What is the difference between a cash ISA and an investment ISA?

savingsBoth cash ISAs and investment ISAs help to shield the investor from paying taxes to the British government. The main difference between the two is the liquidity of the account, as well as investment options available to the account holder. Both accounts provide tax advantages, and any savvy investor knows that any retirement strategy that provides legal tax advantages is a wise one. Taxes and fees can quickly erode the principal balance of any account if one is not careful. The fact of the matter is that no one wants to see their hard-earned pounds go to paying taxes rather than helping reach your retirement goals. In order to accomplish this, it is imperative that good sound strategy be implemented, and that tax planning is part of that strategy. Helping to protect your investment is precisely the advantage afforded to account holders of each ISA type.

A savings account is one of the most liquid and safe investment vehicles available in the financial world today. An account holder deposits cash, and the banking institution pays a specified amount of interest on that cash. Typically, interest earned in a savings account is subject to UK Income Taxes, but this is not the case with a cash ISA. In order to open a cash ISA, you must be at least 16 years of age, and a citizen of the U.K. When you open your cash ISA account, you will pay no UK Income Taxes on any interest made in the account. Keep in mind that deposits to your cash ISA is made with after-tax dollars, and there are annual contribution limits to keep in mind in order to continue to enjoy tax-exempt status. These limits are set by the government and can change from year to year. In order to enjoy the full tax benefits, you must stay within contribution limits, as well as meet eligibility requirements. See your local banker or consult with a tax accountant who can help you understand the regulations around cash ISA, and help sort through complex tax affairs with you.

Investment ISAs and How They Work

ISARetirement is something that all Brits should be concerned with. Having a strategy in place to help you retire comfortably should be a priority rather than relying on the State Pension system to take care of you. While it is possible to receive early retirement at age 55, most are finding that they need to work into their 60’s or 70’s in order to ensure that they retire comfortably. As you consider retirement options, researching those options, and then implementing a successful strategy is critical. Investment Savings Accounts (ISA’s) – whether of the cash or investment variety – are one of the most basic retirement vehicles available. Before getting started, it is wise to understand the difference between investment ISAs and a cash ISAs. Understanding how each account works can help you assess which account type best fits your investing strategy and retirement goals.

In contrast to cash ISAs, investment ISAs allow for the account holder to invest in stocks and other securities. For those investors who are seeking to purchase stocks, and along with their purchase, seize the potential to realize double-digit portfolio gains, an investment ISA is the more appropriate than simply using a cash ISA. Restrictions vary slightly as compared to a cash ISA, for example, in order to open an investment ISA, the account holder must be at least 18 years of age and be a UK resident. Annual contribution limits also apply, as they do with cash ISA accounts. Once those basic requirements are met, the account holder can start taking advantage of immense tax benefits. Keep in mind that there is no guarantee of gains, as well there is no protection against losses.

Open your investment ISA, and begin investing in stocks, bonds, and commodities. Profits made by investing in this type of retirement account are exempt from UK Income and Capital Gains Taxes. Buy and sell in your account without having to worry about tax consequences. This type of investing is very freeing, and this means that profits can be reinvested allowing your portfolio to increase exponentially. Before investing, be certain to determine your level of risk tolerance, as this will likely dictate the type of investments made in your account.

Keep in mind that there is no limit on the number of ISA’s that one citizen can hold. There is however, a limitation on the number of accounts that can be opened within a calendar year. Citizens of the UK have the ability to open one cash, as well as one investment account per year, and must stay within the annual contribution limits. The limits surrounding ISAs as well as specific tax protections afforded to account holders can change at any time and are set by the government. Remember that tax affairs can be particularly complex in some instances and therefore should not be considered lightly. Talk with a tax adviser before opening, or contributing to an ISA account.