Investments come in many forms, so it pays to know your options, before getting involved in a particular scheme. And though maximizing returns is a primary investment objective; effective personal finance also accounts for taxes and an individual’s unique goals. If you have questions about your investments, use this and other resources to bolster your understanding and guide your investment decisions.
Most investors’ portfolios ultimately contain a blend of investment types, including stock market shares, mutual funds, cash, bonds and money held within an Individual Savings Account (ISA). To determine what’s best for your financial future, use online resources and expert advice to firm-up your understanding of various investment advantages.
What is an ISA?
Individual Savings Accounts are investment instruments that help manage savings and retirement resources. What makes them unique is the way interest is earned and taxed. In most instances, money earned by investments is considered taxable income, which requires tax payments. An ISA, on the other hand, enables an investor to grow his or her earnings without subjecting them to tax.
ISA Allowance
Each tax year, which commences annually on April 6, investors are allowed a certain level of contribution to their Individual Savings Accounts. Generally, the ISA limit remains unchanged during any given year, but unusual conditions led to an adjustment to last year’s maximum allowable contribution.
Up until July 1st, 2014, your maximum allowable contribution to a cash ISA was limited to £5,940 for the 2014/2015 tax year. After that date, the ISA contribution threshold level climbed to £15,000, establishing a new standard for the tax year. The sizable bump creates opportunities for investors to increase their savings income without additional tax payments. Another change to ISA regulations allows investors to hold up to 100% of their annual 2014/2015 investments in cash ISA accounts, in contrast to prior-year regulations that dictated what type of ISA accounts could be utilized.
Types of Individual Savings Accounts
ISA investors have options when parceling out their annual savings allowance. Your personal investment goals and other factors influence which approach is best for you, drawing on these types of ISAs to ensure ongoing financial stability within your household.
Cash ISA – This type of ISA bears similarities to accounts most people would think of as ‘traditional’ savings accounts. Like other ISA alternatives, however, money earned in a cash ISA is not subject to tax. Changes to investing regulations now allow ISA account holders to dedicate their entire annual allowance to a cash ISA. Prior to this year, a cap was in place requiring investors to spread their ISA money across various account types. Cash ISAs provide quick access and facilitate regular contributions from account holders. And lump sum investments perform well in ISAs, because they are based on fixed-rates and steady returns. UK residents age 16 and older are eligible to begin rolling over ISA savings with their own cash accounts.
Stocks and Shares ISA – Like other types of ISAs, the primary goals of your Stocks and Shares investment is to grow wealth in the most tax-efficient way possible. These accounts enable investors to include a variety of financial stakes in their ISA accounts, in order to spread risk and maximize returns. Government and private corporate bonds, as well as myriad stocks are eligible to include in a Stocks and Shares ISA.
Compared to cash ISAs, Stocks and Shares present greater risk for investors. The investments also have greater upside potential, so returns can eventually outpace those gained from fixed-rate cash ISAs. Your age and risk tolerance influence how you should allocate your ISA funds, as well as general economic conditions. Earnings from your Stocks and Shares ISA are not taxed as capital gains, so the strategy can be the most tax-efficient approach for certain investors. UK residents who have reached the age of 18 are invited to open Stocks and Shares accounts, which are limited to one new account per person each tax year.
Junior ISA – Like adult counterparts, children are eligible for two forms of ISA. Cash and Stocks and Shares Junior ISAs grow savings for UK residents under age 18. The cap for annual contributions is £4,000 which is saved by parents and children alike. The money belongs to the child, but cannot be accessed until age 18. Interest in cash accounts does not get taxed, nor are capital gains and dividends gained in Junior Stocks and Shares ISAs.
Maximizing your investment includes a close look at ISA options. Changing regulations now allow higher levels of tax-free investing than ever before, and Junior versions give young people a lifetime to grow their tax-free investment income. Use this and other resources to set your course for ISA success.
