You may have heard of an ISA, or Individual Savings Account, a bank account that allows you to save up a certain sum of money tax-free.
ISAs are common in the UK. A study from 2019 showed that more than 11 million people opened ISAs in the UK the previous year, between the regular ISA and the junior ISA.
One of the reasons ISAs aren’t even more common, however, is that not everyone fully understands them – and that void is often filled with misinformation. That’s why, in our latest mythbusting article, we’ll explore the 6 most common ISA myths.
1. You can only open an ISA with a substantial sum of money
One of the biggest barriers to people considering an ISA as a method of saving is that they’re sometimes viewed as a tool for people investing serious amounts of money.
While there is an investment ISA option that allows people to turn their deposit into stocks and shares, the traditional ISA is available to everyone, regardless of your level of income.
As stated by Money Supermarket, there is no standard minimum amount required in order to open up an ISA. If you do some shopping around, you may even be able to find an ISA provider who will allow you to open an account with a deposit as low as £1.
2. You can’t get an ISA if you have poor credit
Anybody who has struggled with their credit score or has a history of defaulting on payments knows how difficult it can be to access certain financial products.
Whether you’re trying to get a mortgage, take out a loan, or even just open certain types of bank accounts, a lot of high street lenders will take one look at the black marks on your credit report and conclude that you’re not worth the risk.
The good news is that this doesn’t apply to ISAs – they’re not a credit product. That means you won’t be subject to a credit check by the provider.. No matter how poor your credit record is, you’re free to open an ISA, build up your savings, and enjoy the benefits.
3. You can only have one ISA at a time
When people learn about the tax benefits of an ISA (that you can save up to £20,000 per year tax free), one of the first questions many ask is: Why don’t people with the means open up multiple ISAs and save more money tax-free?
The most common answer to that question is that you can’t open more than one ISA per year – but that’s not strictly true. The truth is you can’t open more than one of the same type of ISA per year.
As mentioned previously, there are various kinds of ISA – a regular Cash ISA, an Investment ISA (also known as a stocks and shares ISA) and a Lifetime and Innovative Finance (which enable you to invest in peer-to-peer lending).
While you can’t put money in multiple cash ISAs in one year, there is nothing to stop you from spreading your money between a cash ISA, an investment ISA, and a lifetime ISA, allowing you to take full advantage of their respective benefits.
4. ISAs are a risky way to save
Some people don’t trust banks and lenders trying to sell them fancy bank accounts. They assume there must be risks attached, or that there’s some kind of fine print they’re missing. It’s why a lot of people prefer to deal in cash.
While it’s not true to say ISAs are a 100% risk-free way to save, you can minimise the risk to almost zero depending on the type of ISA you use.
By definition, an investment ISA comes with a high level of risk. The money you save in your account will be ‘put to work’ in the form of stocks and shares. Depending on the state of the market, you may turn a profit. By the same token, you could also lose what you have.
With a cash ISA, on the other hand, you’re as near to ‘risk-free’ saving as you can get. Provided you don’t make any withdrawals, the amount in your account will never go down. The biggest risk you’re facing is inflation, which could lead to the money you have not being able to buy you as much as it would have previously.
5. If you pay money into an ISA, it has to stay there
Because it’s a savings account that’s tax-free, a lot of people make the mistake of thinking that when they deposit money in their ISA, that cash will be locked away for a long time before they see it again.
That used to be the case, but it isn’t anymore. From April 2016, the rules regarding ISAs were changed to offer ‘ISA flexibility’ – the ability to remove cash from an ISA and then replace it in the same tax year without losing out on the tax benefits.
It works like this: Let’s say you’ve put £5,000 in your ISA by June, then realise in July that you need £2,000 back. With ISA flexibility, you can replace that £2,000 at a time that suits you (let’s say September), and still be able to add as much as £15,000 in tax-free savings to your account before the deadline the following April.
6. Once you’ve chosen an ISA, you can’t change it
In a similar way that some people believe they can’t touch money they deposit in an ISA, others think that once they’ve signed up to an ISA with a certain provider, they have to stick with that provider for the duration of their contract.
Happily, ISAs don’t work that way. If you put money in an ISA and it’s not performing in the way that you had hoped (i.e. if you’re not getting the value you had been promised) then you can switch things up.
There’s nothing to stop you from transferring your money from one provider to another who is offering you a better deal. In the same vein, you can also move your money from one kind of ISA (like a cash ISA) to another kind of ISA (i.e. a stocks and shares ISA).
The only thing to be wary of is that you don’t ‘cash in’ your ISA in order to move your money to another provider. Instead, you want to make sure your money is transferred from one ISA to another, otherwise you’ll lose the tax free benefits.
