Me and My ISA
23.02.2018 by Jim Ker
ISAs have been available as a long-term savings tool since 1999 and are very popular, with around 21.6 million adults holding one.
There are a range of different ISA products available, such as Cash, Stocks and Shares and Help to Buy ISAs. 2016-17 saw a fall in the number of Cash ISA subscriptions to the tune of around £1.6 million. This indicates that people are moving away from Cash ISAs, possibly due to their low interest rates. With inflation rising, many feel the cash option doesn’t offer a good enough return and they could be losing their buying power. In comparison, subscriptions to Stocks and Shares ISAs rose slightly in the same tax year.
At the end of 2016-17 the market value of Adult ISA holdings in the UK stood at £585 billion. This represents a 10% increase compared to the value at the end of 2015-16. This is driven by an increase in the market value of funds held in stocks and shares, which increased by 20% compared to the year before (source).
Why do people save in an ISA?
Long term Goals
Whichever kind of ISA product you have, the consensus seems to be that people save in an ISA to achieve a long term financial goal. Many save long term in preparation for retirement. Our recent blog post on planning your finances for retirement may help you with a few ideas. Many use their ISAs to contribute to a major financial commitment such as a house deposit or major renovation.
“We’ve been saving into an ISA for 5 years now and the interest we’ve gained from it has meant we have been able to finally sort our new kitchen out. It’s been a long wait, but the effort has really paid off!”
Julie Ker. KU Guest
Home improvements can be costly so it’s great to be able to pull some cash down from your savings to pay for this rather than having to rely the credit card. That dream kitchen might not be too far away after all!
Rising house prices have made saving for a house deposit a financial challenge. For many, a long term saving option has become an important component of their house deposit plans. One of our staff members has found her ISA has come in useful for this.
“Tom and I were able to buy our first home with our ISA’s in 2016 and then we have reopened new ones to continue saving.”
Jade Allan. KU Business Administrator.
Tax-free saving as well as potential high returns, depending on the type of ISA you’re working with, can really assist in pulling together the down payments needed to get those all-important house keys.
Great Saving Opportunities
Many ISAs require a medium to long term commitment to saving which means you need to improve your saving habits over a period to really reap the potential benefits as well as investing in a bit of patience. Most will offer you the flexibility to stop, start and change payments in so you need to be strict with yourself to reach your goal. The key is to ensure you have a long term plan here. Otherwise your overall savings plans may not be as worthwhile as you think.
“I’m using my money for house renovations, but I like ISAs as your money is not as easy to get to as a bank account, so it makes saving a bit easier.”
Rachel Stockwell. KU Member.
Tax Efficient Saving
Nowadays, with interest rates low and inflation rising, making the most of our tax-free savings allowances is more important than ever, which is why so many people use ISAs to build up their savings. With the 2018/19 government limit for investment into a Cash or Stocks and Shares ISA at £20,000, the amount you can put away each year to make the most of tax-free returns is substantial. Therefore, making the right choice about which ISA to use for your savings can impact significantly on your returns.
Which type of ISA is the one for you?
Each type of ISA comes with its own degree of risk and potential return. In recent years, the returns on a Cash ISA have not been as lucrative as other ISA options, but the fixed rate is seen as a safe bet. Last year, according to Moneyfacts.co.uk, the average return on a cash ISA was less than 1%.
A Stocks and Shares ISA comes with a higher investment risk, but the potential returns are also greater. There are however, different Stocks and Shares ISA products with different levels of risk. Some are lower than you would think and you might be able to find one to suit your needs if you’re new to investing as well as more experienced.
Don’t run before you can walk. Some investment options that offer larger potential returns can involve a high degree of loss, so you need to be careful. Make sure you do plenty of research and learn about your different investment and saving options. Remember that an ISA is best used as a medium to long-term saving solution, so while it’s a great option for your major financial goals, it’s often not worth using it as a short-term savings solution and other options may be a better choice.
Some ISA products will also be more flexible then others when it comes to drawing down some of your savings should you need it. This can be very handy in case you need to get hold of some of your cash for whatever reason. If you’d like to know more about the difference between Cash and Stocks & Shares ISAs, have a read of our ISA comparison blog post here.
Some key questions to consider
It’s important to note a couple of your options when it comes to ISA products such as your flexibility with payments and your withdrawal options. You are also not limited to only one ISA. You could, for example, have some savings in a Cash ISA and some in a Stocks and Shares ISA. As long as you do not exceed the Government’s tax-free allowance, you can have the best of both worlds. Make the most of different offers by transferring your ISA to new service providers as well. The clever saver can take advantage of the different rate options available by transferring their ISA savings when appropriate.