What is an ISA? A simplified guide to ISAs (Individual savings account)

Let's talk ISAs

An ISA is a type of saving account that allows you to save tax-free, each year has a maximum saving limit that can be deposited into ISA accounts. For the 2021 to 2022 tax year the maximum saving deposit limit is £20,000. This means that any interest or profit gained within an ISA account is not subject to capital gains tax.

There are 5 different types of ISA accounts:

1. Cash ISAs

2. Lifetime ISAs 'LISA' (the Help to buy ISA is no longer accessible to new users)

3. Stocks and shares ISAs

4. Innovative finance ISAs 'IFISA'

5. Junior ISAs 'JISA' (has replaced the government Child trust fund scheme)

You can deposit money across one of each kind of ISA but be mindful that the £20,000 limit is not applied per ISA account but is your total ISA allowance for the tax year.

Example:

Cash ISA: £5,000

Lifetime ISA: £4,000

Stocks and shares ISA: £11,000

Total: £20,000

How to open an ISA:

You must be a resident in the UK or a Crown servant to open an ISA account. You can open an ISA account with a range of financial service providers such as a Bank, building society, credit union, stock brokers and other financial institutions you can make comparisons online to see which provider is best for you.

Cash ISA: There are different types of Cash ISAs available on the market ranging from:

1. Easy access account: you can withdraw your cash whenever you want without a penalty.

2. Notice account: you need to give a specific amount of days’ notice to withdraw your cash.

3. Fixed rate account: tend to offer higher interest rates than easy access and notice accounts but if you withdraw your cash, you may be subject to an interest penalty.

Lifetime ISA: The lifetime ISA was launched in 2017 to help people to save for their first home or towards their retirement. There is a 25% government bonus awarded to savings made in a LISA, if you saved the £4,000 maximum limit for each tax year you would be awarded a bonus total of £1,000 taking your savings to £5,000 for that tax year (this is before interest or investment growth). You can deposit a lump sum of £4,000 or you can make deposits into your account when you can.

There are two types of Lifetime ISAs:

1. Cash Lifetime ISA: similar to a Cash ISA you cannot invest money from a Cash Lifetime ISA- there is no risk to your savings.

2. Stocks & Shares Lifetime ISA: you can invest in the stock market through this ISA as with any investment your capital will be at risk you may experience fluctuations in your portfolio over time.

Please note: You can only open a lifetime ISA if you are aged 18-39 for any of the two purposes stated buying your first home or retirement once you turn 40 you can continue to deposit money into your account until you turn 50. You can only withdraw cash if you are buying your first home or you're 60 or over. If you withdraw at any other time and you face a penalty of 20%.

Stocks and shares ISA: you can invest in various financial securities such as individual stocks, bonds, funds. As with any investment your capital will be at risk you may experience fluctuations in your portfolio over time. Generally, if you are investing for a long period of time 5 years+ you may be able to ride out dips in the market.

You may have different fees to pay such as:

· Platform charge/ Admin fee: this can vary from a flat annual fee or charged at a specific percentage of the value of your funds (this can sometimes work out to be more expensive if you have a large portfolio).

· Trading fees: fees incurred when buying or selling funds, stocks, bonds etc.

· Annual management charge: this charge is imposed by the fund manager that manages the funds held within your portfolio- this is always a percentage and typically varies from 0.1%-1%+.

· Transfer fees: the cost some ISA providers charge to move your stocks and shares ISA from one provider to another.

There are benefits of investing in a Stocks and shares ISA long term as it is exempt from capital gains tax, this is a tax liable on profits made when you sell your investments that exceed a profit of the £12,300 allowance.

Interest gained on bonds within a Stocks and shares ISA is exempt from tax.

Dividend income is also exempt from tax deductions, when investing outside of an ISA you are entitled to a £2,000 tax free dividend allowance, dividend payments outside of the £2,000 allowance would be taxed.

Innovative finance: is an ISA that contains peer to peer loans meaning the provider of the account will use your money to lend to borrowers this may range from individuals, businesses or property developers.

