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Individual Savings Accounts (ISAs)

26/02/21 ISA

The 5th April is fast approaching, and it signals the end of the tax-year as well as the deadline for your tax-free Individual Savings Account (ISA) allowance.

We are discussing ISAs in our ‘Let’s talk about:’ podcast next Friday (05/03/2021) at 11:30am with Mark Abley and Gary Stewart live on Youtube, be sure not to miss out! 

You may already have an ISA but haven’t used your full allowance for this tax year? Or maybe you’re hoping to invest before the end of the tax year? Many ISA providers have a cut off point/date after which they will no longer accept applications for the current tax year. This is simply so that they can process the application in time for the year end deadline (5th April), typically 6/7 days before. ISAs have a “use it or lose it” tax allowance. If you miss a year you cannot carry forward any of your unused allowance. 

ISAs can help both investors and savers to meet their financial goals. They are one of the most tax efficient ways to invest and save, they are ‘tax wrappers’, a tax wrapper can be described as a fence around your savings to protect them from paying tax on your cash. If you're unsure about how ISAs work and what their benefits are you won't be able to take full advantage of them.

There are 5 different types of ISA; Stocks & Shares (Investment) ISA, Cash ISA (which are the most popular), an Innovative Finance ISA, Lifetime and Junior ISAs. In this blog I’m going to focus on some of the advantages and disadvantages of Stocks & Shares and Cash ISAs, briefly discuss what Innovative Finance, Lifetime and Junior ISAs are and cover what happens to your ISA if you die.

Stocks & Shares ISA

A Stocks & Shares ISA is where you can invest your money into funds (including shares and bonds from various companies pooled together), individual bonds, and individual shares.

Advantages

  • Tax free - no capital gains or income tax.
  • The ‘potential’ for higher returns when compared to cash deposits,but there’s risk involved though.
  • Flexibility
  1. Investment ISAs can be transferred. If you aren’t happy with the performance of your investment ISA or you want to combine all of your ISAs, you have the option to transfer them.
  2. You have the flexibility to invest in all asset classes, not just stocks and shares (such as; bonds,  ETFs and other assets)

 

Disadvantages

You will normally be charged a fee from providers, to look after your money. There are low cost options available, but the bottom line should be choosing the best overall product for you. A financial advisor can help to search for the right investment for you.

You can only invest in one type of Stocks & Shares ISA per year.

Stocks & Shares ISAs are not for people with short term outlooks - an investment ISA is typically for those who want to invest over a longer term (5+ years) if you need access to it sooner, a cash ISA or another alternative could be worth considering instead.

Your funds are at risk, investments can go down as well as up

Cash ISA

A cash ISA is the most popular type of ISA available, they are essentially savings accounts that are tax free.

Advantages

  • Tax free way to save money - you keep all the interest you earn
  • There are both instant or fixed term cash ISAs 
  • Fixed interest or variable rate ISAs are available.
  • No tax penalties on withdrawals 
  • Good to use if you exceed your personal savings allowance

Disadvantages

  • In recent years interest rates have been low and haven’t kept pace with inflation 
  • Notice period could be as long as 90 days with fixed term ISA 
  • Low interest rates mean slow savings growth

We are discussing ISAs in our ‘Let’s talk about:’ podcast next Friday (05/03/2021) at 11:30am with Mark Abley and Gary Stewart live on Youtube, be sure not to miss out!

Innovative Finance, Lifetime and Junior ISAs explained 

Innovative Finance

Innovative FInance ISAs include a variety of things, but essentially you are lending money to companies or people, such as: peer-to-peer lending, lending to businesses, property and crowdfunding. The risk with an Innovative Finance ISA is that the borrower won’t be able to repay the loan, this can be mitigated by spreading your money across different loans or by investing in provider-backed safeguarded funds. You can invest up to your tax free annual allowance each year (£20,000 - 2020/2021).

