ISA or individual savings accounts are available in different forms. And if you have decided to save your cash in such accounts, you need to understand the advantages and disadvantages of using such accounts for prolonged periods. To understand these aspects, you need to have in-depth information about these types of ISAs available in the market.
Individual saving accounts offer every UK citizen to save their money without any issues. The government is responsible for setting the threshold amount held in these accounts every tax year. You get an ISA allowance, which helps the consumer save money tax-free and gain specific interest in this saved amount.
Therefore, as per the UK government policy, every resident over 16 years of age can save lump sum to a specific limit every tax year and receive tax-free savings. The total amount you can invest in these accounts is around £20,000, a number set for the tax year 2019-2020. Please note that the number can change depending on the year and government policy.
What Are The Rules For Cash Savings?
The fundamental concept of ISA is that it offers you to save without any taxes. In 2019-2020, the citizens could save till £20,000, which is about to change for the next financial year. Some of the types of economic benefits offered by ISAs are:
- Cash ISAs for 16 years or above
- Stocks and shares ISAs or innovative finance ISAs for 18 years or above
- Lifetime ISAs for people over 18 or under the age of 40
You can also select any of these ISAs and mix the benefits as per your requirements. To open an ISA, one must be a resident in the UK and a public servant, or servant of the crown or spouses or civil partners, if one lives outside the UK.
ISAs are meant for single users. Therefore, no user can get it for joint names or even manage the accounts for someone else. In case you have children under 18 years, opt for opening the Junior ISAs for each of your children.
Benefits Of Cash Savings
Now that you are aware of the types of ISAs available in the market, it is time to examine the benefits of using such accounts closely. One of the fundamental reasons why users are serious about maintaining such accounts is that one doesn’t have to pay any income or capital gains tax on their returns.
According to many financial investors, ISAs are a great way to invest and save your money without paying any additional taxes to the government. They come with many other benefits, like:
- Tax-Free Withdrawals
When it comes to other investment plans, you might have to pay the penalty to withdraw money in case of an emergency.
That never happens with ISAs. You can get both cash and the investment ISAs without incurring any penalty unless you have opted for a fixed-rate account. In any case, every financial expert would advise you to stay away from any early withdrawals from shares and stocks ISA.
- Wide Investment Choices
Along with not worrying about penalties or taxes, you also get many investment choices when you open an individual savings account. And if you are a cautious saver, then you get to invest in multiple sectors like gilts, funds, stocks, bonds, stocks, and many more. You can even use these funds to apply for quick loans for various purposes.
Not all accounts available in the market can be easily transferred to other names. But these ISAs offer you a great benefit here. You get to switch from one provider to another one without any complications.
These individual accounts are highly portable. And you get the advantages of excellent deals and superior interest rates when you make the switch. So, now you can transfer the funds from your account to another account, or stocks or even shares account without any limitations and vice versa.
- No Wrapper Charges
Okay, so you have faced a lot of trouble with your income range and might have to pay extra charges to benefit from your accounts. But with ISA, the scenario changes as there are no additional charges to settle here. Also, to receive the age-related personal allowances, you do not have to worry about your income range as it isn’t taken into account.
- No Age Upper Restrictions
Another excellent reason why people choose these accounts is that it offers you a self-investment personal pension. You need to be above 16 years to apply for ISAs, and you are set to use all the privileges without any age upper restrictions.
In children below 16 years, you can apply for junior individual accounts, which the guardian can operate on their behalf. In case of any financial queries, you can refer to the professional services as well.
Finally, it is the inheritance of your account. Well, not all the accounts available in the market would offer you hassle-free transference. But in the case of individual saving accounts, it is possible.
You can pass your ISA to your spouse in case you were to pass away. And you can do so through ‘inherited ISA allowance.’ It would be a one-off payment that would equal the amount saved in your ISA along with the allowance.
Disadvantages Of ISAs
Given the long list of benefits, ISAs also do have specific disadvantages. One of the significant drawbacks is that the investment returns are usually much lower than the shares and stocks-based accounts. The other cons are:
- Contribution Restrictions
Both the investment and cash ISAs have a contribution cap, whose value seems to change depending on the current tax year.
- No Tax Relief
The returns would be completely tax-free, but there is absolutely no exemption from taxes related to ISA contributions.
- Cannot Replace Withdrawn Money
Another disadvantage is that you cannot put back the withdrawn money into your account if that would limit it. But there is an exception as well. You can refer to the flexible ISAs where you no longer have to deal with this factor.
No matter how lucrative any offer seems, always seek professional expertise before making any financial decisions for your future. So, be informed about all the current economic trends and choose the best plan for your future.