Most of us are familiar with Individual Retirement Accounts better known as IRAs. These accounts allow us Americans to save for retirement with numerous tax advantages. Today I want to introduce a similar retirement account that is offered to our United Kingdom counterparts, these retirement accounts are called Individual Savings Accounts (ISA).
When the day you retire falls upon you, how do you plan on paying for housing, food, transportation, and medical expenses? I believe you’d be astonished at the number of individuals close to retirement who have not asked themselves this question. The hard truth is that when you retire you stop receiving a paycheck which can cause absolute financial havoc if you are not prepared for it. I’m aware that organizations and companies pay a pension, however with the state of our global economy these types of retirement benefits are becoming less common. As a result, these same organizations and companies are now forcing us to take retirement saving into our own hands.
Overview of ISA’s
ISAs are savings account offered in the United Kingdom, they are similar to an IRA. Residents are permitted to deposit £11,280, up to half of which (£5,640) can be saved in cash into this account tax free. These deposits are called “Subscriptions Limits” where as with an IRA they are known as “Contribution Limits.” ISAs come in two main forms:
- Maxi-ISAs are used by individuals who have their primary focus towards investing in stocks. These funds are professionally managed by an investment bank or group fund.
- Mini-ISAs are used by individuals who want to save a bulk of the money in the account and simply accrue the interest. In short a cash ISA is tax free savings!
For many, an Individual Savings Account (ISA) is a good option for saving. An ISA is an account that has certain tax characteristics. Because the government of the United Kingdom wants its citizens to save for retirement, they enjoy certain tax advantages within the ISA.
Tax Advantages of ISA’s
The main benefit is that any capital gains or interest that is earned within an Isa is tax free. This makes ISAs very appealing to individuals in the higher tax brackets, who can owe up to 40% of their earning to the UK government. Keeping money in an ISA allows investments and savings to work harder and compound over time.
Disadvantages of ISA’s
If you think that the government of the UK is giving its citizens a fantastic deal, you’re right. However, there are a few catches to these accounts.
ISA’s are intended for savings, however if you make the maximum subscription to these accounts, then withdrawl money for an emergency, you cannot deposit more money until the following year. Another pitfall is that there are limits on how much you can contribute to an ISA. This may not be a problem for modest earners of the UK, but certainly does not help the high income earners.
The ISA is a no brainer for those with a basic understanding of personal finance. At the very least, tax free savings account should spark anyone’s interest. The earlier and more you contribute the better!