Many people use Individual Savings Accounts, or ISAs for short, to shelter their savings from tax, but others miss out on the tax breaks offered by this savings option because they listen to and then believe some of the common myths about this popular savings option.
We don’t like the idea of people paying more tax than they need to, so thought we would tackle some of the myths about ISAs head on.
1. “The ISA allowance is too low to be worthwhile”
In the current tax year each person can put up to £11,280 into an ISA, of which half, £5,640 can be put into a Cash ISA.
Some people believe that the Cash ISA limit is too low to make it worthwhile, especially where interest rates are too low; after all, if you are not getting much interest you won’t be paying much tax so why bother?
Two reasons why this view is wrong.
First of all interest rates won’t stay this low forever and when they rise any savings not sheltered in an ISA will pay even more tax on the interest received. Secondly if you don’t fully use your ISA allowance in a particular tax year then it’s lost.
A husband and wife couple can pay over £10,000 a year into Cash ISAs. Over 10 years that’s at least £100,000 that can be sheltered from tax, at a more typical 5% rate of interest this will save £1,000 per year in tax; not an insignificant amount.
2. “ISAs are expensive”
Again, another comment which is simply untrue.
Cash ISAs work like any normal deposit account, except of course no tax is paid on the interest you receive. There are no extra costs for investing in a Cash ISA, the same is true with the other type, a Stocks & Shares ISA.
Using an ISA will not increase costs; however it will improve your return because you will pay less tax.
3. “ISAs are better than pensions”
Some people believe that ISAs are better than pensions when it comes to planning for retirement; the truth is that there really is no correct answer to this.
An ISA is certainly less restrictive when it comes to accessing your capital; there are no limits on how much can be taken out. However, the maximum you can contribute each year is lower than that which can be paid into a pension and of course you receive no tax relief, the flip side to that an income from a pension in retirement is potentially taxable, whereas you won’t pay any tax on income from an ISA (under current rules!).
It isn’t possible to generalise and say that an ISA is better than a pension, or indeed that a pension is better than an ISA. In truth a combination of both is probably the most effective way of planning for retirement.
Ignore the myths and fine the truth
These are just three myths we often hear about ISAs, there are plenty of others and even more when it comes to pensions. Our advice is simple, read multiple sources so that you get a balanced view, don’t believe everything you read in the newspapers (most journalists have o financial qualifications) and if in doubt seek out an Independent Financial Adviser and ask their advice.
This is a guest post. Phillip Bray is a savings and investment expert, here he writes about ISAs and unveils the truth behind some of the myths associated with all types of ISA from Cash ISA, to Fixed Rate Cash ISA to Stocks & Shares ISAs.
Image courtesy of jscreationzs / FreeDigitalPhotos.net