Lifetime ISA (LISA)

A lifetime ISA has an annual contribution limit of £4,000 which counts towards your annual ISA allowance (£20,000 - 2020/2021). You can hold cash or stocks & shares in your LISA or have a combination of both. The government will add a 25% bonus to your savings, up to a maximum of £1,000 each year. The lifetime ISA is typically useful to buy your first home or to save for later in life. To open a Lifetime ISA you must be 18+ but under 40 years old. When you reach age 50, you will not be able to contribute to your LISA or earn the 25% bonus, however your account will stay open and your savings will earn interest or investment returns until you are able to withdraw the funds tax free at age 60. If you wish to withdraw funds from your Lifetime ISA before age 60 or don’t use it to buy your first home (if sooner) there will be a 20% charge.

Junior ISA 

A junior ISA is a long term savings account that can be set up for the benefit of a child by a parent or legal guardian. Only the child can access the money and only once they reach age 18 (except in exceptional circumstances). The junior ISA limit for the current tax year (2020/2021) is £9,000 and parents, friends and family can save on behalf of the child as long as the total stays under the annual limit, but it’s important to remember that once you commit the funds you won't be able to withdraw them.

What happens when someone dies?

Though it’s not nice to think about, it’s important to know what will happen to your savings if you or someone you love passes. Below, you will find all you need to know about the Inheritance ISA Allowance.

What is an inheritance ISA allowance?

If your spouse or civil partner passes away, you will be eligible to receive an Inheritance ISA Allowance. Otherwise known as an Additional Permitted Subscription (APS), your Inheritance ISA Allowance is in addition to the annual ISA allowance you already receive, and means you could benefit from paying less tax on your savings.

However, this doesn’t mean you will directly inherit the money in your partner’s ISA(s). Instead, you will inherit the value of the ISA(s) they held.

For example, if your spouse or civil partner has £10,000 saved into an ISA and they pass away, you will be entitled to save an extra £10,000 tax-free on top of your existing £20,000 ISA allowance (tax year 2020/2021).

Does the inheritance ISA allowance affect your ISA allowance?

No, your Inheritance ISA allowance does not affect your ISA allowance. Instead, it is an extension of your existing allowance.

How is the inheritance ISA worked out?

Any ISAs your spouse or civil partner held, whether they were Cash ISAs or Stocks and Shares ISAs, will count towards your Inherited ISA Allowance. The only exception is the Junior ISA, wherein there is no inheritance ISA allowance and any money in the Junior ISA will be paid to whoever inherits their estate.

When it comes to how much ISA inheritance you’re entitled to, this amount will depend on when the death occurred.

  • If your spouse or civil partner died on or before 5th April 2018, your Inheritance ISA Allowance will be the value of their ISA(s) on the date they passed away.
  • If your spouse or civil partner died on or after 6th April 2018, you can inherit an ISA allowance that is the value of their ISA at the date of death. However, you also have the option of letting your spouse or civil partner’s ISA(s) remain open and earning interest, and you can then inherit an ISA allowance that is the value of their ISA(s) when you close the account.

What is a continuing ISA?

When an investor dies, an ISA is reclassified as a ‘Continuing ISA.’ Though no money can be paid into it at this point, it will continue to benefit from the tax advantages of an ISA. This means any interest earned will remain tax-free.

A Continuing ISA remains until either:

  • The administration of the estate is complete
  • The ISA is closed
  • It’s been three years since death

How long is an inherited ISA allowance available?

Your inheritance ISA allowance will be available for three years after your spouse or civil partner has passed away, or 180 days after the administration of the estate has been completed; whichever one is the later date.

We are discussing ISAs in our ‘Let’s talk about:’ podcast next Friday (05/03/2021) at 11:30am with Mark Abley and Gary Stewart live on Youtube, be sure not to miss out!

Alternatively, if you would like information on the advice that we can offer you, please call us on 0800 0438341 or email letstalk@fathomfinancial.co.uk

You cannot hold an ISA with or on behalf of anyone else other than a Junior ISA for anyone under 18

Capital at Risk: The value of your investment can go down as well as up. You may get less back that you originally invested. Not sure which investment is right for you? Ask us for advice