(Newswire.net — January 16, 2020) — Recent reports have suggested that more than 60% of Americans have less than $500 in savings to their name. It seems that Brits are no better at saving either, with half of 20-somethings reportedly living with no savings at all.
Whether you’re keen to be the exception to the rule, interested in saving for a rainy day or envisioning a certain quality of life during your own retirement, considering an individual savings account might just get you closer to achieving your financial goals.
Individual Savings Accounts Explained
An individual savings account (ISA) allows you to save and invest money in a practical and tax efficient way across multiple different accounts. ISAs are tax free, so you don’t need to worry about paying income or capital tax or tax on dividends until you reach a certain threshold stipulated by the government. This allows for greater returns on your investment over time, particularly if you’re smart about how you invest.
What is a cash ISA?
A cash ISA refers to a cash-only savings account with either a fixed or a variable interest rate, depending on how easily you want to be able to access the funds. The longer you leave the investment untouched, the better the interest rate is likely to be, though traditionally a rate of about 2% applies for this type of ISA. If you’re over 16 years old, you’re eligible to start putting funds into this generally low risk ISA, and the earlier you start, the earlier you can put your earnings to good use.
What is an investment ISA?
Commonly known as a stocks and shares ISA, this type of individual savings account is a bit more risky, as it is based on investing in assets that rise and fall in value over time. It does, however, give you an opportunity to hold a wider range of assets, including shares, bonds, exchange traded funds (ETFs), investment trusts and more. These ISAs are great for investors looking to earn returns through a diverse portfolio, rather than just considering a standard cash ISA.
What is a lifetime ISA?
Lifetime ISAs are designed to help potential first time house buyers save or to help individuals increase their savings as they plan for their retirement. Each tax year, all payments made into a lifetime ISA – up to a maximum of £4,000 – will receive a 25% government ‘bonus’ on top of interest earned. This means you essentially earn one pound for every four pounds you save during the course of the year.
What is an innovative finance ISA?
IF-ISAs are savings accounts that operate a little differently from traditional ISAs. An innovative finance ISA pairs up willing savers such as you with individual and business borrowers via an online peer-to-peer network. This allows you to know exactly where you are investing your money, ranging from the property market through to small businesses – the cornerstone of the British economy – and other ventures. Returns from IF-ISAs tend to be in the 6-8% range, but remember that type of investment is not covered by FSCS protection.
Important to Know: The ISA Allowance
Before deciding what ISA type is right for you, you should know that the government sets a limit (an allowance) for how much money you can put into an ISA each tax year without paying tax. Currently this is £20,000, which can be invested across up to four ISA types per year, although you are only able to pay money into one account of each type per tax year.
With IF-ISAs, you are only allowed to hold one account per P2P platform each tax year, so do your research before deciding which provider to go with. Don’t forget that lifetime ISAs have a cap of £4,000 per tax year. You should also keep in mind that tax rules can change at any time, so if you’re an active holder of an ISA it helps to keep an ear to the ground and remain vigilant of any policy changes that might affect your return on investment.
Whether you’re just starting out on the savings journey or you’re already a savvy saver, ISAs are a great way to make your money work for you, with each type specifically designed to suit people from different walks of life. Investing in your own future doesn’t have to feel like a chore, especially now that you know that there are tax-free options at your disposal. Making the most of these can be the difference between a retirement filled with worry and one filled with peace and satisfaction.