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ISA stands for Individual Savings Account, and they are a way of saving tax-free. There are four different types of ISA, and the maximum which can be saved across the ISAs each tax year is £20,000.
The four types of ISA are:
- Cash ISAs
- Stocks and shares ISAs
- Innovative finance ISAs
- Lifetime ISAs.
It’s possible to put money into one of each kind of ISA each tax year.
For the entire tax year, the deposits can’t exceed the £20,000 annual ISA allowance.
To open a cash ISA, a person must be aged 16 or older.
People must be 18 or older to open a stocks and shares or innovative finance ISA.
To open a Lifetime ISA, a person must be aged 18 or older but under 40.
Additionally, people opening ISAs must be resident in the UK or a Crown servant, or their spouse or civil partner if they don’t live in the UK.
The 2021/22 tax year began on April 6, meaning investments may be on some people’s minds right now.
According to money.co.uk, the beginning of the tax year is one of the best times to put money into your investment ISA.
Differing from a cash ISA, investment ISAs enable a person to put money into the markets – either in stocks, bonds or something else – as opposed to being held in a cash savings account.
It means there is more risk than in a standard account.
However, it could also potentially mean far higher returns, particular with the exceptionally low rates on offer from most cash ISAs at the moment, money.co.uk said.
James Andrews, personal finance expert at money.co.uk, recently shared some expertise on investment ISAs.
“There are two main ways to invest with ISAs, firstly you can open an investment ISA with a lump sum – for example if you’ve recently inherited some cash, received a bonus from work, or had a fixed-term savings bond expire and are looking for somewhere to put the cash,” he said.
“You can also set up a direct debit with many providers, letting you put a little away each month, after opening an account with a nominal sum.
“But before you make a decision on how much to invest, it’s essential you research the whole process to find out if you should invest or not.”
Mr Andrews went on to point out situations when investment ISAs may not be suitable.
“If you’re after a quick return on your money, investment ISAs are generally not seen as the way to go,” he said.
“While you can make double-digit returns in a year by investing in the right stocks and funds, you can also make losses – and this particularly applies over the short term.
“Typically, you’ll need five years or more to be confident in getting a better return from the markets than from cash savings – with the longer you hold the money in the markets the better the chances of making a profit.
“It’s also a good idea to make sure you spread your money across different funds and shares, and review your investments regularly.
“And if all that sounds too complicated, there are now ISA providers that take the work out of it for you.
“You simply answer a few questions on how long you plan to put the money away for and how much risk you’re comfortable with, then they do all the rest of the work for you.
“This service does come with slightly higher fees though, so make sure you check the details thoroughly before investing.”
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