An Individual Savings Account (ISA) may seem scary. It doesn't need to be. We explain some of the bigger ISA misunderstandings.
Myth 1 - ISAs Are Only For Rich People
ISAs may actually make sense for virtually anyone looking to save money. The maximum you can invest in an ISA is currently £20,000 a year. Of course, that's a pretty large amount of money and certainly not everyone can comfortably save that amount, but the important thing is, that is only the maximum level. You can quite easily invest a much smaller amount if you wish. For example, investing £100 in an ISA is quite possible and would still offer similar tax savings and flexibility.
Myth 2 - All ISAs Come With Lots Of Rules And Restrictions
Many ISAs are actually fairly simple. You save money and then you won't pay tax on the amount you earn while the money stays in the ISA. If you want to take your money out of a Stocks and Shares or Cash ISA you can do that. It's not complicated and for the typical ISA (such as the Stocks and Shares ISA at Moola), if you want your money back you can get it back without penalty. The company who offers you an ISA may add rules or restrictions, but ISAs themselves are potentially flexible. Certain ISAs where the government adds money to your account do have potential withdrawal penalties, but Stocks and Shares and Cash ISAs don't.
Myth 3 - An ISA Just Isn't Worth The Hassle
ISAs are something the government use to encourage people to save and invest. They try to achieve this by making any 'profits' from an ISA tax free. As with opening any account there's a little bit of work to do, but the benefit of tax-free growth on the money you make within the ISA is worth it in our view, especially if you're serious about saving over time. It's a good habit to get started on.
Myth 4 - If You Have An ISA Already, That's It
ISAs are flexible. If you want to open multiple types of ISA, such as one for cash and one for stocks and shares, you can do that. You can also have ISAs from different companies. Also, if you had an ISA for the last tax year, it's OK to open another one this tax year. So you can have ISAs of different types, from different providers and for different tax years. There's a lot of flexibility on offer. The main thing to watch out for is that you don't exceed the annual contribution limit of £20,000 across all your ISA contributions for the current tax year (2017-18).
Myth 5 - Once You Have £20,000 In An ISA, It's Full Forever
This may be true for this tax year, but then for the next tax year you may be able to add up to £20,000 again (depending on where the government sets the limit, it may change year to year). So over time, if things go well, your ISA could become very large. However, again if you just contribute a smaller amount into an ISA that's fine too, and you'll still get the tax benefits with whatever level you decide to invest.
Myth 6 - ISAs Don't Offer Flexible Saving Options
There are plenty of different kinds of ISAs. If you want to earn regular interest as you would on a savings account, there's a cash ISA for that purpose. If you want to invest in the financial markets there are Stocks and Shares ISAs for that. You can even set up an Innovative Finance ISA for potentially more complicated things like Peer-to-Peer Lending. When it comes to ISAs there are a lot of choices on offer and although you don't need to understand every single type of ISA that's out there, it’s good to know that there are a lot of options for you.