Published: 29 Oct at 7 PM
There are two main different types of ISA – a Cash ISA for savings in the bank and an investment ISA for stock market based investments. You have an annual allowance of £10,200 and can invest up to half in cash. The balance (or all of it) can go into an investment ISA. Investment ISAs have the potential of a greater reward than cash – but could also lose you some or all of your money. Your ISA could be invested in a wide range of shares and bonds including unit and investment trusts. You can put your money in just about anything, anywhere in the world. The main difference with a pension is that you make your payments into an ISA from your net income i.e. income that you've already been taxed on. However, after this, ISAs are exempt from income tax and capital gains tax. If, on retirement, you convert the ISA to an annuity you would pay less tax on the income from it than a pension fund annuity. Anyone over 18 can have an ISA providing they are UK residents.
One of the problems with a personal pension is that if you have no earnings, you're probably not benefitting from the tax advantages although those earning nothing can claim basic tax relief on contributions of up to £3,600 a year. You only have to put in £2,880 to get this amount of pension contribution. But you have your annual ISA limit whatever you contribute to a pension and whether you work or not. The other main advantage of ISAs over pensions is flexibility particularly your ability to get to your money at any time. Unlike a pension pot which has to be turned into an annuity, you can take your ISA when and how you like.
The only downside is dependent on how much you are looking to put away each month. If it’s just a few hundred pounds an ISA is a fantastic and simple tax-free savings method but if you are quickly coming up to retirement age then you may be wanting to put in a bit more than the £10,200 annual limit that you are allowed to place in the ISA. Many would argue that whilst ISA’s are perfect for flexible and easy savings, neither the tax savings nor the return on investment are particularly impressive.