From saving for a rainy day to setting some money aside so you don’t have to tighten your purse strings come retirement, Isas provide a great way to help you invest.
An Isa allows you to save up to £20,000 a year without worrying about paying tax on returns or withdrawals, and there are many reasons why you may want to place your savings into one.
You might put money into an Isa to save for a specific event or purchase, or be saving with no specific goal in mind. Investment platform Hargreaves Lansdown said customers typically use their investment accounts to fund large one-off expenses such as house purchases, cars or holidays.
But over the past year it has seen a significant increase in clients withdrawing money to support general expenses amid the rising cost of living.
Meanwhile, a poll of almost 2,000 customers by investment platform AJ Bell found that funding retirement income, home improvements and holidays were all among common choices by its own customers. Here, we explain some of the reasons to save and withdraw money from an Isa.
Home Improvements
Around ten per cent of people withdraw money from their accounts to pay for home improvements, according to investment platform AJ Bell.
For major renovations, you may want to remortgage if you are looking to spend a big sum of money.
But for smaller improvements – perhaps installing a new bathroom or redecorating – an Isa can help you save for the work. You might want to choose an easy-access cash Isa, which allows you to withdraw money whenever you need.
The highest interest rate currently available on an easy-access cash Isa is three per cent, which is offered by several providers including the likes of Shawbrook Bank, Cynergy Bank and Virgin Money.
Saving for a property
Perhaps the most common way to use an Isa is to save for a property. Getting a deposit together for a home may take years and an Isa can provide you with a flexible way of saving. You are not committed to fixed payments each month and you can withdraw the money whenever you like (unless you have opened a fixed-rate Isa).
If using an Isa to save for a property, you may opt for a cash Isa that pays a set level of interest if you intend to buy within the next few years.
If owning a property is more of a long-term goal, a stocks and shares Isa may be a better choice. This is because your money will be invested in the stock market and you are likely to benefit from better returns in the long run.
First-time buyers may choose to save into a Lifetime Isa (Lisa), which allows you to save up to £4,000 a year and get a 25 per cent bonus from the government. There are both cash and investment Lisas available.
Matilda Littler, 27, hopes to buy a property in Hertfordshire with her boyfriend in the next few years. She saves into a Lisa using Moneybox, which is a digital finance app.
Matilda has had a Lisa for three years. She has paid in £12,000, which has risen to £15,200 thanks to the government bonuses and interest.
‘As my salary has increased over the years, it’s achievable for me to max out my Lifetime Isa every year. I used to have a Help to Buy Isa, but with the Lifetime Isa you can pay in more money and get a bigger bonus. And you can buy a property worth up to £450,000, unlike the Help to Buy Isa, which is limited to £250,000,’ says Matilda.
Should I open a Lisa to buy a property?
A Lifetime ISA gives first-time buyers from the ages of 18 to 39-years-old a 25 per cent government bonus on savings of up to £4,000 a year. It is free money, allowing you to save quicker to achieve your goal of getting on the property ladder.
■ But there are some things you need to be aware of before you open one. n You need to wait at least a year after opening a Lisa before you can buy a property.
■ You’ll forfeit 25 per cent if you withdraw the money before aged 60 without buying a property, and you could get back less than you paid in.
■ The property you are buying must cost £450,000 or less.
Early Retirement
Isas are popular with people looking to retire early. The state pension starts at age 66, and private pensions can’t be accessed until 55. So if you want to retire before then and plan to rely on your savings for income, then saving into an Isa is a sensible option. There are no age restrictions on Isas and you won’t have to worry about paying capital gains tax or income tax when withdrawing money.
Alan Donegan, 44, and his wife Katie, 39, paid the maximum allowed into Isas over a number of years. They retired four years ago with total savings of £1m that would pay them an income of £40,000 a year. Their portfolio has now grown to £1.65m, despite the economic uncertainty, and they have an income of £60,000 a year.
‘I love Isas as you are able to save up to £20,000 a year (after tax), put the money away and allow it to grow over the years. Then when you sell your assets in the Isa at the other end it comes out tax-free. We have a stocks and shares Isa that is invested in a global fund. Our income allows us to travel the world, create courses and give back. We run a course called the Rebel Finance School teaching people what we do,’ says Alan.
Retirement Income
People who have already retired may use Isa savings to boost their retirement income.
Income from pensions is taxed like ordinary income. So if you pay yourself more than the personal allowance of £12,570 a year, you may want to withdraw money from Isas before dipping further into your pension. This will reduce the amount of tax you pay.
For example: If you have an annual income of £15,000 in retirement, you could receive £12,570 of this from the state pension and your own private pension. The remainder could come from Isas, meaning you would not pay any income tax. If you paid yourself £15,000 solely through pensions, your income tax bill would be £486 (assuming you have already taken a 25 per cent tax-free lump sum).
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