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Debunking Common ISA Myths

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Myths

ISAs are perhaps the most commonly misunderstood kind of bank account on the market. Financial literacy is not an inherited trait by any means, but also not the easiest to learn – particularly in a financial landscape where little seems to make sense. Here, we’ll break down five of the most common myths regarding ISAs, and why they’re such a useful product for consumers.

1. I Don’t Need A Cash ISA, Because I Don’t Pay Tax On My Savings 

This common myth refers to several government interventions – namely, the Personal Allowance, Personal Savings Allowance and starting rate for savings. Your Personal Savings Allowance is a tax exemption on the first £1000 of interest you receive on savings each year, while your Personal Allowance describes the portion of your annual income that is free of taxation. Unused Personal Allowance can contribute to your tax exemption on interest, while your starting rate for interest protects £5000 of interest per year from tax if you earn below a certain threshold.

The figures above are large, and a majority of savers will never break their allowance thresholds on an annual basis. However, this does not make ISAs unviable. Rather, ISAs remain highly valuable in protecting your interest in the future. Changes to the above allowance rates, or even to your personal circumstances, could plunge a great deal of your annual interest into a taxable bracket.

2. I Can’t Move Money Once It’s In An ISA

This myth is propagated by some of the specific forms of ISA you can take out: fixed-rate ISAs and LISAs, both of which we will touch on shortly. These products have some stipulations attached to them, but cash ISAs in general are not prescriptive things – and the opportunity will always be there to transfer if you need to. 

3. There’s No Reason For Me To Open A Lifetime ISA

Lifetime ISAs, or LISAs, are a form of ISA that enjoy government-backed subsidies. Their purpose is to help younger people save for either a first home or for retirement; annually, LISA owners receive a 25% top-up to their balance (up to a maximum of £1000 per year), but this top-up money can only be redeemed if the LISA is used for a first property purchase or a retirement fund. This is an extremely powerful mechanism, and hugely useful in today’s difficult property market! 

4. I Can’t Touch My Money Once It’s In An ISA

Again, this myth comes from the shape of certain ISA products. Some ISAs allow immediate and untrammelled access to funds, while others can afford a higher rate of interest in exchange for limited access. That is, money is ‘locked away’ for a fixed period of time to enable said interest. 

5. There’s No Point Shopping Around And Comparing Rates

Finally, this is a broad myth that is often applied to many different forms of financial products. In the age of endless comparison sites, it might seem easy to just go with your gut – but the truth is that in a competitive market, there are competitive options. Not all ISAs are built alike, and many offer great rates of interest with minimal fixed-rate catches. All you need to do is a little bit of comparing.

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