15 common myths about ISAs that might hold you back from saving more

Clearing up the half-truths about stocks and shares ISAs.
15 common myths about ISAs that might hold you back from saving more
April 5, 2022

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Black taxis, buses, tubes. If it moves around the end of the tax year, it’s probably screaming ISA at you.

But even with all that advertising, what a lot of the financial industry fails to do is actually explain the full extent of what those three letters represent. 

Unfortunately, that means ISA myths are always rife at this time of year too. And if we’re all a bit hazy on the benefits of an ISA, it means we’re less likely to engage with them and find out if they’re a good fit for us, let alone chart a course to become an ISA millionaire.

Luckily, misconceptions about ISAs are often easily explained. So, let’s clear up 15 of the most common ISA myths that have sprung up, and replace them with what you need to know instead.

1. You need a lot of money to get started

You can open a stocks and shares ISA (Individual Savings Account - there’s a misunderstood acronym cleared up already) with as little as £2 on Freetrade.

Everyone has a £20,000 annual allowance each tax year but there’s nothing to say you have to hit that upper limit. Some people will, some won’t, and it’ll reset come the next tax year.

The current tax year started on 6 April 2022 and runs until 5 April 2023.

You can find more information in our full guide to individual savings accounts.

2. ISAs are just for cash savings

You can opt for a cash ISA, normally offered by banks and building societies but ISAs aren’t just for cash. There are four flavours of ISA:

  • Cash ISAs
  • Stocks and shares ISAs
  • Innovative finance ISAs
  • Lifetime ISAs

In a stocks and shares ISA you can hold company shares, exchange traded funds (ETFs), investment trusts and SPACs as well as cash.

Another misunderstanding along this line is that you can only have one ISA each tax year. 

You can put money into one of each kind each tax year, as long as you don’t go over your £20,000 allowance overall.

For example, if you had opened a stocks and shares ISA with one provider in the current tax year you couldn’t then open a second stocks and shares ISA with another firm in the same tax year. You could transfer your ISA between providers (more on that below) but that’s not the same as opening a brand new one.

Cash ISAs might be useful for people who couldn’t stomach the risk of the stock market. But the current record low interest rates on cash ISAs are a key reason why a lot of people have considered the move from cash to investments over the past decade.

3. Opening an ISA is complicated

It’s really not. Just keep your national insurance number handy and the rest should be relatively straightforward.

Before you click anything though, here’s a bit more information on who can open an ISA.

You have to be:

  • 16 or over for a cash ISA
  • 18 or over for a stocks and shares or innovative finance ISA
  • 18 or over but under 40 for a Lifetime ISA

And you also have to be either:

  • A UK resident
  • a Crown servant (working overseas in the civil service, for example) or their spouse/civil partner if you do not live in the UK

You can’t open or hold an ISA on behalf of someone else. Some providers offer Junior ISAs (JISA) that you can open for your children but they’ll eventually take ownership of that. They can start managing it when they turn 16 and actually withdraw from it when they turn 18.

As we’ve said, the ISA is just the wrapper, you have to decide what investments to put in it. 

We think that most people could manage that task themselves with a bit of research but if that doesn’t sound like you, don’t be scared to seek financial advice.

4. The best time to open an ISA is at the end of the tax year

It’s probably when you’ll hear most about ISAs because the 5 April deadline is looming but it’s not necessarily the best time to open one. 

Despite how many people leave it to the last second to open their ISA, or squeeze in their last contributions to make the most of their allowance, you can open an ISA at any time.

If you’re planning on contributing to an ISA regularly, maybe monthly right after you get paid, it could be a good idea to start your account sooner in the tax year rather than later. 

It’ll give you more time to make your savings and investments tax efficient, which is especially relevant if you think you might get near the £20,000 allowance. 

The last thing you want is to not use your allowance in a way that suits you just by being a bit disorganised.

There are also no time limits on how long you need to keep your money invested in a stocks and shares ISA. Though it’s good practice to have at least a five-year time horizon to give your investments time to grow and iron out any short-term volatility.

5. Stocks and shares ISAs are for seasoned investors

There’s something of a mental barrier behind this myth. Investing can conjure up images of old city traders chatting in code about financial products but the reality is we can all get involved in taking control of our financial futures, with help from a stocks and shares ISA.

In fact, stocks and shares ISAs can be particularly helpful the longer you leave them. If your investments begin to grow over time, the benefit of being able to hang onto those gains without having to pay capital gains tax (CGT) grows too.

Whether you’re maxing out your allowance every year or just contributing smaller sums over the years, there’s no need to put on your red braces and Savile Row suit to get started.

It might be worth looking at which providers are set up to help new investors as well as old hands when you’re on a mission to choose the best trading app.

6. An ISA won’t help me, I don’t pay tax on my savings anyway

We’ve touched on this above but it’s worth laying out what purpose ISAs serve in helping us take responsibility for our own financial futures.