Benefits of an IFISA are that you are paid interest for lending your money this is typically higher than interest rates offered in a savings account. Interest gained from lending through an IFISA is exempt from tax.

There are risks attached to peer to peer lending, you may lose your money if the borrower is unable to repay the loan, you can minimise risks by spreading out your investments across different borrowers to achieve a diversified portfolio. It may take a few months before you can withdraw your money.

Please note: peer-to-peer platforms are not protected by the Financial Services Compensation Scheme should they collapse.

Junior ISA: is an ISA that you can open to save, invest or do a combination of both on behalf of your child tax free. You can open a junior ISA on behalf of your child when they are aged 0-15, once they are 16 or 17 they can open the account themselves.

For the 2021/2022 tax year you can deposit a maximum of £9,000 into a JISA, this is a separate allowance to the standard £20,000 allowance for adults.

There are two types of JISAs:

1. Cash JISA: similar to a Cash ISA you cannot invest money from a Cash JISA- there is no risk to your savings.

2. Stocks and shares JISA: you can invest in the stock market through this ISA as with any investment your capital will be at risk you may experience fluctuations in your portfolio over time.

You can divide the annual £9,000 allowance between a Cash JISA and a Stocks and shares JISA allowing you to put some of your deposits into cash and invest some into stocks and shares.

Children can’t access the money stored within a JISA until they turn 18, at aged 16 the child can take control of the account but cannot withdraw any funds until they turn 18.

FAQ’s:

Can you rollover any of your unused allowance to the following tax year? No, you must save or invest by 5th April the end of the tax year for your deposit to count towards that year's allowance. Any unused allowance that you have cannot be rolled over. You will get a new allowance on 6 April each year when the next tax year starts.

Will withdrawing from your ISA affect your tax allowance? This would depend on your ISA account if your ISA is ‘flexible’, you can take out cash then put it back in during the same tax year without reducing your current year’s allowance. You can find out from the provider if your ISA is flexible.

I hope you found this ISA guide useful, if you have any questions leave me a comment below.

Your Finance P.T

If your Finances were a plant would it be Growing or Withering? [Part3]

If your Finances were a plant would it be Growing or Withering?

Having Financial stability and growth is not something that is acquired by luck or chance. It happens as a result of intentionally investing in key habits and principles coupled with the mindset of a winner, this will attract and cultivate the results you desire.

As a plant requires specific 'nutrients' and the right environment in order to grow, similarly our Financial life requires essential nutrients in order for us to thrive and achieve our goals. In my last post we spoke about the second key nutrient which was Mindset if you missed that post you can read it by clicking the link below.

https://www.pearlsandperils.com/post/if-your-finances-were-a-plant-would-it-be-growing-or-withering-part-2

NUTRIENT 3:

A Financial plan: having a clear and concise Financial plan is key for INTENTIONAL Financial growth and stability. A Financial plan is more than simply having goals, it provides us with clarity about where we are currently in our Finances, where we desire to be and the strategies we will implement to allow us to get there. Essentially, it is a road map to guide us to achieving our idea of Financial success.

If you do not yet have a have Financial plan written down or you have one but it isn't written in a clear and concise way, with specific details of what you want to achieve and the timescales. I'd strongly urge you to create one, before you do think about where you are currently in your Finances, what habits or decisions has led you to where you are now? What habits or thought patterns do you need to continue to encourage your growth or eliminate that could prevent you from achieving your goals?

Before setting goals it's important to analyse and understand why you are in your current position irrespective of whether you are happy with your current position or not. Quite often people fail to achieve their goals because they do not work on eliminating the self sabotaging habits that they have.

Once you have done some deep self analysis, take some time to think about your Ultimate goal for your Finances? How do you want your life to be within the next 5 or 10 years and by the time you reach the age you would like to retire? Once you know what your ultimate goal is ensure that it is specific and measurable an ultimate goal like 'I want to be successful or I want to be very rich' is not specific at all. What does successful or being rich look like to you, is there a specific figure you would want to earn, assets you want to possess or a specific place that you want to live?

