Home Business News The most asked questions about ISAs answered ahead of April changes

The most asked questions about ISAs answered ahead of April changes

by Thea Coates Finance Reporter
6th Mar 24 9:04 am

Investment platform, Saxo is on hand to answer your most asked questions ahead of the April 2024 changes.

What is an ISA?

An ISA is an individual savings account that allows investors to reap tax-

free benefits from saving and investing. Any gains accumulated on an ISA are tax-exempt, making ISAs an attractive asset to investors.
What is the ISA Allowance?

For the tax year 2024/25, the ISA allowance for an adult investor is £20,000. Allowances are reset at the beginning of each financial year which is typically during the first week of April. The cap has remained unchanged at £20,000 since 2017.For example, if you invest £20,000 in the tax year 2024, you cannot deposit any more funds into your ISA until the next tax year, at which point you can deposit another £20,000.

Are ISAs safe?

The cash you deposit into an ISA account is protected by the Financial Services Compensation Scheme (FSCS), with a protection limit of £85,000 per authorised bank and building society.

Keep in mind that your money is safe with only a regulated savings provider so make sure you check your bank or building society on the Financial Conduct Authority (FCA) register using your provider’s firm reference number (FRN) or simply by looking at your paperwork or emails. You can always ask your provider if you can’t find it.

What type of ISA is best for me?

If you want to enjoy the benefits of opening an ISA account, you need to think about your goals and motivation for saving money. Are you saving to buy your first house, to build your pension pot or for your children’s futures?

Do you want regular access to your account or do you prefer locking the money away for a period of time? You’d be pleasantly surprised to find out each ISA is specifically designed to fit your needs and saving goals.

Make your own research about each ISA you have access to and find one that fits with your goals. We made it easier for you with the table below listing some key information regarding the different types.

What is a Cash ISA?

Cash ISAs are tax-free savings accounts meaning you do not pay tax on any interest earned. If inflation creeps higher than the rate of interest, the real value of cash decreases so technically it is possible to end up with less money than you put in.

However, if you want to have regular access to a savings account with a higher interest rate to the normal accounts you find on the market, this one is for you. There are three types of cash ISAs: Instant-access cash ISAs, Regular savings cash ISAs  Fixed-rate cash ISAs

What is a Stocks and Shares ISA?

Stocks and shares ISAs are often used by investors to reap tax-free gains. It allows individuals access to invest in shares in global financial markets.

In addition to the standard profits accumulated through buying and selling, investors can also benefit from dividends paid by companies. These are a portion of the company’s profits which are paid directly to shareholders as a bonus for holding equity in the company. Depositing into a stocks and shares ISA offers total flexibility as investors can both deposit and withdraw freely without restrictions.

What is a Lifetime ISA?

A lifetime ISA is the most recent addition to the ISA family and is typically used to help individuals either save for retirement or their first home.

They are a government-backed savings scheme in which the government will add an extra 25% bonus on any deposits into the lifetime ISA. If you add the Lifetime ISA limit of £4,000 before the deadline, you’ll get £1000 in interest with this scheme.

The bonus paid by the government is paid monthly and helps individuals accumulate capital over time. Individuals can use the funds in their lifetime ISA to invest in both cash, or stocks and shares – allowing flexible management of funds.

What is a Help To Buy ISA?

Ideal for first-time home buyers, a help to buy ISA is very similar to a lifetime ISA, however, the funds are restricted to only purchasing a home.

When is the ISA tax-free allowance deadline in the UK?

The deadline for using your ISA allowance is April 5th 2024 – the end of the tax year. After this date, your tax-free allowance for the new financial year resets.

What would a potential stock market crash mean for my ISA?

A stock market crash can happen when the market has entered an unstable phase, and an economic disturbance causes share prices to fall suddenly and unexpectedly. With high inflation, a cost of living crisis and the Bank of England raising interest rates for the past few months, there is a possibility that a stock market crash would occur in the foreseeable future.

With fears of another stock market crash rising, keeping your money in a safe pot has never been more important – but what could this mean to your investments?

If you’ve got a cash ISA, Junior ISA or Lifetime ISA, this is good news for you – you’re not going to be affected by a stock market crash, but for those with Stocks and Shares ISA, they are going to face a period of downfall.

However, it is good to know there are ways to prepare for a stock market crash in time by taking a closer look at your investments and understanding the history of such events. The key is investing long-term. For example, the FTSE 100 has recovered impeccably after every past stock market crash (such as the ones in 2007 or most recently, 2020), helping long-term investors retrieve their hard-earned money.

Are ISA accounts halal?

Conventional ISAs that earn interest and invest in a broad range of fields are not Sharia-compliant. In fact, standard cash ISA and stocks and shares ISA accounts don’t comply with Sharia rules and therefore aren’t halal – and you won’t find these accounts at Islamic banks.

However, if this is an important topic to you, there are specialist Halal Cash ISA and Halal Stocks and Shares ISA accounts available with Islamic banks and other financial institutions

When is a stocks and shares ISA a better option than a cash ISA?

The decision to choose a stocks and shares ISA over a cash ISA depends on the answer to one key question – how long do you intend to save for? If you consider yourself a long-term investor of five years or more, it’s prudent to invest using a stocks and shares ISA.

  • Investing your savings rather than holding it as cash and accepting the interest is proven to yield stronger returns over time. Historically, stock markets have outpaced inflation and the subsequent interest rates of cash ISAs.Between 1926 and 2017, the S&P 500 Index reveals an annualised return of 10.22% – that’s almost a four-fold improvement on the 2.89% average inflation rate during the same period.
  • If you are genuinely saving for the long-term – such as your retirement – a stocks and shares ISA is likely to be the sensible choice if you can afford to ring-fence funds for several years.

How a Stocks and Shares ISA could help you beat inflation levels?

When inflation creeps higher than the rate of interest, the real value of cash decreases so technically it is possible to end up with less money than you put in if investing in a Cash ISA.

Placing your money in a Stocks and Shares ISA can help alleviate this. Firstly, you are avoiding being locked into any fixed interest rates. You will also be removing tax from the equation as you do not need to pay tax on any profits you make.

However, financial markets are subject to volatility, especially during times of economic crisis such as the recent pandemic. This acts as a double-edged sword. Successful investors can accumulate significant gains which would outperform other ISA types. Though the risk is equally as big as investments can fall and therefore investors could end up making a loss on their investment.

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