ISAs: The five key benefits
ISAs offer a flexible and tax-efficient way to invest. So what are the five key features that make them so popular?
As they enter their third decade, Individual Savings Accounts (ISAs) remain highly popular with the UK’s savers and investors.
Since their launch back in April 1999, they’ve given millions of Britons the chance to set aside money tax-efficiently in a cash account, or access a broad range of investments through a stocks and shares account.
With the end of the financial year approaching, investors will be keen to make the most of the tax advantages offered by ISAs. So ahead of the annual ISA season, what key benefits is it worth keeping in mind?
ISAs are a tax-efficient way to invest
ISAs come in two main forms: cash accounts and stocks and shares accounts. The main draw for both cash savers and investors is their tax efficiency.
Cash ISAs allow individuals to deposit money in a savings account, with any interest they earn free of tax.
For stocks and shares ISAs, no tax is paid on the capital gains and income which people’s investments make. There’s no cap on the investment returns which can be earned tax-free. And those who complete tax returns aren’t required to declare the money they generate from an ISA.
Their annual limit is rising
Because of their tax advantages, ISAs are subject to an annual limit, which can be saved entirely in a cash account, invested entirely in a stocks and shares account, or spread across the two.
The government is keen to encourage us to take more personal control of our financial futures and for the financial tax year 2019/20 the annual ISA subscription was £20,000.
They offer access to a range of investment markets
In contrast to cash ISAs, which serve as tax-free savings accounts, stocks and shares ISAs are investment wrappers under which a number of different assets can be placed.
A range of investments can be added to them, including stocks, corporate and government bonds, and investment funds.
Along with a selection of assets, those investing in stocks and shares ISAs can spread their money across different geographic regions and industries. For example, they could choose to invest in foreign markets. Or they could buy shares in specific sectors, such as technology or telecoms.
They’re no longer reserved for adults
Thanks to the launch of Junior ISAs (JISAs) in 2011, ISAs are no longer exclusively reserved for adults.
As with normal ISAs, junior products can take the form of either cash or stocks and shares accounts, with any returns they generate free of tax. An annual limit of £4,368 currently applies to JISAs, with the accounts designed specifically for under-18s.
Any money saved or invested on behalf of a youngster can’t be accessed till they’re 18, although they can take control of it once they turn 16.
Following recent law changes, parents who have previously opened child trust funds for their youngsters now have the ability to transfer them to JISAs.
ISAs can help investors diversify
Thanks to the wide range of investments that can be held in them, stocks and shares ISAs can give investors the opportunity to create a diversified portfolio.
Diversification simply refers to the process of investing in a selection of assets, sectors and regions in order to mitigate risk. If one part of an investor’s portfolio experiences volatility, it may potentially be balanced out by other areas.
By giving people access to everything from shares and bonds through to investment funds, ISAs could offer a useful diversification tool.
Opportunities and risks
ISAs give people the chance to access a wide range of financial markets, while offering tax-free returns. And the introduction of JISAs means youngsters can also start building a tax-efficient nest egg for the future.
Before committing to any products, investors should think carefully about their appetite for risk and how exposed they want their money to be to market movements. The value to you of current tax advantages depends on your personal circumstances which may change in the future. The government may change the way ISAs and investments are taxed, which may be less favourable to you. The charges you have to pay may change in the future and this may reduce the value of your investment.
This is a promotional document and as such the views contained herein are not to be taken as an advice or recommendation to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. Any research in this document has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the views of J.P. Morgan Asset Management. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all-inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you.
It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Changes in exchange rates may have an adverse effect on the value, price or income of the product(s) or underlying overseas investments. Both past performance and yield may not be a reliable guide to current and future performance. There is no guarantee that any forecast made will come to pass. Furthermore, whilst it is the intention to achieve the investment objective of the investment product(s), there can be no assurance that those objectives will be met.