In order to reach your ultimate goal, you will need to use smaller steps (smaller goals) which will allow you to accomplish your ultimate goal. Knowing what you want is important BUT it is equally important to think of strategies and actions you will implement to accomplish each goal. Action is what separates planners from executers, executers achieve their goals whilst planners are often left feeling frustrated or with feelings of regret for their failure to take action.

In your journey to achieving your Ultimate goal, you will make mistakes and may fail on numerous occasions, do not allow temporary failures to cause you to make the permanent decision of giving up on your dream! With every failure, review what went wrong and learn from it, persist and innovate your actions and you will see the results you desire. The problem with most people is that they give up too easily or they keep trying the same actions hoping they will get different results.

Always remind yourself of your ultimate goal as often as possible especially in moments where you are feeling down or on the verge of giving up and BELIEVE that no matter what happens around you, it will happen. Look at your Financial plan at least once a month, create the habit of reading it weekly and visualising the life you desire to live. Review your progress on a weekly or monthly basis to asses whether the actions you are taking are bringing you closer to achieving your goals. If they are not, create new actions and start implementing them.

If you found from this 3 part series your Finances were withering, implement the 3 nutrients we discussed and be committed to your vision! Whatever your mind can conceive, you are capable of achieving!

If you want to have 1-1 support and guidance on how to build a solid foundation in your Finances check out the Financial Coaching page or the Coaching Plans page for more information on the sessions that I provide and you can also view the amazing testimonials. You can also send me a message via the contact page.

Have a great day and a productive week, you've got this!

Your Finance P.T

If your Finances were a plant would it be Growing or Withering? [Part 2]

[Part 2]

If your Finances were a plant would it be Growing or Withering?

Having Financial stability and growth is not something that is acquired by luck or chance. It happens as a result of intentionally investing in key habits and principles coupled with the mindset of a winner, this will attract and cultivate the results you desire.

As a plant requires specific 'nutrients' and the right environment in order to grow, similarly our Financial life requires essential nutrients in order for us to thrive and achieve our goals. Last week we spoke about the first key nutrient which was Effective Cash flow management, if you missed that post you can read it by clicking the link below.

https://www.pearlsandperils.com/post/if-your-finances-were-a-plant-would-it-be-growing-or-withering

NUTRIENT 2:

Mindset: There are many talented and intelligent people who fail to achieve their goals and see growth in their Finances because of their way of thinking.

Our thoughts and what we believe about ourselves directly affects our actions. If we think of ourselves as inferior, incapable of success, weak, unworthy, unintelligent, inexperienced these thoughts will influence the way that we navigate through life.

People who have a negative self image of themselves tend to have a low self-esteem. Consequently they tend to avoid trying new things, taking risks, shy away from opportunities that require them to come out of their comfort zone and doubt their ability to achieve their goals.

If you want to achieve your goals, you have to first believe that YOU have the ability to do so. Even if you are taking actions towards your goals, but deep down you do no not truly believe that you can achieve your goals, it will not happen! The self doubt will sabotage your success in one way or another, because your mind acts as the pilot of your life; it will direct your actions and the way in which you deliver them.

Success and failure starts in your mind, therefore it is imperative that you reject negative thoughts and ideas about yourself and choose to believe that you are capable of achieving whatever you put your mind to.

Our mind has the ability to create and visualise things that have not yet come into existence yet, hence your success or failure starts in your mind. If you truly believe and desire to achieve your goals ensure that you align your actions accordingly.

If your current Financial situation feels like you are Withering as opposed to growing in your finances there is always hope, if you begin to take control of your finances by taking actions that will improve your situation, you will make progress! But you have to be committed to your transformation.

If you want to have 1-1 support and guidance on how to build a solid foundation in your Finances check out the Financial Coaching page or the Coaching Plans page for more information on the sessions that I provide and you can also view the amazing testimonials. You can also send me a message via the contact page.

Have a great day and next week Monday I will be sharing the 3rd nutrient that we need for our Finances to thrive.

Your Finance P.T