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What To Know About The ISA, Britain's Version Of The IRA

What To Know About The ISA, Britain's Version Of The IRA

If you’re a first-time investor, knowing where to start can be a daunting prospect, but there is a relatively easy way to begin even if you don’t have any prior experience. Opening an ISA can be the first step on your journey towards saving for your future, building up a portfolio and getting more hands-on with your overall financial health. 

What Is An ISA Account?

An ISA, or individual savings account, is a tax-free savings account. It is essentially Britain’s version of what Americans know as the IRA, a tax-advantaged retirement account. In order to open one, you need to be 16 or older, be a UK resident and have a National Insurance Number. 
There are a couple of different types of ISAs designed to cater to various needs including:

  • Cash ISAs, which are low-risk cash-based accounts that yield fixed returns of around 2%
  • Stocks and shares ISAs, which allow you to invest in a more diverse portfolio, primarily consisting of equity
  • Help to Buy ISAs help you save for a mortgage deposit to buy your first home
  • Lifetime ISAs must be used towards your pension (retirement) or to buy a house, and the government will ‘top up’ up 25% (up to £4,000) of your annual tax-free savings
  • IF-ISAs (innovative finance ISAs) are popular new ISAs that pair up willing investors with individual and business borrowers through an online peer-to-peer network, allowing you to choose what to invest in based on the provider you partner with

What Is The 2020 ISA Allowance And Deadline?

The government sets an investment allowance - or limit - for ISAs, which effectively dictates the parameters for tax-free earnings. Currently, the allowance caps contributions to ISAs at £20,000 across all owned ISAs for the tax year.

The current tax year runs until April 5, 2020, with the new year kicking off the day after. The deadline is important to keep in mind, as allowances do not carry over from year to year.

If you’re looking to start building an ISA portfolio for yourself there are a couple of basic steps you can take to help to get you there, including:

Mapping Out Investment Objectives

Setting some financial New Year's resolutions is never a bad idea, and if you’re going to be investing in an ISA for the first time, it helps to set some short, medium and long-term objectives for yourself. While this is largely dependent on your age, you should always do your calculations based on how much you would like to save in a given period.

Remember that you can invest the maximum amount across up to four ISA types per tax year, but are only able to pay money into one account of each type, so work this into your planning.

Diversifying Your Portfolio Over Time

You should already be looking to diversify your portfolio, even if you are a first-time investor to ensure that your selection of investments aren’t closely correlated to each other performance-wise. Luckily, ISAs are set up in a way that allows for a diverse range of investments across all types - as this increases risk if one investment ends up going south.

A larger range of investments in your portfolio also increases the possibility of at least one of your investments outperforming, which could help to offset any potential losses.

Reinvesting Your Earnings From ISAs

Take advantage of the tax breaks attached to ISAs from the first time you invest. If you’re a basic-rate taxpayer you are not subject to income tax on interest earned for the first £1,000, with higher-rate taxpayers getting the same deal up until the first £500. By reinvesting tax-free earnings into other ISAs, you can allow each account to compound over time and grow with the market.

Becoming a responsible investor does not have to involve spending a large portion of your earnings in one go. ISAs, and in particular IF-ISAs, are a great place to start if you’re a first time investor, as some providers allow you to invest as little as £100 to start, even offering a percentage of cashback on your first investment. Utilizing ISAs can help to get you closer to your milestone goals in life, and ultimately lead to a more comfortable retirement as well.

Image by Free-Photos from Pixabay

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: DailyFX European Union IRA ISAEurozone Global Markets Personal Finance


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