By Jamie Stanford
We’ve all heard about ISAs and the tax advantages they can bring and there may be tax advantages to opening an ISA early in the new 2019/2020 tax year. But which is the right ISA product for you? And how do you even go about choosing? Here, Magus Financial Planner, Jamie Stanford assesses the options.
You’re probably aware that there are a number of different types of ISAs to choose from. The most common are the Cash ISA and Stocks & Shares ISA, both of which will be the focus of this article.
Before deciding on the right ISA product for you, you first need to answer a couple of questions about your financial goals:
- What are you saving for?
Is it for a new car? A deposit on a house? A holiday? Or for your retirement?
- When do you need the money by?
Is this a short term investment, or a longer term solution?
Based on your answers, we can start painting a picture of what product might best suit your needs. But here’s something controversial to kick off with – it might be that actually, an ISA isn’t the best option for you!
Why? Because it depends on what you need and when you need it. And depending on the answers to the questions above, it could be that a savings account, paying a decent rate of interest, could actually be the right solution for you.
Obviously one benefit of the Cash ISA - indeed all ISAs - is that returns are tax free. Having said that, we all have our own dividend, interest and income allowance, so there will be an element of tax free interest from your cash account too. A note of caution here though, any income or interest generated from other assets held within your portfolio will count towards your allowance too. Best thing to do is to get in touch with us, and we can help you calculate this.
Below I've summarised some of the pros and cons of Cash ISAs, to help you gauge whether it’s the right product for you.
|Tax free growth (as interest not subject to income tax)||Low interest rate currently with limited growth potential|
|Tax free income (as not subject to income tax)|
|Easy to open and administer|
|Low cost (you don't pay to open an account)|
|Can be used in conjunction with other ISAs|
|Good for short term saving|
Both Cash ISAs and savings accounts are lower risk options, suited to shorter-term investment strategies. But if you’re willing - and able - to invest longer-term, then a Stocks & Shares ISA may be a better fit for you.
Stocks & Shares ISAs pose more risk, and the value of your investment can go down as well as up at any time. But we can help you ‘manage’ the level of risk that your investment will be exposed to, so that your ISA is invested in stocks and shares that are exposed to a level of risk you’re comfortable with. Risk and return are inextricably linked, and we’re here to help you strike the right balance between the two.
Stocks & Shares ISA
|Tax free growth (as not subject to income and Capital Gains Tax – CGT)||More complex product than a Cash ISA (but don't let that put you off)|
|Tax free income (as not subject to income and CGT)||Subject to market fluctuations so the value may go up and down|
|Potential for higher growth|
|Good for long-term saving|
|Can be used in conjunction with other ISAs|
Simulated returns of a Cash ISA vs a Stocks & Shares ISA
One other option worth mentioning here is a Fixed Term ISA. This is where you ‘lock’ your money into a Cash ISA for a set period of time in return for a higher rate of interest. So, if you don’t think you will need to touch your money for a while, this could be a good option. Just be aware, things can change and if you suddenly need to access some money, you will have to find it elsewhere or risk losing the interest.
As always…it’s about your long-term financial plan
At the end of the day, it’s about finding a balance between the level of risk you’re comfortable taking, with the returns you wish to achieve. How long you have to achieve that investment goal will also shape your personal financial plan.
If you have money to invest, talk to us. Existing clients will know how we are long-term partners in your financial planning future. We can ask the key questions that give us the information needed to build a financial plan that delivers your goals, based on your personal circumstances.
Past performance is not indicative of future performance.
The value of an investment may fall as well as rise. You may get back less than the original amount invested.
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