ISAs are an important part of anyone’s wealth portfolio, especially if planning to retire before the traditional age of 60+. Wikipedia and Money Saving Expert will give you detailed information on all types of ISAs like a Cash ISAs, Stocks & Shares ISAs, Lifetime ISAs, Junior ISAs.
Who can open an ISA? Anyone in the UK, including children.
What is an ISA? A tax-free savings or investment account
When should I open an ISA? ASAP, if you don’t have high interest debt
Where should I open my ISA? Depends on your money plans, it is up to you to research what is the best fit. I used a Halifax ISA to help with my first home, and a Stocks & Shares ISA with Vanguard.
Why should I open an ISA? It is tax-free, there is no tax to pay regardless of the holdings
How do I open an ISA? Online is the easiest way to open
Why are ISAs special?
- ISAs Are Tax Free
- ISAs Earn Compound Interest
- Withdraw Anytime
- Transfers Are Allowed
1. ISAs Are Tax Free
ISA accounts are tax exempt for life, anything earned from these savings or investments will be 100% tax-free. This is not important in the early days of investing but once balances grow tax charges increase grow too. All other places earning money like jobs, investments, property can incur tax charges, but an ISA charges no tax. ISAs are unique because of their tax status regardless of the account holders tax status elsewhere.
2. ISAs Earn Compound Interest
Compound interest is magical. If an account is earning interest the balance will increase, so £100 @ 10% = £110 (£100 +£10 interest). Interest is paid on the original $100 savings PLUS the extra £10. As time passes this amount snowballs to something bigger. Compound interest is the key to retiring early or becoming financially independent. Saving £100 a month for 40 years @ 10% will give £637,678.02, and only £42,000 will be from savings, the rest is compound interest!!!
Saving money is important but compound interest is the key to building wealth.
3. Withdrawal Anytime
Unlike with pensions the money held in ISAs (except LISAs) can be withdrawn with little or no penalty. If you need your money for something else it is a lot easier to get access to. Life happens, plans change and it is good to know money could be withdrawn penalty free.
4. Transfers Allowed
Transfers between providers is simple and easy. If a provider drops the rate or begins charging higher fee the account can be moved to another. Some charge exit fees but these are small compared to the missed opportunity of a good rate or lower fees.
What will I use my ISA for?
I used a cash ISA when I bought my first house, this account earned interest (tax-free) and came with a government bonus of £50 for every £200 deposited. I now have a stocks and shares ISA holding long-term index funds, the plan is to keep adding to this account over the years and eventually use to cover my monthly spending. An ISA gives a lot more freedom than pensions savings and can be accessed at any time. Investing is a long-term strategy, I would recommend using an ISA as part of a wealth building strategy.
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