How do Investment ISAs work?
For those looking to make the most of their 2020/2021 ISA allowance, the more attractive rates offered by Investment ISAs are very appealing. So, if you want to put your money into a tax-free wrapper which also gains interest on investments, a Stocks and Shares ISA is the way to go. But how do Investment ISAs work?
What is an Investment ISA, and why should I get one?
An Investment ISA (also known as a Stocks and Shares ISA)
In fact, the maximum amount you can pay into any kind of ISA account in a year is £20,000.
An Individual Savings Account (ISA) is a tax-efficient way of making your savings work for you in the best way possible. There are lots of different kinds of ISAs, but for the sake of this blog we will be focussing on Investment ISAs (also known as a Stocks and Shares ISA).
For people looking to put their money to work in an investment ISA for the first time, there is a lot to be aware of. So – with that in mind, we’ve put together this blog to give you the rundown of what Investment ISAs are, and how they work.
So…how do they work?
An Investment ISA is generally a more long-term option. Your money will be put to work in an investment (as the name would suggest). You can choose between having an actively managed fund or a passively managed fund, depending on your preference.
Those investments should put your money into various stocks and shares, which should garner returns for you.
And - because it is an ISA, Government legislation means that any returns earned on your investments are tax-free.
But remember: because it is an investment, the stock market could go down as well as up, so you could end up losing money on your investment. There are some Investment ISAs which are much lower risk than others, but these tend to produce lower yields. It’s important to evaluate your attitude towards risk before opening an Investment ISA.
How much can I put in my Investment ISA?
The limit you can put into an Investment ISA (or any ISA) is set by the government each tax year. For tax year 2020/2021, this amount is £20,000 per person, per year.
Also - you can only open one investment ISA per person per year, so it's important to shop around first to make sure you find the right provider and account for you.
Where Can I get one?
You can get an Investment ISAs from lots of different platforms, including (but not limited to):
- Building societies
- Financial Services Companies
- Credit Unions
- Friendly societies
- Peer to peer lending services
- Crowdfunding companies
Where you open an Investment ISA will depend on your chosen platform – some will have the ability for your to open an ISA online, via phone or by going to a traditional bricks-and-mortar bank.
What do I need to open an Investment ISA?
Every adult UK Citizen is entitled to opening an investment ISA;
- Your National Insurance Number
- Your bank account details
- You might need a debit card
In order to open a new Stocks and Shares ISA, it needs to be the only ISA of this type you are opening this tax year. This is because legislation limitations mean you are only able to open one Investment ISA per year – but you can pay into existing Investment ISAs or transfer providers.
But – you can mix the type of investments you’ve made within your stocks and shares ISA. You can read more about this in our specific blog “How much can I invest in a Stocks and Shares ISA?”.