Time is running out to take advantage of this year’s £20,000 Isa allowance, so make the most of it to help achieve your life goals
The Individual Savings Account (Isa) is a perfect starting place for saving toward many life goals, from a holiday to a comfortable retirement.
It offers flexibility, tax-free saving and other financial advantages, so it is no wonder that Isas hold nest eggs to the tune of £608 billion for UK savers, with more than 10 million accounts subscribed to each year. Last year alone, savers were able to cut their tax bills by a collective £2.9 billion owing to the tax-efficiencies on offer.
Isa rules and limits might have changed over the years, but the fundamentals of the accounts have remained the same since launch: gains on any contributions are shielded from tax.
Once the money is in an Isa, you will not have to pay tax on any interest earned on cash or any capital gains on investments. Dividends are paid tax-free too.
The annual Isa contribution limit has been at £20,000 since 2017. If you keep filling your Isa allowance every year, in time it is possible that you could become an Isa millionaire – and there still would be no tax to pay.
While the basics have not changed, Isas have come a long way over the past couple of decades.
At their launch, there were two types: but savers opening a new account can now choose from five types of Isa.
What are my Isa options?
The Cash Isa will always be the first port of call for many — and with good reason. This type of Isa offers a great starting point for savers.
Much better returns can be achieved by investing in a Stocks and Shares Isa — but this option is not without a degree of risk.
While more people have Cash Isas, Stocks and Shares Isas account for a greater share of the market value of all Isas (55% versus 44%).
Parents have the option to open a Junior Isa for each of their children — they can save money in cash or take a punt on the stock market on behalf of their child.
Lifetime Isas (Lisas) can help you save toward your first home, or toward retirement past the age of 60. The Lisa’s predecessor, the Help To Buy Isa, closed to new applicants last year.
Finally, the Innovative Finance Isa allows you to invest in the higher-risk peer-to-peer sector.
Isa rules have changed significantly over the past 21 years. Back in 1999 when they were first launched, the maximum you could put into a Cash Isa was £3,000. Even once inflation is considered, the £20,000 maximum today is a huge increase.
Isas are also a lot more flexible today. You can switch your money between Cash and Stocks and Shares Isas and Lifetime Isas, and invest into more than one type of Isa in a single tax year.
How long do I have to invest?
One thing that has stayed the same is the strict Isa deadline. Your annual allowance resets on 6 April 2020, whether or not you have used your full allowance.
Your allowance for the 2019/20 tax year expires on 5 April 2019, so you don’t have long to take advantage of it, if you have not already.
Isa allowances cannot be carried over to future years — so now’s the time to use up your allowance before it has gone forever, or get started with your first Isa.
Of course ISAs are now complete rubbish as interests rate close to zero mean that almost zero tax would be payable even if the account is tax free. And as for the nonsense about becoming an ISA millionaire - the only way you could do this is to have a million pounds over 50 years to start with and put it in over 50 years at a rate of £20000 a year. You would achieve the same by putting it under the mattress each year for 50 years.
Of course the money would lose net value each year through inflation and probable your saved £1 million would be worth less than £100000 after 50 years.