I have some spare money to invest – about £35,000 – which I’ve built up in a bank deposit account. I’ve been thinking about putting some of it into an ISA, holding about £5,000 back as an emergency fund. I’ve looked online and see that there are different types of ISA, so what would you suggest?
Matthew Hinchliffe of Smith & Pinching responds:
This isn’t a question I can answer without an in-depth discussion with you to look at your financial circumstances and what you are looking to achieve with your investments.
However, I can explain a little about ISAs. There are four types of ISA, but I am going to focus on the two most common: Cash ISAs and Stocks & Shares ISAs.
Cash ISAs are very similar to bank deposit accounts in that you deposit the money, and the provider pays you interest on your savings. The value of your holding will not fall below the amount you invested and should grow reliably, albeit at a relatively low rate which may struggle to keep pace with inflation.
The benefit of holding your cash savings in an ISA is that there is no tax to pay on the interest, however much interest is earned. If you have cash savings outside an ISA you may benefit from the Personal Savings Allowance which is £1,000 per year for basic rate taxpayers and £500 for higher rate taxpayers. There is no allowance for additional rate taxpayers. However, if your savings generate more than your allowance in interest, then tax is potentially payable.
Stocks & Shares ISAs use equity investments, so there is no guarantee that your investments will increase in value and they could, in fact, end up worth less than you originally invested. However, equity investments do have the potential to outpace inflation in the medium to long term, so may be more beneficial provided you can leave your money invested until markets are favourable. The benefit of the ISA framework is that there will be no tax to pay on any income or gains you make on your investments.
ISAs cannot be held jointly. Generally speaking, every UK resident over the minimum age of 16 for Cash ISAs and 18 for Stocks & Shares ISAs has an annual ISA allowance, which for the 2020/21 tax year is £20,000 – and you can’t carry forward unused ISA allowances from previous tax years. You would, therefore, only be able to invest some of your £35,000 before April this year. You can use your allowance for Cash or Stocks & Shares ISAs, or a mixture of both.
Your choice of ISA should be determined by your individual needs, plans, attitude to investment risk and preferences, so I recommend that you get advice from an independent financial adviser.
Any opinions expressed in this article do not constitute advice. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.
For more information visit www.smith-pinching.co.uk
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