Have you had questions about your finances that you’ve been too embarrassed to ask a professional? In this four-part series, I’m taking a look at 50 of the most popular questions that people may be too scared or embarrassed to ask. Here we go with the next lot of questions.
An ISA is an individual savings account where any money you invest is tax-free. There are various ISA’s with the two main ones being a Cash ISA and an Investment (Stocks and Shares) ISA. It is a vehicle for saving or investing your money.
They are different products but fundamentally they are both potential investment vehicles for your money. With an ISA you don’t receive any tax relief when you put money into it as you do with a pension. However, you are not taxed when you take money out of the ISA, a pension you will be taxed when take money out (apart from 25% that is allowed tax-free). Also, you have access to an ISA at any time. With a pension, you must be a certain age.
This will depend on your circumstances. As discussed there are restrictions on when you can access your pensions so if you need the money before then, an ISA may be a better option. There is no reason that you can’t invest in both. Pensions can be a great long-term option due to the tax relief and because you can’t access this money, it will be there when you need it. An ISA is more flexible but that can mean you may access it before you intend to use it. A balance between the two is likely the best option.
Both an ISA and a pension could be invested in the same investment portfolio and there is no difference tax wise on the underlying investments once within an ISA or pension.
It is possible to have both, although it is worth checking with your bank regarding their approach. You are allowed to put £20,000 into an ISA each year and this can be split between both a Cash ISA and an Investment ISA.
You are limited to £4000 for a Lifetime ISA, and less for a Help to Buy ISA.
In any personal tax year you can contribute £20,000 into an ISA. You get a new allowance of £20,000 each tax year. It is a use it or lose it approach so if you don’t contribute the full amount in the tax year you CAN’T put more than £20,000 in the next tax year. Each individual has their own allowance so you and your partner can each put in £20,000 into ISAs.
So you are allowed more than £20,000 in an ISA, but you can only contribute up to this amount each year.
A junior ISA (for those under 18) is limited to £9,000. Again there are different limit for Lifetime and Help to Buy ISA.
Yes you can, but you would need to transfer this to an investment ISA in order to do so. Previously you were unable to transfer an Investment ISA into a Cash ISA but this is no longer the case. Your Investment ISA can be invested in mutual funds which will give you exposure to assets such as stocks, shares, property, bonds etc.
It used to be the case that you weren’t allowed to do this, but this changed recently. Some accounts are flexible, meaning that you can withdraw money from an ISA account and replace it. The only condition is that you top up your ISA in the same tax year the withdrawal was made. So you couldn’t top up withdrawals from previous tax years.
Cash ISAs currently have extremely low interest rates, meaning a low return for your money. If you are saving money for the long term and inflation is higher than the return you receive, the spending power of your money is actually reduced. This is the case with Cash ISA rates currently.
If you are investing for the long term, and want to grow your money in real terms you will need to look at investments in order to generate returns above inflation.
Inflation is a measure of how much the prices of goods (such as food or televisions) and services (such as haircuts or train tickets) have gone up over time.
Usually, people measure inflation by comparing the cost of things today with how much they cost a year ago. The average increase in prices is known as the inflation rate.
There are various measures of inflation and the current inflation rate is 2.1% (based on CPI 7.6.2021).
The easiest way to think about is that a Mars Bar costs more than it did when you were a child and is smaller. This is mainly due to inflation.
Yes, there is a difference. A nominal return is the return you receive before you factor in tax, investment costs and inflation. Most people think of their houses in nominal terms i.e. I brought my house 10 years ago for £200,000 and it is now worth £300,000 ignoring expenses such as mortgage interest or inflation rate.
A real return is the return you receive after taking inflation into account. For long-term investing you should focus on the real return above inflation you are receiving.
Often referred to the as 8th Wonder of World. Essentially it relates to the growth you get on assets that will increase over time. For example, if you receive a 10% return each year on £100 your money would be worth £110 after the first year.
Each preceding year not only would your money grow by £10, but you would also get a 10% return on the growth you already had. This would compound each year so your £100 would increase as follows.
Year 1 - £110
Year 2 - £121
Year 3- £133
Year 4 - £146
Year 5 - £161
So with compounding interest, instead of £100 being worth £150, it is worth £161.
Over the long-term compounding growth makes a massive impact on your initial investment, especially with larger sums. Although investment returns don’t work in a linear fashion like this, compound growth and regular investing is extremely powerful.
The stock market is where you can buy and sell shares of publicly listed companies. These companies are listed on a stock exchange, typically located in major financial cities across the globe. The ones you may have heard of are the New York Stock Exchange and the London Stock Exchange.
The stock market is essentially a collection of The Great Companies of the World. They are real companies, selling real goods to real people. They list on the stock market in order to generate capital and this gives you the option to buy stakes in the companies themselves.
Stocks, shares and equities are terms used to describe units of ownership in one or more companies. The owner – the shareholder – will receive dividend payments, as well as voting rights if the company grants them.
The terms are often used interchangeably, but there are some technical differences between stocks, shares and equities that can cause confusion.
For investment purposes, they are a way of owning the great companies of the world.
There are two main ways, the first that the underlying assets increase in value. If you brought a share for £1 and it grew to £2, the value of your investments will have increased.
By owning stocks and shares you can also receive dividends from these, which is your share of the profits which will also contribute to the returns. These dividends can be reinvested to allow you to buy more shares or taken as an income.
It is worth noting that investments and shares can fall, as well as increase in value.
For most people, the simplest and most cost-effective way is to buy an investment fund, which invests on your behalf. This is called a mutual fund and it pools your money together with other investors and then the fund manager will then invest on your behalf. This fund can invest in different assets and allows you to diversify your portfolio.
You will need an investment vehicle such as a pension or investment ISA in order to access the fund. There are 1000s of funds to choose from, all with different approaches and risk level. It is important to research the funds before investing in them.
Part 3 tomorrow
This article doesn’t constitute financial advice and is intended as information only. Should you need financial advice you should speak to a trusted financial adviser. For simplicity purposes, I have been unable to cover off all the different elements that I could answer. This is intended to be as simple as possible and not an all-encompassing answer.
You should do your own research before acting on any information within this blog. Remember the value of your investments can go up as well as down, and there is no guarantee you will get more than you put in.
