You’re thinking of planning for the future, so you’re doing your research online and you keep coming across the word “ISA”. So, what does ISA mean? ISA stands for individual savings account, and it’s a type of savings account that, when used correctly, can help you plan for your retirement, allowing you to live comfortably during your golden years.
Keep reading to learn how an ISA can help you enjoy the retirement you’ve always dreamed of.
An individual savings account allows you to earn interest and all without having to pay income tax. However, you’ll be limited regarding how much money you can deposit.
Each year, you’ll have an allowance in the UK. This allowance allows you to invest or save money up to a determined amount, without paying any taxes on your returns.
There are a couple of fund access options to choose from when shopping for an ISA.
First is the easy-access ISA. With this option, you’ll be able to withdraw your funds if and when you need it. This option can come in handy if you’re going to school and want to start setting aside money each month. Just keep in mind, you might not be able to put that money back if you’ve gone over the annual ISA allowance for that year, in which case the interest rates can include a temporary bonus and variable interest rates.
With the fixed-rate option, interest rates are usually higher and fully guaranteed. But the big drawback here is that your money will be locked up for a year. This option should only be chosen if you’re one hundred percent sure you won’t need access to that money for that time frame. Should you touch the money during that period you will get penalized.
Did you know you can have more than one individual savings account? While multiple savings accounts are possible, you will only be allowed to pay into one every tax year. So, if you have two to three accounts and want to invest only part of your allowance in your third account, this can be a problem since you will be unable to add more funds to the first or second in the same year.
However, this rule will only apply with certain providers. Some will allow you to split your allowance into multiple individual savings accounts. These providers are usually referred to as split ISA providers because they will allow users to put their allowance into multiple savings accounts.
Click here to read our guide on ISAs to learn more about account options.
This type of ISA tends to be the most popular option and it offers several benefits that make them very appealing to most consumers.
First off, this individual savings account is tax-free, regardless of your income. This means that a basic rate taxpayer can make up to one thousand pounds a year before any tax is due. However, the allowance halves if you’re a high rate taxpayer.
So, what does this mean? If you get a pay raise that will move you into a totally different tax bracket, then you may find that your savings are now liable for income tax.
Money that’s held in this type of savings account can earn tax-free interest, regardless of your annual income. Once your funds are in an ISA, then you don’t have to worry that a change in your income could result in a larger tax bill at the end of the year.
Saving that’s Stress-Free
Remember, regardless of how big your savings pot grows, you won’t have to pay taxes on it. The only limit will be on the annual deposit, which is currently twenty thousand pounds a year. Over the years, you can potentially shield thousands of pounds from taxes. With this type of individual savings account, as long as you don’t exceed the deposit limit every year and you stick to the rules regarding only opening one cash ISA annually, you won’t ever have to worry about the taxman.
Click here to read our article on ISA tips to learn how you can save even more each year.
When you die, your personal savings allowance is non-transferable. This means that the savings you pass on to the beneficiary will be taxed at the beneficiary’s marginal rate if the interest rate puts them over their own personal savings allowance. Additionally, civil partners and married couples can also inherit an ISA pot. The year the holder passes away their partner will receive an increase to their own annual allowance. This is known as the additional permitted subscription. This is done to reflect the balance of the account that’s passed on to them. The beneficiary will be allowed to reinvest the funds into an ISA in their own name so that money will remain protected from taxes.