As well as getting asked lots of questions about ISAs, we find that when we speak to clients, they have many false assumptions about what you can and can’t do with ISAs. We call these ‘ISA myths'.
To help, we've put together a list of the 13 most common ones.
13 ISA myths that are false
1. ISAs are risky – FALSE
Did you know that an ISA isn’t an investment? True, an ISA is a wrapper that money is kept in to protect it from the taxman. Think of an ISA as a shield that prevents the taxman from being able to touch your investment returns. Any risk comes from the investments that you have chosen to hold within the ISA, not from the ISA itself.
2. With a stocks and shares ISA, you are not able to park in cash – FALSE
If you believe a bear market (major downtrend) has been triggered, you can move out of your fund and into the safety of cash via an ISA Cash Park. If you are ever unsure of where to invest your ISA money, you can also use an ISA Cash Park.
3. You can only open one ISA – FALSE
Some people mistakenly think that you can only open one ISA in your lifetime. The rules allow all adults to open up a new ISA each and every year. Remember that if you have a partner, they can also open one ISA per year.
4. It’s impossible to make a million with ISAs – FALSE
As reported by FT.com on October 8th 2010, scores of people are now ISA millionaires, with £1 million-plus in tax sheltered holdings – including some with portfolios worth £12 million.
5. Investing in ISAs means my money is locked up – FALSE
There is no minimum term for which the investment must be made and the tax advantages start on day one when investing in an ISA. It is always possible to gain easy access to all or part of your savings, subject to any restrictions that may be included on a particular ISA product.
6. It is best to invest in an ISA at the end of the tax year – FALSE
The tax advantages of an ISA start the day that the money is invested so, by investing earlier in the tax year, you gain more potential advantage. Since investing in ISAs back in 1997, in 95% of cases, we’ve added at the beginning of the year rather than the end. Remember that as soon as the year’s allowance is invested, it will start to receive its tax-boost, and the longer you delay investing throughout the tax year, the smaller the boost it will get in that year.
7. If you invest in ISAs, you have to fill out a tax return – FALSE
Tax savings occur automatically within the ISA and ISAs do not have to be recorded on your tax return. You also do not need to inform HMRC (the taxman) that you have an ISA.
8. Opening an ISA is complicated – FALSE
It takes us literally minutes each year to take out a new ISA. It is a common mistake to think that opening an ISA is complicated. We can assure you that it's really easy.
9. Transferring an ISA to another manager is complicated – FALSE
ISAs can be transferred at any point to a new location such as moving from one fund supermarket to another. Your existing platform cannot stop you from moving, but they may make a charge or force you to sell any assets to be transferred as cash. Any charges that apply will be in the terms and conditions and should be considered when shopping for an ISA.
It may also take a few weeks to complete the transfer. If you believe the delay has been unreasonable, you should contact both providers and, if you are still unhappy, complain to the Financial Ombudsman.
10. Teenagers are not allowed to own an ISA – FALSE
If you have a son or daughter who is either 16 or 17 and a UK resident they are allowed to open a cash ISA, but to open a stocks and shares ISA they would need to wait until they were at least 18.
11. If I move abroad I’ll lose my ISAs – FALSE
It's true that you can only open an ISA if you are resident in the UK for tax purposes. If you move abroad you won't be able to open a new one or fund an existing one. You will, however, be able to keep your ISA and still get tax relief on investments held within it. Government employees, such as diplomats, are exempt from this. If you work overseas and are paid by the Government, you may open and fund an ISA.
12. I have to invest my ISA money all in one place – FALSE
If you choose a stocks and shares ISA you can mix up the way your money is invested by choosing a range of funds which provide exposure to different countries, sectors and markets around the world.
13. You are not allowed to transfer cash ISAs into stocks and shares ISAs – FALSE
Many of our clients have moved money from a cash ISA into a stocks and shares ISA. If the cash ISA is from a previous tax year, you can move as much or a little as you like. If the cash ISA is from the current tax year, you must move all of it. You will however, be free to invest in another cash ISA, subject to the overall investment limit.
As always, if you have any questions or thoughts on the points covered in this post, please leave a comment below or connect with us @ISACO_ on Twitter.
ISACO is a specialist in ISA and SIPP Investment and the pioneer of ‘Shadow Investment’, a simple way to grow your ISA and SIPP. Together with our clients, we have £57 million actively invested in ISAs and pensions*.
Our personal investment service allows you to look over our shoulder and buy into exactly the same funds as we are buying. These are investment funds that we personally own and so you can be assured that they are good quality. We are proud to say that by ‘shadowing’ us, our clients have made an annual return of 12.5% per year over the last four years** versus the FTSE 100’s 7.4%.
We currently have close to 400 carefully selected clients. Most of them have over £100,000 actively invested and the majority are DIY investors such as business owners, self-employed professionals and corporate executives. We also have clients from the financial services sector such as IFAs, wealth managers and fund managers. ISACO Ltd is authorised and regulated by the Financial Conduct Authority (FCA). Our firm reference number is 525147.
* 15th November 2012: Internal estimation of total ISA and pension assets owned by ISACO Investment Team and ISACO premium clients.
** 31st December 2008 - 31st December 2012.
ISACO investment performance verified by Independent Executives Ltd.