What is an ISA? How Do ISAs Work?

What is an ISA Account?

If you are new to the world of investments and want to take your first steps, then this article may be useful to you. In fact, if you have heard about ISAs (Individual Savings Accounts), maybe you have read some news, but still don’t know what they are and how they work, keep reading in order to get a comprehensive overview about the matter.

ISAs are very popular because they allow to save or invest money in a tax-efficient way. However, since there are different types of ISAs, choosing the proper one for your needs may not be so easy, so consulting a financial advisor could be an option to consider.

What is an ISA?

ISAs stands for Individual Savings Accounts and can be opened from every person resident in the UK. There are some age limits depending on the type of ISAs, such as 16 years old for the Junior ISA. ISAs have been introduced by the UK government in 1999, and they are investment vehicles aimed at helping people to save by providing a tax-free income. An ISA allowance, the maximum amount that can be saved without paying taxes, is set for each tax year that runs from the 5thApril to the 6th April. Anyway, ISAs don’t close after a fiscal year is passed, but you can keep your saving in your ISA account.

These are just some general information about ISAs, but a brief and simple guide to deepen this topic can be found at this link: https://blog.moneyfarm.com/en/isas/isa-guide/.

How to choose the ISA according to your needs

Choosing among different types of ISAs could be not as easy as it may look. All kinds of these financial products offer tax advantages, but each type serves different purposes. Furthermore, it is useful to know that you can put money in into one of each kind of ISA during a tax year. This may help you to diversify your investment, so you could increase the likelihood of long-term gains and reduce the impact of a wrong investment.

You can choose to open a Cash ISA, a tax-free savings account in which you can deposit money on a monthly basis, on-demand when it’s convenient for you, or all at once.

Stocks and Shares ISAs are a type of account to consider if you are looking for a long-term tax-efficient way to purchase stock market investments. You can put your money into equities, government bonds or investment funds. Investing in stocks, bonds, etc usually involves risks due to the market volatility, as a matter of fact it’s not possible to know exactly how an investment will perform.

In 2016, the Innovative Finance ISA (IFISA) was introduced into the financial market: it is a tax-free solution that offers the possibility to borrow money through a peer-to-peer network regulated by the FCA (Financial Conduct Authority) earning returns on interests.

For young people under 16, Junior ISAs may be an option to consider. Parents can save money for the future of their children into the account, and investing in cash or stocks and shares. However, children aren’t allowed to withdraw the money until they turn 18.

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