ISAs are one of the UK’s favourite ways to save and invest their money, with 22.3 million adult subscribers throughout the country. But despite their popularity, many misconceptions are still prevalent when it comes to what individual savings accounts can and can’t do.
Because they behave a little differently from traditional savings accounts, there have been plenty of myths and mysteries emerging around ISAs over the years. This has become particularly true of Stocks and Shares ISAs, which float investments on the stock market.
Using an ISA is a great way of saving money in a tax-efficient way, helping to boost your savings in real terms and build a larger nest egg for the future.
While many UK residents know that ISAs are great for keeping money away from the clutches of the taxman, some assume that there are more complicated catches associated with tax-free savings.
So, what misconceptions are causing you to lose out on accessing the full potential of your Stocks and Shares ISA? Let’s explore 10 common misconceptions about individual savings accounts and the real truth about ISAs:
1. You can only pay into one type of ISA each year
While many UK savers believe that only one type of ISA can be paid into each year, the rules are actually very relaxed when it comes to how you save your money with individual savings accounts.
With a £20,000 annual tax-free allowance, you still can’t invest more than a fixed amount into a Stocks and Shares ISA, but there are no restrictions on opening a Stocks and Shares ISA as well as, say, a Cash ISA or Lifetime ISA.
From the 6th of April 2024, rules were relaxed further to allow individuals to hold multiple ISAs of the same type with different providers, meaning that you can spread your £20,000 allowance across different Stocks and Shares ISAs if you wish. However, restrictions still apply to Lifetime ISAs, where only one account can be open at any given time.
2. You need lots of money to open a stocks and shares ISA
Some investors believe that they don’t have enough money to open a Stocks and Shares ISA, or to begin growing their wealth effectively. However, the tax-free benefits of individual savings accounts and flexible withdrawals mean that they can be a great place to start your investment journey.
Some providers require as little as £1 to open a Stocks and Shares ISA, and round-up apps can help you to invest your spare change to build towards your financial goals.
3. You can’t choose where your money is invested
Many Stocks and Shares ISA providers will allow you to be more involved in the selection process of your stocks if you want a more hands-on investment experience.
Whether you liaise with your provider over the level of risk you want to be exposed to or have a full discussion with your advisor to determine the type of stocks you want to hold, there can be plenty of flexibility afforded to how your ISA is managed.
Some Stocks and Shares ISA providers can even provide ethical investment options to ensure that you have a savings account that’s aligned with your morals.
4. Stocks and shares ISAs are too risky
While it’s certainly true that Stocks and Shares ISAs are riskier than Cash ISAs, they’ve historically outperformed their cash counterparts on a consistent basis.
Stocks and Shares ISAs have averaged a 9.64% annual return over the past 10 years, while Cash ISAs have only mustered 1.21% on average in comparison.
These higher returns come because there’s more risk associated with investing in stocks and shares. But to say a Stocks and Shares ISA is ‘too risky’ is to ignore the historical outperformance of global markets in comparison to fixed-rate savings accounts.
5. It’s difficult to open an ISA
Opening an ISA is far from complicated, and you only need to have a few documents to get your account set up and ready to go.
The only criteria you need to fulfil before opening an ISA are to be aged 18 or over for a Cash ISA, Stocks and Shares or Innovative Finance ISA, or between 18 and 40 to open a Lifetime ISA.
You also need to be a UK resident or a Crown servant working overseas in the civil service. As long as you meet these requirements, you can open your Stocks and Shares ISA with little fuss.
6. Pensions are better investments
While for some investors, it can make sense to use the higher tax-free margins associated with pension schemes, Stocks and Shares ISAs can help you achieve your financial goals more effectively if you’re looking for easy access to your earnings before retirement age.
There’s no right or wrong way to embrace the tax efficiency of Stocks and Shares ISAs or pensions, and different investment strategies hold varied benefits for each account holder. With this in mind, it’s worth looking for professional advice on which approach to take if you’re unsure.
7. You can’t withdraw from an ISA
Some investors believe that you can’t withdraw from an ISA without losing your tax benefits, but this is untrue.
Although ISAs are indeed designed for more long-term investments, most are very flexible when it comes to withdrawing your savings.
For Cash ISAs, some terms can carry early withdrawal penalties that can impact your savings, but in the case of most Stocks and Shares ISAs, it’s possible to request a withdrawal, and once the holdings have been cashed out, the money goes straight into your bank account.
8. It’s too hard to move funds
From the 6th April 2024, new rules were introduced to allow you to transfer part of your account balance from one ISA provider to another, no matter when the money was paid into the account.
This rule change has added even more flexibility to individual savings account holders and allows you to keep some funds with your existing provider and retain your old accounts at the same time.
9. You can’t re-deposit withdrawn money
If you hold money in a flexible ISA, you’re free to make a withdrawal and then pay it back within the same tax year without any impact on your annual allowance.
Although only certain ISA providers, like Wealthify, offer the flexibility of re-depositing withdrawn money, it’s entirely possible for you to have the freedom to do as you wish with your savings.
For instance, if you’ve used £5,000 of your allowance and withdraw £5,000 of your savings, you can put it back before the tax year ends and still be able to add the remaining £15,000 of your £20,000 by the end of the tax year.
However, it’s always a good idea to check with your provider to ensure that they support this level of flexibility before taking any action.
10. You have to Invest £20,000
Some investors believe that it’s not worth opening a Stocks and Shares ISA unless you’re in a position to reach the £20,000 tax-free threshold each year. However, this isn’t the case at all, and many investors enjoy boosting their wealth by saving their spare money each month at a rate that suits their needs.
The great thing about ISAs is that everybody can enjoy tax-free earnings at their own pace, and this opens the door to far more long-term earnings potential, no matter your financial situation.
Embracing stocks and shares ISAs
Stocks and Shares ISAs have been a great option for UK savers since they were introduced in 1999, opening the door to tax-free investments and an opportunity to build your wealth without having to pay over a portion of your earnings to the taxman or wait until retirement to access your cash.
While some misconceptions still exist about Stocks and Shares ISAs, their benefits are still clear for all to see. So if you’re mulling over opening an account, it’s worth talking to a financial advisor or scouting out your account options today. With some of the best tax efficiency available in the UK, there’s no time like the present to invest.
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