Introduction
Are you making the most of your annual Individual Savings Accounts (ISA) allowance? Or are you squandering this unique tax break by utilising your annual allowance to deposit money in a cash savings account which is unlikely to even beat inflation? Currently there is over £725 billion invested in ISA's, of which over 40% is in cash deposit accounts the majority of which is receiving below inflation returns. (Source: https://www.gov.uk/government/statistics/annual-savings-statistics-2024/commentary-for-annual-savings-statistics-september-2024 )
Busting the Myth: An ISA is Much More than a Savings Account
One of the biggest misconceptions surrounding ISA's is they are just another cash savings account, with additional tax benefits. In reality, an ISA is simply a very advantageous tax wrapper and can take on many forms, from direct share ownership to pooled investments to savings accounts, and offer UK residents a smarter way to save without worrying about tax being applied to any gains realised or income generated.
However, these unique investment allowances built into ISA's are often being wasted on low return savings accounts, minimising the benefit these tax breaks bring. There is no capital growth on savings accounts and the interest payable is often not high enough for any tax savings to be of any consequence. Indeed, it is rare these ISA savings accounts keep up with inflation let alone provide any long term growth prospects.
Why a Cash ISA May Not Be the Best Choice
Whilst a Cash ISA is arguably a safer environment in the short term, for anyone investing for five years or more, your money may well be losing its purchasing power year on year, since the savings rates offered are generally lower than inflation, at least after any initial promotional rate has expired, often used by bank's and building societies to attract new deposits.
Additionally, the Personal Savings Allowance (PSA) already allows most basic-rate taxpayers to earn up to £1,000 in interest outside of an ISA, which makes the benefits of a Cash ISA practically redundant for many, especially when far better alternatives exist.
Curious about how your savings are performing? Use Keystone’s Savings Calculator to compare options.
Understanding the ISA Allowance
The UK government allows you to invest up to £20,000 into a standard ISA. This allowance shields your money from Income Tax, Capital Gains and Dividend Tax. Additionally, this allowance can be spread across different types of ISAs, including:
Types of ISAs
Cash ISA – A standard savings account with tax-free interest.
Stocks & Shares ISA – Allows investment in funds, stocks, and bonds, free of income and Capital Gains Tax.
Innovative Finance ISA – Involves peer-to-peer lending, though not widely available due to regulatory complexities and not part of Keystone's offering to their clients.
Lifetime ISA – Designed for first-time homebuyers and retirement savings for those aged between 18 and 40. With these ISA's, a government bonus of up to 25% per annum will be paid will add (and forms part of the available allowance). these funds can be used towards the purchase of a home or from 60 onwards as a retirement boost. If cashed in for any other reason (other than serious health issues) these bonuses must be returned.
Junior ISA's - Available to those under 18 with an annual allowance reduced to £9,000. This can be converted into a standard ISA upon reaching the age of 18.
The Power of Asset-Backed Investments within an ISA tax wrapper
If you are looking for real growth potential over and above inflation, then a Stocks & Shares ISA is the smarter choice, as you not only benefit from any income dividends but also capital growth of the underlying assets within the fund - all of which is tax free. Unlike traditional savings, which may only earn a few percent in interest, well managed asset-backed investments have historically delivered much stronger returns over the medium to long-term (i.e. 5 years plus) as they are geared towards providing real growth returns.
Key Benefits of Investing in an ISA
Tax Efficiency: No Capital Gains Tax or Dividend Tax on any returns or encashment.
Higher Potential Returns: Historically, asset backed investment funds outperform cash savings over the medium to long term (5 years plus).
Diversity of Investment Options: Investing into Stocks and Shares, Bonds, Exchange-Traded Funds (ETFs) and Real Estate Investment Trusts (REITs).
By utilising your annual ISA allowance for investment, you are maximising tax efficiency whilst allowing your money to grow at a rate designed (but not guaranteed) to outpace inflation.
How to Make Your ISA Work for You
To truly take advantage of your ISA allowance, you will need to consider the following steps:
1. Assess Your Risk Tolerance
It is important that any investment you make is in line with your appetite for risk with the understanding that whilst a higher risk strategy has the potential for greater returns, it does come with an element of risk. The level of risk you are prepared to take and the time horizon you have before you expect to utilise any funds you plan to invest will have considerable bearing on the investment choices you make.
2. Diversify Your Portfolio
Diversity is a key tenant to smart investing, as whilst it is possible to purchase single shares into an ISA, a balanced mix of shares, alternative asset classes and other financial instruments help spread the risk whilst maximising returns.
3. Seek Professional Advice
Whilst you may wish to save money by taking things into your own hands, it is prudent to seek financial advice from a qualified professional who can help tailor your ISA investment strategy to suit your specific goals.
Snooze and You Lose: Your ISA Allowance Expires Each Tax Year:
Your annual ISA allowance (currently £20,000) falls away if you do not use it by 5th of April each year. So try not to forget this valuable allowance or let it go to waste in a low-interest account.
If you have invested into Cash ISA's up to this point, all is not lost. The good news is you've still had the benefit of the allowance and can move these funds into an asset-backed investment whilst still retaining the valuable benefits of the ISA tax wrapper they have utilised.
Whether you are looking to improve the returns and/or the tax efficiency of your current savings or invest new money, you can accelerate the growth of your wealth significantly over time by employing the right investment strategy to suit your circumstances, risk appetite and savings objectives.
Take Action Today;
Book Your Free Initial Consultation Here with a Keystone Professional where you can discuss the best ISA strategy for you with a qualified financial adviser.
Please Note:
ISA investors do not pay any personal tax on income or gains, but ISAs may pay unrecoverable tax on income from stocks and shares received by the ISA managers. Tax treatment varies according to individual circumstances and is subject to change.
For Lifetime ISA's You will incur a lifetime ISA government withdrawal charge (currently 25%) if you transfer the funds to a different ISA or withdraw the funds before age 60 and you may therefore get back less than you paid into a lifetime ISA.
By saving in a lifetime ISA instead of enrolling in, or contributing to an auto-enrolment pension scheme, occupational pension scheme, or personal pension scheme:
(i) you may lose the benefit of contributions from your employer (if any) to that scheme; and
(ii) your current and future entitlement to means tested benefits (if any) may be affected.