The ISA is one of the most popular ways to save in the UK. They work as a flexible, tax-efficient way to grow your wealth for the future, and depending on your present needs and situation, you have the possibility to choose the best one for you and to decide how much to invest. The benefits afforded an investor who opens an ISA are cumulative over the years and contributing to an ISA year on year can help you have a healthy investment portfolio.
Here are five reasons why you should try to invest in an ISA account each year:
1. A generous allowance
The ISA was introduced in 1999, with an original tax-free allowance of £7,000. In 2017, the allowance increased to £20,000, where it currently sits. Contributing to one each year adds up to a huge amount. In fact, if you had used your full ISA allowance between 1999 and April 2017, even before the increase to £20,000, you would have contributed £151,560. You would be well on the way to a comfortable retirement and would have a healthy house deposit.
By contributing to an ISA you’ve not just protected your contributions, you’ve also protected your returns. If you had invested that ISA allowance and achieved a moderate 4% return each year that pot would be worth £209,154.46. You’ll have protected that from tax and be limiting the cost of investing, making it more efficient.
With the allowance now at £20,000, you have a far greater scope to invest in your future and cumulatively grow your savings pot. See how a Moneyfarm Stocks & Shares ISA could work for you. For more information on how a stocks and shares ISA stacks up against a cash ISA, for example, check out our 10-year study of the two.
If you want to know more about how an ISA can help you during your retirement years, you can also read this guide about the differences between a SIPP and an ISA.
2. Tax benefits
The larger the size of your investment the better the tax benefit. The ISA allowance allows you to protect that income. If you had used your ISA allowance every year since 1999 you may have received £8,044.40 in returns between 2014/15 and 2015/16. If you were a higher-rate tax payer you would have to pay income tax on this at 40% if you didn’t use your ISA allowance, you would only have £4,826.64 in returns.
3. Everything could change
The ISA allowance is set in the UK Budget and taxes change all the time. A future Chancellor could decrease the ISA allowance or even abolish some or all of the tax benefits of the ISA. Not only that but the tax paid on investments outside of an ISA could also change. If you use the current ISA allowance you protect your assets from future changes in the Budget.
4. Make investment decisions
Tax is complicated, an entire industry exists to help individuals navigate the tax landscape and investing can be similarly complicated. Make it simple and use your ISA allowance so you can focus on investment decisions rather than tax decisions. Tax works in the same way as cost and when it comes to investing selling at the wrong time can lead to being charged more in taxes. By using your ISA allowance you ensure you have more control of your investment decisions. If you’re still not confident with investing you can use one of the discretionary wealth managers on the market and they’ll make those decisions for you.
You can access your ISA at any time without incurring a penalty (depending on your provider). This is unlike any other tax-efficient account. By using your flexible ISA allowance you can now withdraw money without impacting your ISA allowance, you can access your money whenever you want and you can transfer provider to ensure you have the right product for you.