Imagine being given a chance to put money away in a savings or investment account and could do so without paying tax on it.
That would be awesome, right?
Well, that is exactly what the UK government did in 1999 when they introduced the Individual Savings Account (ISA) and the Stocks and Shares ISA.
The difference between the two is fairly obvious. The ISA (also known as a cash ISA) was designed merely to put money away tax-free.
The Stocks and Shares ISA was designed to allow investments to be made using the tax-free sums in the account.
Back in 1999, the tax-free limit was £7,000 per year across both ISAs.
Now it is a far more generous and enticing £20,000 per year, with two extra ISAs available (Lifetime and Junior).
The Cash ISA is simply a savings account with interest earned.
However, things are not quite as simple for the Stocks and Shares ISA.
That’s because misconceptions have arisen over time about what you can and cannot do with your Stocks and Shares ISA.
We have undertaken fundamental analysis to uncover the truth.
So, here are the behind FIVE of the greatest Stocks and Shares ISA “myths.”
You can only pay into one type of ISA each year
This is a myth because youcan spread your maximum £20,000 tax free per year investment over as many ISAs as you like.
So if you have an ordinary Cash ISA, a Lifetime ISA and a Stocks and Shares ISA, you could put £4,000 in the cash one, the maximum £4,000 allowed in the Lifetime ISA and the rest in your Stocks and Shares ISA – i.e. £12,000.
What you can’t do is have more than one of any type of ISA up and running with different providers.
However, you can switch your provider at the beginning of each tax year (i.e. beginning of April).
What you may not know is you can have an additional Junior ISA as an extra investment account. You can put up to £9,000 a year as well as the £20k max in your other ISAs.
ISAs are a great way to save your money from the tax man. The Cash ISA is the safest as there is virtually zero-risk. The Stocks and Shares ISA can provide profitable returns but as your money is being invested into assets there is risk attached.
So you must be sure which ISA is right for you.
You need vast sums of money to get started
This myth has been around for decades when it comes to investing and trading. That is the beauty of the ISA, indeed any of the ISAs.
You can invest with as little as £100 as a lump sum OR from just £25 a month as a Direct Debit with some ISA account providers.
This is not an industry regulation fixed amount, so do make sure you shop around for the best deal.
The point is, many people are still under the impression that you need to have vast sums of money to be an investor.
That just is not the case these days.
Thousands of everyday people from all walks of life are going on courses to learn stock trading and going on to enjoy successful careers as investors and traders.
You have to make an immediate decision where to invest
So do not panic.
The way it really works is like this:
When you pay into your Stocks and Shares ISA, the money remains there until you decide what to do with it – i.e. you start choosing your own companies and opportunities to investment in or you put it into a fund(s) managed by your account provider.
This is all part of the appeal of becoming an investor in companies, making money trading shares is exciting. You can make good returns, consistently.
It does take some skill, if doing it on your own. You can learn easily enough with an educational online trading course.
However, you do need to take it seriously and realise that it’s not about “getting rich quick.”
You can grow your wealth brilliantly with the right training, strategies and tools behind you – but the #1 skill to have is the right mindset.
So, yes, there is a lot to think about and you will need to make a decision about how to invest – DIY or leave it to your fund manager – at some point in the tax-free ISA year as keeping your initial deposit in the Stocks and Shares ISA as cash is not much use at all as it won’t make much in interest.
There might also be fees from your account provider to consider. If you are not investing you may end up paying more in fees than you are making!
Your money cannot be taken out
The main aim with investing in stocks is to wait for market opportunities to both buy at the right time and sell at the right time.
This is how you make profits.
Add on top the bonus of the £20,000 tax free ISA allowance, plus the power of compound interest, you have yourself a valuable money making vehicle!
So why would you want to spoil that by taking your money out?
That is not to say you can’t.
You can withdraw money from your Stocks and Shares ISA each year, and given the present cost of living crisis it is easy to understand why you might need to.
But if you don’t need to, it’s far better and rewarding to keep adding to your pot each year. Build it up.
This is how you truly grow your wealth, over time.
If you do decide to take money out, you need to make sure you know what your provider’s rules are for doing this.
Some providers will allow you to replace the sum removed later in that same year without penalty.
Others, however, may count the replacement amount as counting towards that year’s taxable allowance.
You need to keep your Stocks and Shares ISA in the same place forever
Contrary to popular belief, ISAs are actually very flexible.
Not only can you have one of each ISA on offer, and spread your £20k allowance across all of them, you can also move money from the Cash ISA to the Stocks and Shares ISA.
You can also switch providers at the end of each financial year without harming your ISA (though of course there may be fees involved when making any switch).
Also, you need to be sure before you sign up with a provider that they do provide the flexibility described just now.
Not all providers operate in the same way, so it is always essential to check the fine print to make sure you are familiar with all the provider’s criteria and fees.
And remember the risk involved if taking a first step into the world of investing.
The #1 being the value of your investments can drop, as well as rise and make profit.
You just need to accept that risk is a part of investing. There is no getting away from it, so be happy with the risk.
It’s all about risk management, as you will learn on any investment course.
ISAs vary in what they offer you and the ways they can help your money grow.
But as you can see from these “myths” ISAs are also very flexible and give you a great way to both save and make money, TAX FREE!
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