Are ISAs a Good Investment? 7 Myths Debunked

With the end of the tax year in sight, it's important to make sure you make the most of your tax free allowances. An Individual Saving Account (ISA) can be a great way to achieve this.

What are ISAs?

ISA stands for Individual Saving Account.

The main difference between ISA and any other savings account is that it offers interest payments that are tax free.

Below we've explained seven common myths about ISA, so that you too can take advantage of this year's deposits of up to £ 20,000 before the end of the tax year. Remember, if you do not use it, you will lose it.

Myth no. 1 - I can only have one ISA account

There are four different types of ISAs:

• cash

• investment (also called stock and shares ISAs),

• lifetime a

• innovative finance

Cash ISAs are the simplest and most popular type. However, you can divide your deposit between several types, but you cannot pay money to more than one of the same ISA types in the same tax year.

For example, if you have already deposited some of your money into Cash ISA, you will not be able to open another Cash ISA account with another provider - any additional money would have to go to the same ISA account to which you have already paid or you must choose another type of ISA, for example, Investment ISA.

Myth no. 2 - I will have to tax the income from ISA

Simply put: no, it's not true. ISAs are exempt from income tax.

However, it is possible that the ISA rules will change in the future and the amount of tax will depend on your individual circumstances.

Myth no. 3 - With the tax relief on dividends and interest ISAs make no sense

There are other tax free allowances that allow you to pay no savings or investment tax to a certain extent, which can lead to the assumption that an ISA account is not worth opening.

For example, dividends received up to £ 2,000 per year are exempt from dividend tax, or you do not pay tax on interest received up to £ 1,000. This may be enough for someone, but if you build an investment portfolio, you may find that over time you exceed these annual tax free allowances. However, if you choose ISA, whether in the form of dividends or interest, these do not affect your non-taxable amount of dividends and interest.

It works similarly for investment returns, which are subject to Capital Gain Tax (CGT). You can avoid this tax by spreading the sale of your assets over several years, or you do not have to worry about profits with ISA, because CGT will not be applied.

Myth no. 4 - ISAs are risky

Cash ISAs are just as secure as other available savings accounts.

However, when investing in shares and stocks, you will need to consider a level of risk, that is the same as investing in the same assets outside the ISA system.

Myth no. 5 - You cannot withdraw money and return it back

If you withdraw money from your ISA account, you should be able to return it in the same tax year without affecting your annual tax-free contribution. However, there are providers who do not offer this option, so it is recommended to verify this before withdrawing money from your ISA account.

Myth no. 6 - You have to decide which investments you want to hold in Investment ISA before you open an account

If you want to make the most of this year's contribution by investing in ISA, but you still can't decide where to invest the money, you can easily deposit it into your ISA account without using it immediately. This is an acceptable alternative if you are not ready to invest or you are unsure of market conditions.

Myth no. 7 - Once you select the ISA account type, you cannot change it

In recent years, ISAs have become more flexible. It is possible to switch from Cash to Investment ISAs and vice versa. Check with your provider that they accept transfers and will not charge you any penalties.

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Are you considering transferring money from Cash ISA to Investment ISA? Make sure you understand the risks involved and that it suits you. Potentially high returns can be tempting, but if it fall in value, you can get back less than you originally invested.

Please note that this article is for general information purposes only. It is advisable to seek professional financial advice before starting a savings or investment.