Updated: February 17, 2020

Are ISAs Worth It?

Thinking of opening an ISA? Read up on their advantages and disadvantages and find out how they compare to the alternatives before you get started

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Richard Angliss

Author: Richard Angliss - Finance Expert

Updated: February 17, 2020

ISAs come in several different flavours, but if you’re yet to decide which type you want to open, there are general advantages and potential drawbacks of this product category to bear in mind.

In this article, we outline the pros and cons of ISAs in general, focusing on the cash and investment varieties.

For in-depth information about these ISA types, be sure to check out our standalone guides through the links, or better yet, make an enquiry to speak with an expert.

The following topics are covered below…

What are the benefits of ISAs?

One of the main benefits of cash ISAs and their investment-based alternatives are that you won’t pay any income tax or capital gains tax on your returns.

Some savers choose ISAs for this reason alone, but there are other potential advantages to consider, and they include the following…

  • Tax-free withdrawals:
    You can withdraw funds from both cash and investment ISAs without incurring a penalty (unless you have a fixed-rate account). Keep in mind, though, that most experts would advise against making early withdrawals from a stocks and shares ISA.
  • Wide investment choices:
    ISAs offer a range of investment choices. If you’re a cautious saver, the cash variety might be the best option but those with a higher appetite for risk and investment experience can hold funds, gilts, bonds, stocks and shares, and more.
  • Transferrable:
    ISAs are highly portable. It is possible to switch from one provider to another to take advantage of superior interest rates and deals. You could also transfer your funds from a cash-based ISA to a stocks and shares account, and vice versa.
  • No wrapper charges:
    There are usually no extra charges with an ISA and the income you earn will not be taken into account for age-related personal allowances.
  • No age upper limits:
    This gives ISAs an advantage over some of the alternatives, such as a self-investment personal pension (SIPP). In terms of lower age limits, anyone aged 16 or over can open a cash ISA, and junior ISAs can be opened on their behalf by a parent or guardian before that. You can read more about them in our guide to junior ISAs.
  • Inheritance:
    You can usually pass your ISA savings onto your spouse if you were to pass away, through an ‘inherited Isa allowance’. This is a one-off payment that is equal in value to the amount that was saved in the account, in addition to the allowance.

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What are the disadvantages?

Perhaps the main drawback of cash ISAs is that the investment returns can be much lower compared to stocks and shares-based accounts, but there are general drawbacks to be aware of too…

  • Contribution limits:
    Cash ISAs and investment ISAs both have a contribution cap of £20,000 for the current tax year (2019/20).
  • No tax relief:
    Although your returns will be interest-free, there is no tax relief on ISA contributions. This is not the case for alternative products, such as SIPPs.
  • Withdrawn money cannot be replenished:
    Due to the annual contributions cap, you can’t put withdrawn money back into an ISA if this would put you over the limit. There is, however, a subcategory of products called flexible ISAs where this rule may not apply.
  • Allowance cannot be carried forward:
    If you don’t use your annual allowance, you will lose it. You cannot carry over anything that’s left from the previous year’s allowance
  • You cannot have an ISA in joint names:
    And this drawback does not apply to some alternative products, such as high-interest savings accounts, which some people might choose instead of a cash ISA. Also, you can’t put an ISA into trust.
  • Inheritance tax liabilities:
    Although your ISA allowance can be inherited by your beneficiary in the event of your death, there may be an inheritance tax bill to foot. This does not apply if your spouse is the beneficiary, though.

How safe are ISAs?

How safe your money will be in an ISA depends on the type of ISA in question. With a cash ISA, there is no danger of capital loss because the money is not invested in an asset that carries risk. If the provider was to collapse, you would be covered by the Financial Services Compensation Scheme (FSCS) up to a maximum of £85,000, so with this in mind, most experts would recommend that customers with more than this to invest should spread the funds over multiple accounts.

Stocks and shares ISAs carry a higher risk as well as a higher potential for rewards, depending on where the money is invested. It’s important to work with an independent financial advisor if you’re investing in a stocks and shares ISA because there may be a possibility of capital loss.

An advisor can suggest ways that you can offset this risk, such as drip-feeding funds into your account and investing in a mix of different asset types.

The first £50,000 you put into an investment ISA will be protected if your provider goes under, but this will not cover you against underperforming assets.

Are ISAs worthwhile?

If earning tax-free interest on your savings is your main concern, some experts will tell you that an ISA is a viable option, especially if you’re a higher rate taxpayer or are likely to become one. But to answer this question thoroughly, there are many factors that need to be considered.

This is why it’s so important to speak to an independent financial advisor. They can look into your needs, circumstances and appetite for risk and help you choose the right savings option for you.

There may be more suitable alternatives available, since ISAs aren’t the only way to earn interest tax-free. Non-ISA savings accounts might be worth considering over a cash ISA, depending on the market conditions and the rates currently being offered by finance providers.

An advisor is also likely to take the reason you’re saving up into account when recommending a product. For example, if you’re saving for retirement they may suggest a lifetime ISA or a SIPP, and if you’re putting away money for your children, a junior ISA might be recommended.

Speak to an expert

Now that you’re read up on the potential risks and rewards ISAs can offer, you should get in touch with us to speak to an independent financial advisor to find out more.

The experts we work with can help you choose the right option based on your needs, circumstances and risk preferences.

Call 0808 189 0463 or make an enquiry online to get started.

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Richard Angliss

Richard Angliss

Finance Expert

About the author

Richard Angliss has made a career in financial services which stretches over 40 years.

His early career was spent learning about the various financial products and applying them to prudent advice, working for one of the largest life assurance and investment firms. After that he joined the financial services arm of a very well-known firm providing independent advice to their 8 million customers.

For the last 20 years he has been involved in building software solutions that help Advisers and clients work together to achieve good financial outcomes and helping to set up three independent advisory firms. He also has written many articles for financial services publications and provided commentary for newspaper journalists.

At an early stage in his career he realised the great satisfaction that comes with being able to help people achieve their goals and protect their families. “Regulation of financial services has hugely impacted on ensuring people get appropriate advice. The issue these days is access to that advice and just as importantly regular reviews to make sure that everything stays on track”.

With the growing development of online resources such as Online Money Advisor he sees a great future for people to access advice to make their pension and investment work harder for them.  Plus, of course, to ensure they have insurance products in place that will be required when unforeseen events happen.

He knows getting that balance right is crucial to prudent financial planning and the wellbeing of individuals and their families.

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