5 reasons to open an ISA
Presented below are 5 reasons to open an ISA.
- It offers tax benefits
The interest earned on a cash ISA is not taxed. This is not the case with a normal savings account, wherein a basic taxpayer gets returns of just 1.60 interest on his/her savings account with 2 percent AER. The interest earned by a higher tax payer is even lower at 1.20 percent with a 2% AER on the savings bank account. Profits from an investment in shares and stocks ISA are also exempt from CGT (capital gains tax). It may however be noted that ISA share dividends are taxable as there is an automatic 10 percent tax deducted at source.
- The money in ISA can be transferred to a better earning asset
If the current ISA is not performing as per expectations, then investors can transfer their funds into another account as long as that new account allows ‘transfers in.’ It is also possible to move money from a shares and stocks ISA to a cash ISA account, and vice versa. It is important to avoid cashing in ISA to transfer money to another account as it will result in loss of tax benefits associated with ISA. Investors instead need to instruct the current ISA provider to move the funds to the new provider via filling of a transfer form.
- Access to ISA funds still remain
It is a widespread misconception that investment in ISA involves locking away the funds for a long time. It may be noted that lots of cash ISA accounts come with easy access to the funds, which allows investors to withdraw money as and when they want to. ISA accounts have also new increased flexibility added to it. In the past, if a withdrawal was made from an ISA account with an investment to the full limit, then it was not possible for the investor to top-up that ISA account with funds in the same taxation year. Now, investors can put in funds (previously withdrawn) in the ISA account till its max limit.
- It is possible to begin ISA account with an investment of just £1
The minimum amount that is required by several cash ISAs for opening an account is only 1 pound. Thus, hundreds of pounds are not required to start an ISA. In case of shares and stocks ISA, one can open an account with a monthly investment of 25 pounds or 50 pounds. A good practice is to purchase less ISA shares when the prices are higher and more shares when prices are lower. This can help smooth the volatility in the stock market as well as help avoid concern about selecting the correct time to invest.
- Investors can determine their own risk level
Investors who are willing to accept a greater risk for greater rewards can go for investment in shares and stocks ISA instead of a cash ISA, which has lower risk and lower rewards. You can invest in a wide range of shares and stocks ISA, such as ETFs/exchange traded funds, oeics/open ended investment companies, funds holding bonds or shares, shares of individual companies, and investment trusts, etc.
Study about the risk involved with different kinds of shares and stock ISA investments beforeinvesting in one.