10 ISA myths

1. You can only open one ISA

Each tax year individuals can open one cash ISA and one stocks and shares ISA. The over-50s have a yearly allowance of £10,200 of which £5,100 can be saved in a cash ISA.



Those under 50 have an allowance of £7,200 for each tax year - of which half can be in a cash ISA - although it will rise to £10,200 in April for the next tax year.

You may have other ISAs from previous years, but the rules state that you must only contribute into one cash ISA and one stocks and shares ISA each tax year.

2. They have to be declared on a tax return

ISAs do not have to be declared on your tax return; you don't even have to inform HM Revenue & Customs you have one. Any funds within an ISA are sheltered from tax so you don't need to tell the taxman.

3. They are only worth having if you are a higher-rate taxpayer

ISAs are particularly attractive to higher-rate taxpayers because they save up to 40% tax, which they would usually pay on savings interest or income tax on investments.

Furthermore, higher-rate taxpayers are only charged 10% on dividend income instead of 32.5% incurred outside an ISA. Basic-rate taxpayers save the 20% tax they pay on normal savings interest but pay the same as higher-rate taxpayers do on dividend income.

Both groups are sheltered from the 18% capital gains tax, which is normally payable on gains of more than £10,100. 

4. They are risky

Cash ISAs are as safe as savings accounts and savers will not lose their capital, unless their bank or building society defaults and the funds are not covered by the Financial Services Compensation Scheme.

Stocks and shares ISAs vary in risk, much like investing in stocks and shares outside an ISA. The best way to remain cautious is to spread the investment over a number of sectors and asset classes.

For example, don't just buy shares in Footsie companies; buy a variety of funds and trusts spanning different asset classes and regions.

5. Opening an ISA is complicated

ISAs are available through a variety of providers: banks, building societies, unit and investment trust companies, insurance firms, financial advisers, fund supermarkets and stockbrokers.

With so many options, it is a common misconception that opening an ISA is complicated, but all it requires is filling in an application form, which can often be done over the phone, online or in a branch.

6. Putting money in an ISA is better than contributing to a pension

This is a long-running debate and not likely to be settled soon. Both vehicles have tax breaks but at different times of their lifecycle. Some people prefer ISAs because the money can typically be accessed at any point.

Others like pensions because they can't be dipped into until retirement age. It's a matter of personal choice and having both could be a good compromise.

7. Transferring an ISA is a nuisance

ISAs can be transferred to another manager at any point and the new manager should be able to arrange this. Your existing ISA provider cannot stop you from moving, but they may make a charge or force you to sell any assets to be transferred as cash.

Any charges that apply will be stipulated in the terms and conditions and should be considered when shopping for an ISA.

It may also take a few weeks to complete the transfer. If you believe the delay has been unreasonable, you should contact both providers and if you are still unhappy, complain to the Financial Ombudsman.

8. There's no point putting money into an ISA outside ISA season

The 'ISA season' is the few months running up to the end of the tax year (5 April). During this period providers tend to offer better deals to entice savers and investors, so some people delay putting their money into an ISA until then.

For a stocks and shares ISA it is a good idea to set up regular payments to drip-feed your money. This way you will not fall foul of a potential depression in market values which could happen if you put all your allowance in during the 'ISA season'.

9. Teenagers can't have ISAs

If you are aged 15 or under you cannot have an ISA. However, if you are 16 or 17 you can have a cash ISA. Once you become 18 you can also apply for a stocks and shares ISA.

10. If I move abroad, I'll lose my ISA

It's true you can only open an ISA if you are resident in the UK for tax purposes. If you move abroad you won't be able to open a new one or fund an existing one. You will, however, be able to keep your ISA and still get tax relief on investments held within it.

Government employees, such as diplomats, are exempt from this. If they work overseas and are paid by the government, they may open and fund an ISA.

This article was originally published in Money Observer - Moneywise's sister publication - in March 2010

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Your Comments

 I am surprised that cash ISA deals get better just before the end of the financial year. I would have thought that it was all in the savers interest, last chance, to get an ISA before April 5 so banks didn't need to attract savers. However, come April 6 it is in the banks interest to get new ISAs opened ahead of the competition, as you can only have one in the year, and the earlier you fund it the more tax you will save.