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Are ISAS worth it in 2024? Why choosing investment ISAs

Saving or investing in an ISA (Individual Savings Account) in the UK can significantly impact how much tax you need to pay on your savings. So, are ISAs worth it in 2024? Well, the answer is not as straightforward as you may think. Is an ISA worth it? Are investment ISAs worth it? These are questions many savers and investors are asking as they consider the best ways to grow their wealth in a tax-efficient manner.

What does ISA stand for?Individual Savings Account
What types of ISAs are available?Cash ISA, Stocks and shares ISA, Innovative Finance ISA, Junior ISA, & Lifetime ISA
What are the current ISA allowances in 2023?The ISA limit for 2023 is £20,000
Should I invest in an ISA in 2023?It depends on your individual circumstances and financial goals

Investing in an ISA can be a good savings option for people who want to save tax-efficiently. But whether or not you should invest in an ISA in 2024 will depend on several factors. We’ll look into the question in more depth. If you want to know the answer to “Is an ISA worth it or not?” please read on.

The Personal Savings Allowance explained

The term “personal savings allowance” (PSA) refers to the tax-free allowance you are entitled to on interests earned on savings in a regular savings account or a non-ISA savings account; you may not have to pay tax on that interest. The size of the allowance is dependent on your income tax bracket. It is as follows:

  • £1,000 interest tax-free for basic rate taxpayers whose income is taxed at 20%
  • £500 interest tax-free for higher rate taxpayers whose income is taxed at 40%
  • No interest-free allowance for additional rate taxpayers whose income is taxed at 45%

According to government statistics, the PSA results in 95% of savers not paying any tax on their savings interest.

In the UK, an ISA and PSA are two ways to save money while taking advantage of tax benefits. When evaluating if an ISA is worth it in 2024, it becomes a simpler decision for those in higher income tax brackets.

What PSAs cover

A PSA applies to any interest that you might earn in a number of savings vehicles, including:

  • Bank accounts
  • Building society savings
  • Corporate bonds
  • Credit Union accounts
  • Government bonds and gilts
  • Savings accounts

It also applies to any foreign currencies held in UK savings accounts, like Euros and US dollars.

When the interest rate on cash savings is relatively low, you have to have a significant amount of savings before PSA becomes worthy of any real consideration. So, when asking, “Are ISAs worth it at lower levels of savings” the answer is maybe – the risk involved means you should have at least enough to cover any potential losses. But asking “Are Stocks and Shares ISAs worth” is a different question entirely and something we will discuss in more detail a little later.

Is an ISA worth it for higher-rate taxpayers?

Are ISAs worth it if you are a higher-rate taxpayer, especially in 2024? Yes, it is when you reach the PSA maximum threshold. As a basic rate taxpayer, for every £100 interest above your PSA in a savings account, you will lose 20%, or £20, to the taxman. As a higher-rate taxpayer, you will lose £40.

However, if you invest in an ISA, you keep the lot for each £100 of interest you make over your PSA threshold. It’s 100% tax-free; any interest, dividends, or capital gains generated within the ISA are tax-free. So, the more you make, the more you save—if you see what we mean. Anyone looking to beat inflation and grow their wealth effectively over the long term should consider an ISA.

Are ISAs a good idea from other viewpoints?

We’ve limited our discussion to interest so far. But is an ISA a good idea in 2024 from other perspectives? The answer is yes. An ISA can be a suitable option for many people, especially when there is a debate about ISAs vs savings accounts.

ISAs are flexible

A good ISA gives you a huge amount of flexibility. If you choose the right one, withdrawing money from your ISA and repaying it without affecting your annual ISA allowance, which is £20,000, is permitted. The key is to replace the funds in the same tax year. But before opening any accounts, you should check with your ISA provider, as not all ISAs offer this as a feature.

ISA allowances can be inherited

Why are ISAs worth it and good in the long run? Since April 2015, couples have been allowed to inherit each other’s ISA allowance. The inheriting partner is entitled to an “additional permitted subscription,” otherwise known as an APS allowance. So, as well as having their own ISA allowance, the surviving partner also inherits the value allowance to which their deceased partner was entitled at the time of his or her death.

Why is a Stocks and Shares ISA worth It?

The types of ISAs and saving accounts we’ve talked about so far are cash savings accounts. When you start asking the question, are Stocks and Shares ISAs worth it? – we are looking at a very different picture.

Current Interest Rates

The Bank of England’s base rate has experienced fluctuations, reflecting changes in the economic landscape. The Bank of England’s base rate is currently at 5.25% and is expected to fall to 4.25% by the end of 2024 as inflation drops (although it will be higher than the Bank’s 2% target).

