Investing Basics: Why investing in an ISA is a good idea

The Chancellor is under pressure to claw back the huge amount of money the government borrowed during the pandemic and with rock bottom interest rates, it’s a challenging time for savers and investors. If you don’t already have an ISA, perhaps now is the time to explore the benefits.

 
Even with the current economic challenges, the core reasons for investing, and particularly in an ISA are strong; here are 7 good reasons to invest in an ISA:
 

1) Tax efficiency

 
There is no tax to pay on gains on money held within an ISA, and you don’t need to declare ISA savings on your tax return.  Your money is sheltered from capital gains tax charged on the profit or gain made above the current £12,300 annual allowance (2022/23).

You will also avoid the tax usually charged on any dividends that would be applied on income-paying investments outside an ISA above the annual £2,000 limit per investor (2022/23). For cash ISAs you pay no tax on interest earned.
 

2) Free cash

 
The Lifetime ISA comes with the offer of free cash top-ups when you save; designed for those building a deposit for a first home or for retirement, you can pay in up to £4,000 a year in a Lifetime ISA (which forms part of the £20,000 yearly allowance) and receive up to £1,000 (25%) in government hand-outs.

The money can be used to buy a first property worth up to £450,000; alternatively you can withdraw it from the age of 60 to boost your income in retirement. If you take the money for any other reason there’s an exit penalty of 25%, which represents an effective loss of 6.25%, so you should be sure that you are using the wrapper for one of these objectives.

You must be between 18 and 39 to open a Lifetime ISA which can be opened as a cash or stocks and shares account; the £450,000 limit could be problematic for anyone hoping to buy a property in London.

Those who opened a Help to Buy ISA before the 30 November 2019 deadline, receive a government top-up of £50 for every £200 you save, up to a maximum of £3,000 over five years; they can keep saving until 30 November 2029 when accounts will close to further contributions – you must claim your bonus by 1 December 2030, or alternatively convert it to a Lifetime ISA.
 

3) Valuable long-term investment vehicle

 
Historically, stock market returns beat those from cash and you can use your ISA wrapper to buy shares in individual companies or investment funds. While cash is regarded as risk-free, there is a great risk of the value being eroded by inflation; currently the best instant-access Cash ISA offers just 1% with the best fixed term product 2.2%.

Weighed against the current rate of inflation as measured by the Consumer Price Index of 7% (March 2022) savers in all Cash ISA products are currently losing the real value of their money to inflation.

Calculations from Brewin Dolphin, the wealth manager, found that depositing £100 in cash from 2011 to the end of 2020 would have seen its value fall in real terms to £87.82, as inflation picked up and interest rates remained low following the financial crisis of 2008. Meanwhile, investors in the UK’s FTSE 100, 250, and All Shares markets saw real returns of 33.87%, 93.68%, and 43.65% respectively.
 

4) Flexibility

 
Those wishing to ensure they use their annual allowance before the end of the tax year, but unsure where to invest, can pay into a stocks and shares ISA and stay in cash until they are ready to do so.
 

5) Low entry level

 
Something and often is rarely worse than nothing and ever; not everyone can afford to save as much as they would like each and every year, but even putting just a little away every month is better than doing nothing. Many platforms will allow you to investing in an ISA with as little as £25 per month; over time even small contributions could build up to a sizeable fund – ‘mony a mickle maks a muckle’ as it were.
 

6) Doing well, doing good

 
Companies that adhere to goals under the environmental, society and governance (ESG) banner, are becoming increasingly popular with investors – particularly now that to invest sustainably does not automatically require compromise on returns. Those passionate about improving society, climate change and stamping out boardroom greed can choose ISA funds choose that target these areas.

For example some funds only invest in companies that are contributing to the decarbonisation of the world economy; there will be funds that look to improve areas you feel most passionately about.
 

7) They really are the future

 
A Junior ISA offers parents a chance of building up a meaningful fund for their children. It allows you to stash away £9,000 each tax year in a cash or investment ISA with the money locked away until the child reaches 18 and earnings are tax-free.

Children can take control of their own investment decisions from the age of 16. Once a Junior ISA has been set up by a parent or legal guardian, anyone can contribute to it and those aged 16 or 17 can have a Junior ISA allowance plus a cash ISA allowance.
 

A word of caution

 
The Innovative Finance ISA was established to allow savers to make loans through peer-to-peer companies – matching investors with individual borrowers. A large number of IFISA launched, often based on property investments, and many offering big returns; however, they also come with bigger risks and the returns are not guaranteed.

These accounts are not covered by the Financial Services Compensation scheme, and have been under pressure, with some companies warning that there is a delay in getting money out. Be sure that you understand how peer-to-peer lending works and the risks it exposes you to before considering an investment.