While a lot of us stockpile cash in general savings accounts, record low interest rates have meant the benefit of doing so has faded quite a lot in recent years.

If you are using a cash savings account, chances are you won’t pay tax on any interest you get because there just won’t be very much.

This low rate environment has made a lot of people ask themselves where else they can put their money and get a return on it rather than just gather dust.

The move from cash account to cash ISA might be an initial thought but even then rates there are in and around 1% currently (well below the 5.4% UK rate of inflation, according to the Bank of England).

For those making the step from cash into investing, there has to be an acknowledgement that risk becomes a factor. And where people are ready to accept the risks that come with the stock market, they could begin to invest outside of an ISA.

But be aware that if your gains exceed the £12,300 CGT allowance, you’ll be liable for tax on any gains above the threshold.

Read more:
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How much capital gains tax you might have to pay depends on what level of income tax your salary falls into.

For basic rate taxpayers, that could mean paying 10% on gains above the £12,300 level. For higher rate taxpayers (and additional rate taxpayers) that could mean a 20% hit.

Stocks and shares ISAs offer a way to invest in the knowledge that any gains you make won’t be liable for CGT (so won’t spark the need for calculations involving tax brackets).

So, you might not be currently paying tax on any savings or investments but if there is the possibility that you might have to in the future, it’s worth considering how to make your money tax efficient now.

And if the goal of long-term investing is to build up the snowball effect of compound interest over time, the last thing you’ll want is to penalise your gains later on because you chose a different account to begin with.

It all depends on your individual circumstances and sometimes it helps to think about your goals and work backwards. Will the way you currently save or invest hit that nest egg goal or do you need to revisit how you plan to get there? 

If tax becomes the hurdle to you reaching your financial ambitions it’ll be too late to turn back the clock, so a smart investor will consider all their options from the get-go and be open to change as their life goes on.
If you want to know more about it, have a read on paying tax on investments in the UK.

7. If I get a stocks and shares ISA I’ll have to do a tax return

Tax seems to be a word that strikes fear into savers and investors, or just turns us off completely. But if that’s a reason you’re unsure of ISAs, remember the goal here is to be tax-efficient.

That means you don’t have to get involved with any tax calculations later on because your gains inside a stocks and shares ISA won’t attract CGT. 

There is no explicit need to fill in a tax return either when you invest in a stocks and shares ISA.

8. You have no control over what you invest in within your stocks and shares ISA

It’s never been easier to decide exactly what goes into your stocks and shares ISA. There are a range of options, including UK, European and US stocks and shares, ETFs and investment trusts to pore over and use for portfolio diversification.

Where the latter two are concerned, it might be that the companies or weightings change in the portfolios through natural market movements or because the portfolio manager (more commonly in trusts) has bought or sold a holding.

But even in that case, you’ll still be able to see at least the top 10 names in their trust on the fund factsheet.

In short, it’s not the opaque industry many people believe and you can select the assets to fit your own goals, risk tolerance and time horizon.

9. ISAs are a better way to save for your retirement than pensions

Workplace pensions and self-invested personal pensions (SIPPs) benefit from tax relief, as well as a host of other unique characteristics that don’t apply to other accounts. 

And while ISAs and pensions are both tax efficient in their own ways, ultimately how you plan to use them can be the key differentiator in which is a better choice for you. 

You can currently only access your pension savings and investments from the age of 55 (set to rise to 57 in the near future). So, if you have goals that require money before then, and you want to invest tax efficiently, a stocks and shares ISA could come in handy. 

Where the two can complement each other is if you plan to retire before you can access your pension. ISAs could help bridge the gap between your working life and your retirement savings kicking in.

It may be that an ISA could provide tax-efficient dividend income for you as you ease off the pedal at work and edge into retirement. In general though, most people will use pensions to build up their investments for their third age, and use ISAs for savings goals before then. As we’ve seen though, it doesn’t have to be a case of ISA or SIPP, both can work together.

10. Once investments in your stocks and shares ISA hit the annual allowance you start paying tax

This one blurs a couple of concepts around ISAs so let’s separate them.

Your £20,000 allowance refers to how much you are allowed to put into your ISA each tax year. It has no bearing on tax thresholds, it’s just the upper limit to the amount of cash you can add to your account from April to April.

The second part here risks missing the point of stocks and shares ISAs entirely. They offer a way to invest so that you can keep your gains instead of worrying about exceeding the £12,300 CGT limit and doing all the maths about any tax you might have to pay.

The fact is that we don’t know how our investments are going to perform. ISAs allow us to acknowledge and accept that, whatever happens, CGT won’t come into the equation.

11. Stocks and shares ISAs are risky

It’s not the ISA itself that carries risk, it’s the stocks and shares you put inside it.

Think of a stocks and shares ISA like a sweet wrapper. All it does is house the sweet, it has no taste of its own. 

