There are three weeks to go until the Isa limit for the 2017/18 financial year comes to an end and vanishes for ever.
It means savers and investors have until 5 April 2018 to maximise their £20,000 tax-free wrapper before it refreshes again the day after.
The limit is staying at £20,000, with no inflation-linked rise – and while some may think they are now a waste of time, This is Money still believes having money in the tax-free wrapper is worthwhile and can be a vital part of a financial portfolio.
Isa myths: Many may believe that the tax-free offerings have lost their magic – we bust seven myths below
Yes, there is no longer a mad scramble from banks and building societies to outdo each other and offer the top rates in what used to be dubbed ‘Isa season’ but you shouldn’t write them off completely.
The Isa has come a long way since launching almost 20 years ago.
In the last few years, a number of different versions have launched and for many, it is a cautious way to dip their toe into the world of investing.
There are plenty of myths surrounding Isas and many common questions crop up about the tax-free wrapper.
We explain seven of the most common ones below:
1. ISAS ARE NO LONGER WORTH IT THANKS TO PSA
Rates on cash Isas have crumbled faster than non tax-free offerings in the last few years.
Meanwhile the new personal savings allowance came into play in April 2016 and have upstaged Isas somewhat.
The PSA means £1,000 of interest is tax-free on savings each year for basic-rate taxpayers and a slimmer £500 for higher-rate taxpayers.
For many, this has removed the primary benefit of cash Isas, as they will not earn enough interest to trigger tax on regular accounts – and savers have simply looked to savings accounts with better rates or turned to investing.
However, having an Isa wrapper is still a worthwhile exercise, especially for those who have built up a sizeable Isa balance over the years or fall into the higher-rate taxpayer bracket.
Meanwhile, there is no guarantee that the PSA won’t be axed – it is far more likely to get the chop than the annual Isa allowance, which has been around now for nearly 20 years.
2. THEY ARE ONLY FOR RICH PEOPLE
If rates rise, some savers may find that they could start paying tax on interest earned on their non-Isa accounts outside of the PSA.
If savers do not opt to use their tax-free allowance, they might lose tax advantages for when they may need it in the future.
It is fair to say that those in the higher tax bracket will now find Isas more beneficial – but you could one day find yourself in the same bracket if circumstances change.
Isas offer the unique opportunity to house money away from the taxman – and many, who have maxed out allowances in the last two decades, could now be sitting on a rather healthy pot, earning interest far above the £500 PSA limit.
3. YOU CAN ONLY HAVE ONE ISA AT A TIME
You can have multiple Isas, but you can only open one cash Isa each tax year.
There are now a number of types of Isa. Cash Isa, stocks and shares Isa, lifetime Isa, innovative finance Isa and for children, the Junior Isa.
The lifetime Isa is for those aged 18-39 and can be held in cash or stocks and shares – although only one firm currently offers a cash version.
A maximum of £4,000 can go into this and £16,000 can go elsewhere.
The innovative Isa is for peer-to-peer investments, but again not many offer them. The Junior Isa has a lower limit of £4,128.
Each new tax year, you can choose to contribute to your existing Isa or open new ones – and it does not have to be with the same company.
You can put your whole Isa allowance into one or split it.
Many providers now also offer a mix ‘n’ match service, meaning savers can use a combination of fixed-rates and easy-access at the same financial institution.
Just remember, however, that holding different Isas can mean extra administrative time.
Read our recent guide: Can I invest into more than one Isa?
4. MONEY IS ALWAYS LOCKED IN
Money is locked into cash Isas – but only if you have opened a fixed-rate account, just like it would in an ordinary account.
With most non fixed cash Isas and stocks and shares Isas, you can withdraw as and when you want.
However, you need to check the terms and conditions – some may charge exit penalties to transfer or withdraw.
You can also withdraw and replace funds in your Isa in the same tax year without the replacement counting towards your annual Isa allowance.
Future growth: Although £1,000 interest is now tax-free on ordinary savings accounts for basic-rate taxpayers, an Isa can shield savers from the taxman
5. INVESTING IS TOO COMPLICATED
You may be surprised to hear that stocks and shares Isas have more money held in them than cash Isas.
According to HMRC, at the end of 2016/17 tax year, the market value of Isa holdings was £585billion – and 54 per cent was in stocks and shares Isas.
Many may panic about investing in a stocks and shares Isas – and you do need to do some homework.
For instance, knowing your risk appetite, being comfortable that investments can fall and potentially having a longer term plan. However, you won’t need to keep tabs on the financial markets if you don’t wish to.
Investors can use a DIY investing platform or online broker and the wealth of research at their fingertips to hopefully build their fortune.
Money is typically invested in a fund that tracks a stock market or group of companies.
But picking the right DIY platform is crucial and the array of different options has left many investors scratching their heads – read our guide: How to choose the best (and cheapest) DIY investing Isa
And remember, all money in an Isa wrapper is exempt from income tax and capitals gains tax.
6. ALLOWANCES CAN BE CARRIED OVER
Nope. You have to use it or lose it. Any unused allowance will not roll over – so if you don’t max it out, you lose its benefits forever.
You’ll get a new allowance in the new tax year, but can’t contribute anything to the old Isa.
7. BEST RATES ARE LAST MINUTE
As mentioned above, there used to be an Isa season which typically ran a month either side of the new tax year – so March to May.
This was to sweep up last minute Isa savers before the new tax year began, and attract early birds afterwards.
This hasn’t really happened for some time, with most banking big boys not interested in taking in savers’ cash – while newer challengers have focused on savings away from tax-free deals.
You can open an Isa at any time during the tax year and the earlier you do it, the better your returns are likely to be if you’re saving cash, especially when you consider compounding interest.
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