ISAs: The five key benefits - J.P. Morgan Asset Management
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ISAs: The five key benefits

Contributor J.P. Morgan Investment Trust Team

 

ISAs offer a flexible and tax-efficient way to invest. So what are the five key features that make them so popular?

As they approach their 18th birthday, Individual Savings Accounts (ISAs) remain highly popular with the UK’s savers and investors.

Since their launch back in April 1999, they’ve given millions of Britons the chance to set aside money tax-efficiently in a cash account, or access a broad range of investments through a stocks and shares account.

With the end of the financial year approaching, investors will be keen to make the most of the tax advantages offered by ISAs. So ahead of the annual ISA season, what key benefits is it worth keeping in mind?

1. ISAs are a tax-efficient way to invest

ISAs come in two main forms: cash accounts and stocks and shares accounts. The main draw for both cash savers and investors is their tax efficiency.

Cash ISAs allow individuals to deposit money in a savings account, with any interest they earn free of tax.

For stocks and shares ISAs, no tax is paid on the capital gains and income which people’s investments make. There’s no cap on the investment returns which can be earned tax-free. And those who complete tax returns aren’t required to declare the money they generate from an ISA.1

2. Their annual limit has risen

Because of their tax advantages, ISAs are subject to an annual limit each tax year. We offer a cash ISA and a stocks and shares ISA, you can invest entirely in one, across the two we offer, or across any combination of permitted ISAs.1

The annual ISA allowance for the 2017/18 tax year has risen to £20,000.2

3. They offer access to a range of investment markets

In contrast to cash ISAs, which serve as tax-free savings accounts, stocks and shares ISAs are investment wrappers under which a number of different assets can be placed.

A range of investments can be added to them, including stocks, corporate and government bonds, and investment funds.1

Along with a selection of assets, those investing in stocks and shares ISAs can spread their money across different geographic regions and industries. For example, they could choose to invest in foreign markets. Or they could buy shares in specific sectors, such as technology or telecoms.

4. They’re no longer reserved for adults

Thanks to the launch of Junior ISAs (JISAs) in 2011, ISAs are no longer exclusively reserved for adults.

As with normal ISAs, junior products can take the form of either cash or stocks and shares accounts, with any returns they generate free of tax. An annual limit of £4,128 currently applies to JISAs, with the accounts designed specifically for under-18s.3

Any money saved or invested on behalf of a youngster can’t be accessed till they’re 18, although they can take control of it once they turn 16.

Following recent law changes, parents who have previously opened child trust funds for their youngsters now have the ability to transfer them to JISAs.3

5. ISAs can help investors diversify

Thanks to the wide range of investments that can be held in them, stocks and shares ISAs can give investors the opportunity to create a diversified portfolio.

Diversification simply refers to the process of investing in a selection of assets, sectors and regions in order to mitigate risk. If one part of an investor’s portfolio experiences volatility, it may potentially be balanced out by other areas.

By giving people access to everything from shares and bonds through to investment funds, ISAs could offer a useful diversification tool.

Opportunities and risks

ISAs give people the chance to access a wide range of financial markets, while offering tax-free returns. And the introduction of JISAs means youngsters can also start building a tax-efficient nest egg for the future.

Before committing to any products, investors should think carefully about their appetite for risk and how exposed they want their money to be to market movements. The value to you of current tax advantages depends on your personal circumstances which may change in the future. The government may change the way ISAs and investments are taxed, which may be less favourable to you. The charges you have to pay may change in the future and this may reduce the value of your investment.


Important Information:

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