December 10, 2016

What is an ISA?

For readers of the Financial Bin in the United Kingdom, I wanted to talk a little bit about ISAs today (or individual savings accounts). As you may know, an ISA is a financial product available to UK residents that allows you to save money without having to pay income tax or capital gains tax. Not a bad deal, is it?

Per Wikipedia:

Cash and a broad range of investments can be held and there is no restriction on when or how much money can be withdrawn. Funds can not be used as security for a loan. It is not a pension product but can be a useful complement to a pension for retirement income, particularly when it is desirable to draw down capital at a faster rate than permitted in a pension.

The two main types of ISAs are:

1. Cash ISAs

2. Stocks and Shares ISAs

Cash ISAs

The Cash ISA is basically a savings account that you DO NOT have to pay taxes on. Hey United States readers — does this make you want to move to the United Kingdom yet? This a fantastic deal. Make sure to read up on some of the best ISAs in the UK. You have to know what you’re doing and be proactive!

Stocks and Shares ISAs

With the Stocks and Shares ISA, your money is invested in what are called “qualifying investments.” If you’re not invested in the Cash ISA, there must a chance for you to lose  at least 5% of your investment. Per Wikipedia, types of investments include:

1. Cash awaiting investment.

2. UCITS authorized funds like unit trusts and open-ended investment companies.

3. Investment trusts that satisfy various possible conditions.

4. Stock market company shares listed on one of the many recognized stock exchanges.

5. Public debt securities.

As the UK’s Guardian explains:

For most people, the best way to invest in stocks and shares is through an ISA. It is not an investment itself, but a wrapper that allows you to take your returns free of income tax and capital gains tax. This tax year, you can hold up to £11,280 in that wrapper.

It is possible to hold a wide range of investments within the ISA wrapper. As well as unit trusts and open-ended investment companies, you can hold individual shares, investment trusts, corporate bonds, gilts and exchange-traded funds (ETFs). ETFs track the performance of a market or index and are traded like individual stocks.

So, for all of your UK readers out there, make sure educate yourselves on everything the ISA offers along with the ways to invest. You will be glad you did and offset some of your tax burden. Good luck!

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