and other specific rule sets, it can be easy to assume that ISAs are difficult to engage with after initial depositing. But nothing could be further from the truth. It is extremely easy to move money from one ISA to another, and to carry previous years’ worth of savings through to a new account. Money can even be transferred to different kinds of ISA with ease, provided, you do not exceed that annual limit of £20,000.
Is it Worth It?
All told, is it worth it to open an ISA of your own? The answer is, essentially, yes – though the quality of that ‘yes’ depends on your individual situation. As a prospective first-time buyer, opening a Lifetime ISA can make saving up for a deposit far easier than otherwise.
As someone with a vested interest in actively growing your holdings, a Stocks and Shares ISA can be crucial to facilitating tax-free success. Finally, while most will not earn enough interest on cash savings to defeat the £1000 Personal Savings Allowance threshold, Cash ISAs are still a powerful and secure way to put money away long-term – and a great safety net besides.