Article written by UK based Writer. This article is definitely for the UK based readers of My Journey to Millions, but I think it’s important to gain a different perspective of the account options available elsewhere. In the US the equivalent of an ISA is an IRA – Individual Retirement Account, so there is some comparison to be made.
Tax free savings accounts or ISAs (Individual Saving Accounts) in the UK are a source of confusion to some people and can have a negative perception; that they’re inflexible, that savings thresholds are too low and that they are generally a waste of effort for their return.
However, with modern tax free savings account, the benefits are much clearer and well worth investigating to take advantage of. Equally, the old legacy tax-free systems have been simplified and rationalised in recent years, to become more customer friendly.
Commonly customers are confused as to what ISAs are and believe them to be complex savings products. However, quite simply, an ISA is a tax-free wrapper, that allows a person to save without attracting tax onto interest payments.
Another negative customer perception is that the savings ceilings are low, however they have improved in recent years and are currently £5340 for a cash ISA and £10,680 with a stocks and shares ISA (for 2011/12.) This means that an individual can invest a maximum of £10680 into a stocks and shares ISA if they don’t take the cash ISA allowance.
Some people feel that it’s difficult to find the best rate, however there are plenty of places to look for a competitive ISA and a good place to start is via an online comparison site. The advantage of researching online is that you should find a range of options clearly presented, which help to explain the different terms and conditions.
Another preconception is that only one ISA can be held. In fact, a new ISA allowance is offered each financial year and although it is only possible to have one at a time – a combination of cash and stocks/shares ISA may be held by any one individual.
Another preconception is that ISAs are inflexible and this can be the case – for example, if you have previous savings account from former years, not all new products will allow you to transfer your existing accrual into the current year’s offer, however others will.
Other customers believe that this inflexibility means that money can’t be accessed from an ISA, however some savings accounts allow a number of withdrawals across the year without attracting interest penalties, although these also tend to offer less interest overall and it’s important to note that once you have withdrawn money from an ISA, then you cannot top it back up again.
A correct perception of ISAs is that their administration is complex and it’s true that an ISA transfer must be requested and handled by the financial institutions involved.
Another preconceived idea is around lower interest rates, however even in this current environment, there are ISAs that offer more competitive interest rates if the investment is locked away for a longer time periods, or will track a base rate as it moves.
In conclusion, it’s well worth casting aside old preconceptions about ISAs and revisiting them afresh, as a great option for longer-term financial planning.