Introduction

As we explained last week, we hope to bring you a technical blog on a weekly basis.

We’re starting the series off with an explanation of the humble ISA, which we’ve done in a Q&A format below.

Most of us have heard of ISAs, but how many of us know what they actually are, and what makes them special?

What does ISA stand for?

“ISA” is an abbreviation of “Individual Savings Account”. Despite the uninspiring name, ISAs have an important part to play in many people’s finances.

What is the difference between an ISA and a savings account?

When you earn interest on your cash savings, this is potentially liable to income tax. However, interest earned in a cash ISA is tax free.

Is an ISA just a special type of bank account?

There are different types of ISAs. The one that most people are aware of is the cash ISA, and yes, this looks just like a normal savings account.

You also have stocks and shares ISAs, which can be used to hold either investments or cash. The main benefit of holding investments in a stock and shares ISA is that if your investments grow in value, the growth is not subject to capital gains, and the income produced by these investments is not subject to income tax.

We’ll do a separate blog outlining how investments grow in value and how they produce income.

If instead you hold investments in a general investment account (you can think of this as the investment version of a standard savings account) then any income from, or growth in, the investments is potentially liable to income tax and capital gains tax.

How much can I put into an ISA?

£20,000 each year.

The ISA allowance increased dramatically under the Conservative Government of David Cameron. Chancellor George Osborne was a big fan of ISAs, inventing at least three new ISAs, and increasing the allowance substantially during his term in office. When he became Chancellor, the annual ISA allowance was £10,200, but by the time he left 6 years later the wheels were in motion to raise the allowance to £20,000 a year. It has remained at this level ever since.

What are the other types of ISAs?

As noted above, there are cash ISAs and stocks and shares ISAs.

In December 2015, Help to Buy ISAs were launched, but in April 2017 they were replaced by Lifetime ISAs (LISAs). Innovative Finance ISAs were launched in between, in 2016.

If you’re keen to read more about these types of ISAs, the Money Saving Expert website is generally a good place to start:

LISAs: https://www.moneysavingexpert.com/savings/lifetime-isas/

Innovative Finance: https://www.moneysavingexpert.com/savings/peer-to-peer-lending/

You also get AIM ISAs, which is a special type of stocks and shares ISA that is used for holding shares in companies listed on the Alternative Investment Market (AIM) (https://www.londonstockexchange.com/raise-finance/equity/aim)

How long have ISAs existed?

24 years!

It may seem like ISAs have been around forever, but compared to other tax wrappers such as pensions, they are relatively new, being introduced in April 1999. They replaced both PEPs (Personal Equity Plans) and TESSAs (Tax Exempt Special Savings Accounts).

Should in invest in an ISA?

Investing in ISAs has benefits and drawbacks. The main benefit is the tax free status of the income and the growth on the money within the ISA. Some drawbacks are that you do not get any tax relief on the contributions, there is a cap on how much you can add each year, and in most cases the money you put into an ISA will be part of your estate for inheritance tax. As always, if you are considering investing in an ISA, we recommend that you get professional advice.

If you’ve got any other questions about ISAs, please send them to us using hello@principled.eco. Likewise, if there is any other topic you’d like us to blog about, please send through your suggestion.

New blog series

We are excited to launch our blog series, designed to help individuals in County Durham, the North East, and beyond, gain a better understanding of the importance of financial planning and equip people with the knowledge and tools to make informed decisions about their financial future.

We’ll provide a series of blogs around personal financial planning alongside and a separate series of blogs about technical aspects of financial planning and financial services generally.

Personal financial planning, and technical blogs

With the financial planning blogs, we’ll explain what financial planning actually means, and we’ll show you how undertaking financial planning can improve your life. By reading these blogs, we’ll hope you understand how Principled differ to the other more basic or old-fashioned providers of financial advice.

With the technical blogs, we’ll cover a whole range of subjects. We’ll explore investments, tax, pensions advice, and outline any pertinent changes to legislation following events such as the annual budget announcement. We understand that these topics may seem a little drab to many people, but we’ll do our best to make them easy to ready and relevant.

We’re different!

We want you to understand how modern financial planners such as Principled are different to traditional financial advisers, and we want you to understand how financial planning can benefit you and your family. We also want to provide you with information to help you better understand your own finances. Where possible we’ll provide actionable points to help you review, and make the most of, your own financial position.

Financial planning is not just about the numbers; it’s about creating a life that is aligned to your values, and it is about securing your future and achieving peace of mind.

Join us at Principled as we unlock the secrets to financial success, one blog post at a time!

The information provided in our blogs is for educational purposes only and should not be considered as financial advice. It is always recommended to consult with a qualified financial professional regarding your specific financial situation.