When the Bank of England’s base rate falls, savings account rates usually decrease but don’t always match the base rate. For example, a 4.0% base rate doesn’t guarantee a 4% savings rate. It’s important for savers to actively seek out the best rates and consider various savings products to potentially earn higher returns, especially in a falling interest rate environment.

The actual interest rates available to savers can vary, often ranging from around 0.5% to 3.5%, depending on the financial institution and the type of savings account. The lower interest (0.5%) rate is typical of easy-access accounts, whereas the higher rate (3.5%) is for a fixed-term account, whereby you cannot access your savings until the term is up.

Would ISAs be still recommended with inflation?

With the upper end of interest on savings being in the region of 3.0%, for this cash to keep pace with its real value, inflation should also be around 2.0%. However, the fact of the matter is that as of January 2024, according to the ONS, consumer price index inflation is running at 4.0%.

So in real terms, if your savings are earning 3.0% in a fixed-term account, your money is devaluing at 1% per annum. And that’s at the high end of savings interest. At the lower end, it devalues by 3.5% per annum. Unfortunately, the bad news doesn’t end there. Fortunately, UK inflation is projected to decline more slowly than in 2023. The Bank of England and other economic experts predict that the inflation rate will average between 2.2% and 3.1% for Q4, influenced by factors like lower energy prices and reduced consumer goods inflation.

Is an ISA a good investment?

If you’re asking yourself, do I still need an ISA? – Yes, if you’ve got a substantial amount of money tied up in ordinary savings accounts and Cash ISAs, you really do, unless you’re content to let its spending power deteriorate badly in real terms. If you’re asking the question, are ISAs still best for rates, then yes, if we are talking stocks and share ISAs or investment ISAs, they certainly are.

Why choose an ISA?

By now, it will be pretty obvious to the reader that ordinary savings accounts perform so badly in terms of interest, and with inflation due to ramp up, you need a savings vehicle that can outperform inflation. So the question “Why are ISAs good?” is answered by the fact that, on average, stocks and shares ISAs often significantly outperform other savings vehicles by some margin.

According to moneyfacts.co.uk, the average return of stocks and shares ISAs between 1 March 2020 and 2021 was 13.55%, beating the previous year’s average return of 13.3%.

Also, if you are looking to save towards retirement and you are considering SIPPs or ISAs, an ISA might be the better option if you want easy access to your savings at any time, making it a flexible option for people who need to access their money in an emergency.

The only thing that you have to consider is your attitude towards risk. Investing in the stock market does pose a risk, and your savings could decrease as well as increase, which is why you should only consider a stocks and shares ISA if you are intent on saving for the long term.

Transferring your ISA

An ISA transfer is the process of moving an existing ISA from one provider to another. You can transfer your ISA if you’re unhappy with your current provider’s charges, investment options, or customer service experience. You can also consolidate your ISA investments into one account with a combine ISA transfer.

Before you transfer your ISA to another provider, ensure the correct process is observed and do your research so that you don’t lose your tax-free status. There may be fees or penalties associated with an ISA transfer, and weighing up these costs against the potential benefits of transferring is important.

FAQ

What are the risks associated with investing in an ISA?

There are several risks associated with an ISA investment. For instance, stocks and shares ISAs are vulnerable to stock market volatility, which can cause the value of your investments to rise or fall. Cash ISAs are exposed to interest rate fluctuations, which can affect the return on your savings. Inflation risk is associated with any investment, which erodes the value of your investment. Your provider can go out of business, and you can lose all your money if it is not protected by FSCS.

Are ISAs worth it in 2024?

Investing in an ISA will depend on an individual’s financial circumstances, investment goals, and risk tolerance. However, an ISA investment can be a good option for people looking to save for the future in a tax-efficient way. However, it’s important to be aware of the risks involved and to seek advice from a financial advisor if you’re unsure about the best investment strategy for your specific needs.

What are some of the benefits of investing in an ISA?

There are several benefits associated with ISA investing. They include tax-efficient savings, where the returns on ISA investments are tax-free. You can choose the investment strategy that suits your goals and risk tolerance, regardless of the type of ISA account. ISAs can be used to save for retirement as they are designed for long-term investing. If you have a flexible ISA, you can access your money without affecting your ISA allowance.

Are cash ISAs worth it?

For many, the answer lies in comparing the potential returns of cash ISAs with those of stocks and shares ISAs, especially considering the ISA allowance 2023/24. Cash ISAs can be worth it for risk-averse savers seeking a tax-free way to save money, especially if their savings exceed the Personal Savings Allowance or they are higher-rate taxpayers because the interest earned is tax-free. This means they can avoid the 40% tax they would otherwise pay on interest earned outside of an ISA, making saving or investing money more efficient without incurring additional tax liabilities. However, low-interest rates mean returns may not keep pace with inflation.

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*Capital at risk. Tax treatment depends on your individual circumstances and may be subject to change in the future.