ISAs 20 years old

If you were born in 1983 or earlier, you will have had access to the Individual Savings Account (ISA) for the past 20 years.

If you have been a saver and have religiously used your full ISA allowance, you will have sheltered over £140,000 in a cash ISA with no obligation to pay tax on the accumulated interest.

This unique opportunity is not one to miss, however as inflation continues to erode our pounds and our disposable income, it is getting harder to save enough to fill the current allowance of £20,000 per year.

You are able to invest your ISA allowance entirely in a cash, a stocks and shares, or an innovative finance ISA which invests in peer-to-peer lending - or spread between more than one type.

The Lifetime ISA is available to those aged 18-39, but investment is limited to £4,000 each tax year (out of the overall £20,000).

The government adds a 25% bonus to the amount saved within the Lifetime ISA, and the funds are available either when a first home is purchased, or from age 60 onwards (funds withdrawn outside of these rules mean loss of government bonus).

Transferring ISAs from previous tax years doesn’t count towards your current year’s ISA allowance (but would count towards the Lifetime ISA limit if transferred into a LISA), and you can choose to transfer all or part of the balance.

If you don’t use your ISA allowance by the tax year end, you can’t carry it over into the new tax year.

The ISA was introduced on the 6th April 1999, making it 20 years old at the end of the 2018/19 tax year.

It came into play to replace the earlier Personal Equity Plans (PEPs) and the Tax-Exempt Special Savings Accounts (TESSAs), which were all investment wrappers designed to shelter savings and investment appreciation from tax.

There are restrictions on adding new monies into an ISA each tax year.

Progressively, the amount one can shelter in the wrapper has increased, starting from £3,000 for a cash ISA (total of £7,000) in 1999 to the current £20,000 per year.

This incentive from the government is designed to encourage people to invest tax-efficiently.

That’s key, as the less one must pay in tax, the closer one can get to investment goals.

Investing into a stocks and shares ISA

Depending on the choice of investment strategy you chose to implement, you could have easily doubled your money by investing into a Stocks and Shares ISA, especially over the 10 years since the financial crisis as the stock market has boomed, and continues to boom!

The relative simplicity and longevity of ISAs means that they are a core product in the UK savings market.

They offer an alternative tax-efficient investment strategy for those individuals who can no longer benefit from further tax relief on their pensions savings, particularly if they have contributed up to their combined annual allowance and carry forward facility for the tax year.

Investing through an ISA has various benefits, ranging from protecting returns from capital gains tax (CGT) on capital growth and income tax on dividends and interest, as well as simplifying your tax return.

The beauty of an ISA is its flexibility and as such, the ability to withdraw the funds immediately when required (if the ISA has adopted the Flexible ISA rules, funds can be withdrawn and reinvested in the same tax year without the reinvestment using up any of the ISA allowance).

Withdrawal of Lifetime ISA funds can result in loss of government bonus. Investment returns and income are also not required to be declared in tax returns, although it is a good idea to keep a note of what goes in and what comes out each year.

The risk from holding investments within an ISA wrapper is that the capital held is susceptible to drawdown risk based on the types of investments held, however diversification is key to mitigate the risk.

The types of investments one can hold in a stocks and shares ISA ranges from shares and corporate bonds, gilts issued by the UK government, units or shares in authorised funds (unit trusts or open-ended investment companies), units or shares in non-UCITS (Undertakings for Collective Investment in Transferable Securities).

There is a wide investment choice, however speak to a TPO adviser before reaching a decision.

Always remember that investments can fall in value. You may get back less than you invest.