Q

Should I get an ISA?

A

In short, absolutely.

Should you open an ISA, short for Individual Savings Account? Absolutely. ISAs are an absolutely irresistible financial device for bargain seekers. It’s a pretty simple concept: anyone over the age of 18 is free to deposit up to £20,000 every year into an account and, after that, any interest or gains earned won’t count as income tax by HMRC.

Imagine a traditional £50,000 investment account earns a respectable 5% in a year, netting you a cool £2,500. Depending on how much you earn, with a non-ISA account, you’d forfeit anywhere from £500 to £1,125 of that to taxes. Paying nothing is preferable to paying £1,125, right? And you’re free to withdraw ISA funds whenever you want, without penalty, so it’s not as though putting money into an ISA means saying sayonara to your cash for decades.

Getting an ISA is an absolute must, but deciding what type of ISA to get is a hair trickier. There are many types of ISAs, but the two primary ones you’ll hear about are cash ISAs and stocks and shares ISAs. Cash ISAs are a lot like old-fashioned savings accounts, and in the very short term, cash ISAs are useful places to park your money if you expect that you’ll need to access it right away. You won’t ever lose money in a cash ISA — the FSCS insures cash ISAs up to £85,000 in case of bank failure. But neither will you ever make much money in a cash ISA, given that the average interest rate banks offer is currently less than 1% annually. Plus, with last year’s introduction of the personal savings allowance (PSA), cash ISAs may not always be a particularly good idea for basic taxpayers. Stocks and shares ISAs, on the other hand, are a very good idea for anyone who’s able to sustain some short-term investment volatility in the service of long term gains. The investment options for stocks and shares ISAs are virtually without limit, so, if you’re able to commit to investing your money for about five years, absolutely get a stocks and shares ISA. If you’re not chuffed about the idea of eating way your investment gains with high management fees, Wealthsimple would be happy to set a stocks and shares ISA customized for your specific financial needs.

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