Your biggest ISA questions answered
How many ISAs can you have? Are they risky? We've got the answers to these and other burning questions about ISAs.
ISAs are relatively easy to open. They have great tax advantages. And they don’t require you to spend a lot of admin time. But they can seem pretty confusing at first, and there are a lot of misconceptions about them. So we've rounded up the answers to your biggest ISA questions right here.
Can I have more than one ISA?
One of the most common ISA myths is that you can only have one ISA at a time. It’s true that you can’t open multiple ISAs of the same type – you can only invest into one cash ISA at a time, for example.
But you can split your yearly ISA allowance across the different types of ISA.
This means you could open one cash ISA, one stocks and shares ISA, and one innovative finance ISA in the same year. You can also have a Lifetime ISA at the same time (but you can only have one of these in your lifetime).
Every tax year, you receive a new ISA allowance. This is the maximum amount of money you can pay into an ISA in that year without being taxed on the interest. In 2017/18, the ISA allowance is £20,000. This allowance remains the same no matter how many ISA’s you are contributing into. So for example, if you pay £3,000 into a cash ISA, you’ll have another £17,000 you can invest in other ISAs.
You can also keep your old ISA accounts alongside any new ones you open. But, you won’t be able to pay into them. They become ‘inactive’. When the new tax year starts you can choose to either: keep your current ISA active, or you can make your ISA inactive and open a new one.
Do I have to split my allowance equally between my ISAs?
Before 2015, you could only split your allowance in half. If you wanted more than one type of ISA you could only do so by putting half of your allowance in a cash ISA and half of it in a stocks and shares ISA.
However, this has now changed, which means you can divide your allowance in any proportion you like.
There are two limitations to the rule on splitting your allowance:
you can only open one cash ISA, one stocks and shares ISA and one lifetime ISA each tax year
you can only put up to £4,000 a year in a lifetime ISA.
Will I be able to access the money I save in an ISA?
Some ISAs do tie your money up for a significant period of time. However, others are pretty flexible.
If you’re after flexibility, variable rate cash ISAs don’t tend to have a minimum commitment. This means you can keep your money in one for as long - or as little - as you like. These also allow you to take out some of the money from your ISA and put it back in without affecting its tax-free status.
On the other hand, fixed-rate cash ISAs will typically require you to tie your money up for a set amount of time. If you decide to cut the term short, you usually have to pay a penalty. But ISAs that tie your money up for longer do tend to have higher interest rates.
Stocks and shares ISAs don’t usually have a minimum commitment, which means you can take your money out at any point. That said, your money has to be converted back into cash before it can be withdrawn. This can take some time.
How risky are ISAs?
When it comes to investing, ‘risk’ is how likely you are to lose money.
How risky an ISA is depends on the type of ISA and your attitude to risk.
Different kinds of ISA carry different levels of risk. Cash ISAs are as safe as any other bank account. Your money isn’t invested, instead it’s just held entirely in cash. Your money is also covered by the Financial Services Compensation Scheme. So, if your ISA provider goes bankrupt, you’re guaranteed to get your money back, up to £85,000.
Stocks and shares ISAs are riskier, because your money is invested. With any investment there’s an element of risk involved. You might make money, but you could also lose money.
With an ISA you can also adjust the level of risk depending on how you feel about risk. You can choose to make ‘cautious’, ‘balanced’ or more ‘adventurous’ investments. Even with 'cautious' investments the value of your stocks and shares are likely to go up and down from time to time. For this reason, stocks and shares ISAs are best for long-term savings goals (goals you want to achieve in five years’ time or more). This gives your investments a chance to recover should they fall in value at some point.
Do I still need a personal pension plan if I have an ISA?
ISAs and personal pension plans have a similar concept. They’re both a type of savings account with tax benefits. And an investment-based ISA such as a stocks and shares ISA could potentially grow your savings as much as a pension plan in the long-term. However, personal pensions have benefits which ISAs don’t have:
The yearly tax-free pension allowance is higher than the yearly ISA allowance.
Besides tax-free interest, you also get tax back on all your contributions. This is paid at the highest rate of tax you pay, up to a maximum of 45%.
If you’re in a workplace pension scheme, your employer will also contribute to your pension plan. Currently, your employer must contribute an amount equivalent to at least 1% of your salary.
The earliest you can take out your pension is age 55. This means there’s no temptation to dip in early. An ISA can be a good way to supplement your personal pension plan. The yearly tax-free pension allowance is in addition to your yearly ISA allowance. By using both allowances as much as possible, you’ll maximise your tax savings.
Andre is a former lawyer turned award-winning finance writer.