ISA confusion and ISA understanding
Individual Savings Accounts (ISAs) are often misunderstood. The rules surrounding ISAs have changed several times since their introduction in April 1999. It’s little surprise that many people are confused by the ISA rules and benefits.
New research from Fidelity International has found that 93% of investors still do not fully understand the benefits of an ISA.
Just one in twenty people admitted to understanding the tax advantages of a stocks and shares ISA. More people could explain the tax treatment of a cash ISA, with one in nine investors fully understanding these.
Worryingly, 7% of investors thought there were no tax advantages associated with investing money within an ISA. Fidelity have described the three main reasons why they think there is this level of confusion.
Firstly, investors fail to separate the ISA tax wrapper from the underlying investment. The ISA is not the investment but a ‘tax shield’ which protects the investments you select from tax charges.
This means that using an ISA does not result in taking more risk with your money. It is simply a tax wrapper to reduce the impact of tax charges on your cash or investments.
Secondly, there is possible confusion over phrases like ‘tax advantageous’ and ‘tax efficient’. This is because the Government stopped paying the additional tax credit for stocks & shares ISAs in 2004. Investment returns within an ISA are free of all personal UK tax, with the tax you save compared to a non-ISA investment depending on the type of underlying investment.
Finally, there is often confusion between a cash ISA and investment ISA, as they tend to operate in a different way. With a cash ISA you can only access deposit accounts that have been created as cash ISA accounts. Recently it has been the case that non-ISA deposit accounts are offering a more competitive net interest rate than the gross interest available on the cash ISA alternative.
With investment funds, they tend to be accessible either inside or outside of an ISA, the main difference being the tax treatment.
ISAs remain an important part of any overall investment strategy, particularly for retirement planning as pensions come increasingly under attack by the Government. They offer a degree of flexibility not available within pensions and make investing money simpler, particularly from an administration perspective.