29 Mar 2021

Five myths about Individual Savings Accounts (ISAs) explained...

Five myths about Individual Savings Accounts (ISAs) explained...

Time is running out fast if you want to put money into an Individual Savings Account in the current tax year.

You can invest up to £20,000, but the deadline is midnight on Monday, April 5.

ISAs were introduced in 1999 to create a safe place to keep savings where the taxman couldn't eat away at the interest. However, many people don't make the most of their annual ISA allowance because they aren't sure exactly how ISAs work, or because they don't think the benefits are really worth it.

Here are some common ISA myths.

Myth one - you can only have one ISA each tax year

There are different types of ISAs: cash, investment (also called stocks & shares ISAs), lifetime and innovative finance. You can split your annual allowance between more than one type of ISA, so you could put some in a cash ISA and some in an investment ISA, for example. However, you can't pay money into more than one of the same type of ISA in the same tax year.

Myth two - dividend allowances mean ISAs aren't worth bothering with

You can receive up to £2,000 a year in dividend income without paying tax. This might be adequate for many people, but if you build up an investment portfolio over many years you may find that the amount you receive in dividends exceeds the annual allowance.

Myth three - you can't take money out and pay it back in

If you hold money in an ISA, you can take it out and pay it back in within the same tax year without it affecting your annual allowance.

Myth four - you must decide which funds or investments you want to hold in an investment ISA before you can open one

If you want to put this year's allowance into an investment ISA, but haven't yet decided where to put your money, you could pay it into the ISA but keep it as cash until you've made up your mind. The ability to hold cash in your investment ISA can also be useful if you're uncertain of market conditions and don't want to invest immediately.

Myth five - once you've chosen an ISA, you're stuck with it

ISAs have become more flexible in recent years - it's possible to change ISA provider and switch from cash to investments and vice versa. You just need to make sure that the ISA you want to move to accept transfers, and check you won't be charged a penalty, suffer any other detriment or lose any benefits from your current ISA. 

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