Your two-minute guide to Isas
Isas are boring, right? Just another savings account which you can't afford to put money into. That may well be true but even if you can only afford to put a little bit of money away each month, Isas offer you significant benefits.
Let's start with the basics (sorry if you already know this, feel free to skip ahead).
"Isa" stands for Individual Savings Account. You can choose to keep savings in an Isa in cash or take a risk and invest money into financial markets in the hope of achieving better returns.
It's worth knowing that if you keep the money in cash then up to £85,000 is protected by the Financial Services Compensation Scheme (FSCS).
Okay, that's the boring bit over, now here's the real attraction for savers.
Isas are a tax-efficient savings account into which anyone over the age of 18 can save up to £20,000 a year (I know, that's a lot right?) and withdraw the proceeds, at any time, tax-free.
The tax-free part is the super cool benefit. If you decide to invest your money in the stock market, for instance, then the government can't get their hands on any gains you make, no matter how much.
This is a huge benefit if you are fortunate enough to make the right investment. You could, in theory, become a millionaire and the government wouldn't be able to take any of it in taxes. Pretty sweet, right?
Admittedly this is quite unlikely, and you must always be aware the value of investments and the income from them may go down as well as up and you may not get back the amounts originally invested.
You can also withdraw the cash at any time, which is a major benefit over something like a pension where your savings are tied up until your late 50s (although pensions have their benefits too).
There are some disadvantages, the main one being that if you don't max out your £20k allowance (which, to be fair, is quite likely) then you lose the remaining allowance because it doesn't roll over into the following years.
Why save into an Isa?
In summary, there are two main benefits to saving in an Isa:
- You can withdraw money at any time
- Withdrawals are completely tax-free
Isas might be best if you want flexibility with your savings to pay for holidays or buy a car or even a house.
Below is a quick summary of the benefits of an Isa.
Isa tax treatment could be subject to change in the future.