ISA myth busting: mass affluent consumers fall into common ISA traps

 

With the end of tax year upon us, new research from Charles Stanley reveals the most common ISA misconceptions amongst mass affluent consumers; the audience who should be making best use of ISA season!

 

Myth

% of mass affluent population who believe it is true

Reality
You can only have one ISA at a time

19%

You can have as many ISAs as you like at one time, but you can only pay money into one ISA of each type in a particular tax year. For instance, in the 2022/23 tax year you can split your allowance of £20,000 between a Cash ISA and a Stocks and Shares ISA, but not between two Stocks and Shares ISAs.
An ISA is the only tax-efficient savings vehicle you can have

17%

ISAs are often the first port of call for investors looking to save tax. However, pensions are more tax efficient than ISAs for many people. You get a boost to your own payments in through tax relief plus there’s no tax on gains or income on investments in a pension. While there can be tax to pay when you take money out, and you have to wait until retirement age to do so, they tend to be highly advantageous for those investing for a comfortable retirement.
You can top up your ISA allowance from previous years’ unfulfilled contributions

16%

For ISA’s, unlike pensions, the annual allowance of £20,000 is a ‘use it or lose it’ one before the 5th April at the end of a tax year.
ISAs are just for cash savings

14%

Cash ISAs for savings are very popular, but those looking for a longer term home for their money could be missing a trick. The alternative, Stocks and Shares ISAs, invest in shares and other assets that aim to grow your money faster. Although there is a risk you can lose money, especially in a short time period, in the long run you have a much better chance of preserving and increasing wealth – and outpacing inflation – through investing.
You can’t take your money out of an ISA

11%

ISAs are very flexible and withdrawals from a Cash or Stocks & Shares ISA are possible at any time.

You can even withdraw any amount of money from your ISA (from the current or previous tax years) and replace it in the same tax year without losing your allowances built up or counting towards your current one – so long as your provider offers a ‘Flexible ISA’.
You have to use your full ISA allowance in order to qualify for one

10%

The full ISA allowance is £20,000 a year but few people can use this in full. It’s possible to save or invest much smaller amounts either as a lump sum or monthly.
You get taxed on any interest earned within an ISA

9%

Interest paid on cash in ISAs is tax free. Similarly, any income received from investments such as dividends from shares isn’t taxable, and there is no capital gains tax to pay on profits.
You need to keep your ISA in the same place forever

8%

ISAs are flexible accounts. Withdrawals from can be made anytime, plus you can transfer your ISA to another ISA provider whenever you like. You can even move between ISAs of different types, for instance from a Cash to a Stocks & Shares ISA or vice versa.
You can only access an ISA via a financial adviser

7%

You can set up an ISA on your own without taking advice either through a bank or building society for a Cash ISA or through an investment platform such as Charles Stanley Direct for a Stocks & Shares ISA.

 

  • Charles Stanley also looked into how many mass affluent consumers understood what a flexible ISA is. The research found that nearly three quarters (74%) don’t know what a flexible ISA is, with more than a quarter (27%) having never heard of one.
     

    • 11% think a flexible ISA it allows you to increase your ISA contribution.
    • 20% think it allows you to swap your cash ISA to a stocks and shares ISA or vice versa.
    • 9% think it allows you to transfer your ISA to someone else.

     

  • Only 26% correctly understand that a flexible ISA allows you to withdraw money from an ISA and pay it back again within the same tax year without affecting your annual allowance.

 

Rob Morgan, Chief Investment Analyst at Charles Stanley, comments: “ISAs are a popular way for consumers to build up tax-efficient savings and investments, as they are sheltered from paying capital gains or any further income tax. And if you look at the potential compounding effects of long term savings, the returns can amount to quite a substantial nest egg.

“But despite their popularity and having existed for more than two decades, there is clearly much confusion about how they work. This brings into question whether consumers are making the most of their ISAs, but also if they understand what other tax efficient savings vehicles there are to utilise, such as pensions. With the ISA deadline fast approaching, it’s important that Brits make best use of their tax allowances – there’s no going back once we enter a new tax year on 6th April, so it’s best to use it rather than lose it.”
 

Five tips for last minute ISAs

 

  1. Use your ISA allowance as far as you can

 

You can currently invest up to £20,000 a year with an ISA, often the first port of call for those looking to save tax. They are simple, flexible and tax efficient. Gains realised on the sale of stocks and shares within an ISA are free from tax, and so is any income from dividends or interest. Even if keeping your money outside the clutches of the tax man doesn’t seem relevant now, it might in the future. It could be worth planning for when your money grows. A Stocks & Shares ISA could deliver a higher return than Cash ISAs over the longer term, but remember that there is a risk the value of your investments could fall – especially in the short term.

 

  1. Don’t rush into an investment decision

 

If you’re unsure where to invest in your Stocks & Shares ISA, you can always secure this year’s allowance with cash now and decide later.

 

  1. Consider your spouse’s allowance too

 

If you are married or in a civil partnership it’s possible to organise your affairs efficiently so that tax free allowances aren’t lost.

 

  1. Don’t forget the kids

 

Junior ISAs are a popular way for family and friends to build up tax-efficient savings and investments for a child. The tax benefits are the same as an adult ISA – no capital gains tax, and no further tax to pay on income. Withdrawals are possible from the age of 18 when it automatically converts to an adult ISA, meaning the pot can be useful to help with the cost of university or a deposit for a house. This tax year’s Junior ISA allowance is £9,000 per child.

 

  1. Pensions are also an option

 

Pensions are often a highly effective means of investing for retirement owing to the tax relief available on payments into them. Currently, anyone under 75 with relevant UK earnings can receive tax relief when they make a contribution within the annual allowance to a personal pension. 20% is added by HMRC and any further higher or additional rate income tax relief can be reclaimed – a potentially a simple way of reducing your income tax bill for the year.

 

Methodology:

Research was conducted by Censuswide with 2003 ‘mass affluent’ consumers (defined as those earning above the UK average salary and with at least £1,000 in accessible cash/savings or those who have retired and have more than £1000 in savings) between 08.03.23 – 14.03.23.

Censuswide abide by and employ members of the Market Research Society which is based on the ESOMAR principles and are members of The British Polling Council.

 
www.charles-stanley.co.uk
 



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