That’s why you’ll often hear it referred to as a ‘tax wrapper’. It’s up to you what you want to put inside.
You get to select the assets and determine your own level of risk. If you’ve never done that before or would like a refresher, have a look at our beginner’s guide to investing in the stock market.

12. You need to decide where to invest straight away

You don’t. The good thing about being able to hold cash in a stocks and shares ISA is that you can add money while you are deciding on what to invest in, as well as after you’ve sold one asset and want a bit of time to look at what to do next.

This aspect can be useful at the end of the tax year, if you know you want to secure your allowance but haven’t decided what to invest in yet. 

Be careful though, cash drag is a real thing and ultimately, stocks and shares ISAs are for investing, not for hoarding cash.

One of the most common misconceptions about cash is that, because you can see and hold it, its value stays the same. 

What that tenner can buy you next year or the year after is likely to reduce though, due to inflation. It’s often a hidden risk but it’s there all the same.

13. You can’t take your money out

There may be different types of ISAs with lock-in periods or terms that penalise savers for taking money out early.

Thankfully, stocks and shares ISAs don’t carry these rules. You are free to buy and sell assets in your ISA, and withdraw your money when you need it.
It should be said though, good investing is about letting time do the work. Having a long-term view from the beginning is a key part of developing strong investment principles.

14. You can’t take money out and pay it back in

This can be a tricky one because individual ISA providers will approach this differently.

Some providers offer flexible stocks and shares ISAs. This means you can deposit and withdraw money in the same tax year and your allowance will be adjusted accordingly.

It is worth noting this often applies to any cash you’ve added but haven’t actually invested.

Other ISAs are not flexible. This means any money you deposit contributes to your allowance. Take money out and your allowance will not be adjusted. 

As an example of the difference between the two, imagine you have an allowance of £20,000. 

You deposit £20,000 in cash and then decide you only want to invest £10,000, so you withdraw £10,000. 

In a flexible ISA that will mean you still have an allowance of £10,000.

But if your ISA is not flexible then the initial £20,000 deposit will mean you’ve used all of your allowance for the tax year. You can’t invest any additional amount. 

If in doubt, check with your provider before you take action.

15. You need to keep your ISA in the same place forever

If you’ve spotted another ISA provider with a range of investments or cost that suits you better you can transfer an ISA over to them. It might be that you’ve opted to calculate your annual ISA fees and are looking for a better option elsewhere.

You can move your existing ISA to another provider or change your existing ISA to another type with the same provider. 

For example, you could move a stocks and shares ISA from your bank to a stockbroker. The account type remains the same but the provider has changed.

Alternatively you could transfer from a cash ISA into a stocks and shares ISA. You could do this with the same provider or move to a different one.

An ISA transfer should be handled by the provider you’re moving to, so check with them to see how you can start the process.

The first thing to be aware of is a possible exit fee. This is a fee you may have to pay for moving your ISA from one provider to another. It will be charged to you by your existing provider.

Make sure you know if you’ll have to pay one before you do anything, or if your new provider will help cover it.

The actual ISA transfer process can take two routes:

'In specie' ISA transfers

This type of ISA transfer will keep your existing investment portfolio intact and move it to another company.

So if you were wondering, “Can I transfer shares into an ISA from another ISA?”, the answer is ‘yes’, if you do an ‘in specie’ transfer.

In specie transfers can take around six to eight weeks, whereas cash transfers usually take about four weeks. You can check with either provider for more information on how to transfer an ISA.

Cash ISA transfers

This is where your existing holdings are sold and the resulting cash is transferred to an ISA with another provider. You might already be holding cash in a cash ISA.

Cash transfers are generally faster than in specie transfers.

Protect your investments from UK tax with tax-efficient investing accounts like a stocks and shares ISA or a SIPP account. Check out the ins and outs of both accounts before opening one. Take a look at what is a stocks and shares ISA and our SIPP guide. We summed up the key differences in our SIPP vs ISA guide. 

Important information on ISAs

Before transferring an ISA or pension you should ensure that this is the right thing for you to do and in particular you will not lose valuable guarantees or incur excessive transfer penalties.

Important information on SIPPs

SIPPs are a pension product designed for people who want to make their own investment decisions. You can normally only access the money from age 55 (set to rise to 57 from 6 April 2028).

This article is based on current rules, which can change, and tax relief depends on your personal circumstances. When you invest, your capital is at risk.

The value of your portfolio can go down as well as up and you may get back less than you invest.

Before transferring a pension you should ensure you will not lose valuable guarantees or incur excessive transfer penalties. Pensions are usually transferred as cash so you will be out of the market for a period.

Freetrade does not currently offer drawdown products for our SIPP.

Important information

This should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice.

When you invest, your capital is at risk. The value of your portfolio, and any income you receive, can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future results.

Eligibility to invest into an ISA and the value of tax savings both depend on personal circumstances and all tax rules may change.

Freetrade is a trading name of Freetrade Limited, which is a member firm of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales (no. 09797821).

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