Should you have an ISA or invest in other things, too? This is a question asked by many people who want to be smart and invest their money wisely. Before we get into that, however, let’s take a look at what an ISA even is.
An ISA, also known as an Individual Saving Account, is a tax-free saving method, highly worthwhile for those who are non-taxpayers. The profit you earn over ISA comes with zero interest, so in that sense, ISA is profitable than other investments – stock and shares. What’s more, you don’t even have to pay tax on dividends inside an ISA.
But should you solely depend on an ISA for your investment? Well, let’s discuss this in detail.
Why Should You Have An ISA?
ISA is a popular form of investment that offers a number of benefits, including:
1. Tax-Free Withdrawals
You can withdraw your profits from cash as well as investment ISAs with no penalty fee as long as you refrain from any early withdrawals. Since an ISA is a long-term commitment, withdrawing your money beforehand or too early is just not worth the effort. Sticking to your ISA bond or stock for at least a year (or more) will help boost your finances.
2. Variety of Investment Options
There are four types of ISAs (so, there’s something for every kind of investor) – Cash ISAs (also called NISAs), Innovative finance ISA, Stocks and Shares, and Lifetime ISA. Of all these choices, cash ISAs offer a better interest rate in exchange for you securing your cash and keeping it away from your reach for a fixed amount of time. However, if you can make monthly contributions, then a Regular Savings Cash ISA could be more befitting.
ISAs are transferrable, which means you can easily transfer your funds from one account to another. For example, you can switch from cash-based ISAs to shares and stocks. This lets you take advantage of better deals and interest rates. In other words, you’re not bound to use a particular type of ISA. You can switch whenever you want, which is just another one of the many benefits of ISAs.
4. Allows Lower Age Limits
This gives ISAs an edge over their alternatives – you don’t have to be 18 or above to have an ISA account. Anyone who is 16 or above is eligible to open a junior ISA or have ISAs cashed on their behalf by their parents or guardian.
5. No Extra Charges
Unlike so many other investments, ISAs do not have any hidden or added charges if you want to switch from one type to another or withdraw your cash after a fixed time period. The profit or extra money you make won’t be taken for “age-related personal allowance,” which all taxpayers are usually entitled to.
Should You Invest Somewhere Else Than an ISA?
After learning more about ISAs, you’re now probably wondering, should you have an ISA or invest in other things, too? Well, as you can see, ISAs offer plenty of great options to investors, so you might be tempted to move your money into ISAs. However, the major drawback of ISAs is that the return on investment can be much lower than stocks or shares. The profit may also be negligible if you invest for a short period. Some other ISAs disadvantages to watch out for are:
1. Contribution Limits
As disappointing as it may sound, there’s a limit to how much you can contribute to your ISA account. The total contribution cap amount is approximately $27,381 per year.
Additionally, if you don’t use your annual profit, you will lose it. Unfortunately, you can’t carry over the previous year’s amount to the new or upcoming year’s allowance.
2. Money That’s Been Withdrawn Cannot Be Put Back Into the Account
It’s also important to note that you can’t put withdrawn money back into your ISA account. Having said that, there’s a subcategory of products known as “flexible ISAs,” where you may be allowed to re-invest your withdrawn money into an ISA account.
3. Lack of Joint Ownership
You can’t have an ISA in joint names, so if you are planning to share an ISA account with your partner or sibling, think again. While you can’t share your ISA with others, your spouse, your parent, or your guardian can inherit your allowance in the event of your death. Also, keep in mind, you can’t put your ISA money into a trust.
Should You Have an ISA or Invest in Other Things – Our Verdict
An ISA is an effective way to get a good return on investment where the return is interest-free. Plus, you can withdraw your money any time you want without being charged extra. Having said that, there’s no tax relief on money paid in, which is not the case with ISA alternatives, such as SIPPs.
If your sole purpose is simply to save money for a long time, go for an ISA. However, there are many other kinds of ISA alternatives that are worth investing in. For example, property funds can offer lucrative rental income to investors. Fixed-rate bonds tend to provide a greater return than cash ISAs. You can also look into EIS/SEIS funds that have the potential of higher upsides than ISAs.
So, should you have an ISA or invest in other things? In the end, it all comes down to what seems feasible to you and your needs. Depending on your personal requirements, you can either go for ISAs or any other better investment option out there.