Roth IRA: is there a UK Equivalent? Yes! Full explanation!

Created in 1999, ISAs were designed as a crucial way to save for the long run (meaning retirement). People need to be incentivized to invest. Otherwise, it would be much harder to direct their focus on growing their capital over time. Whether you are just starting to save or are building up an investment portfolio for retirement, ISAs will play an important role in your overall financial situation.

The key benefit of using an ISA comes in the form of tax-free on the gains you make from interest, dividends, and/or investment returns. Let’s say you decide to invest outside an ISA, any profits made above the annual Capital Gains Tax (CGT) allowance for 2021-22 tax year is £12,300, are subject to tax at 10% or 20% depending on your tax band. On the other hand, investing through an ISA, you won’t have to pay CGT regardless of the amount in capital gains (£1 or £1M). The same applies to interest and dividends.

In addition to the tax advantages, you also do not need to declare any ISA interest, income, or capital gains on it in your tax return. In other words, you may complete a tax return for investments in a non-ISA account and be in doubt whether or not you should include the ISA Accounts – Don’t worry, you don’t need to!

The annual subscription limit per tax year (6 April to the following 5 April) is £20,000 across all ISAs combined. The only exception is in the Lifetime ISA which has a maximum allowance of £4,000. You can split your allowance across the different types of ISA. For example, you may have invested £8,000 in a Cash ISA, £10,000 in a Stocks & Shares ISA, and, finally, £2,000 in a Lifetime ISA.

Also, evaluate the flexibility of your ISA. Some ISAs accounts allow you to take out money without counting towards your annual ISA Allowance on any tax year. Using the previous example, if you withdraw £4,000 from your Stocks & Shares ISA, you would have £16,000 invested in total, meaning you could re-invest £4,000 in the same or another ISA of your choice.

Remember that not all ISAs offer flexibility, so check the terms and conditions of your particular case!

The requirements are pretty simple to open an ISA account:

• Be a resident in the UK;
• Be over 16 years old (18 for stocks and shares ISA) – Except for Junior ISAs;
• Have a national insurance number.

Keep in mind that it is not possible to have an ISA account with another person. ISAs are personal investment vehicles, so they must be in only one person’s name.

First, you need to choose the provider (bank, stockbroker, peer-to-peer lending services, credit unions,…), then you will require the usual documentation: Your full name, address, national insurance number, and a signature.

After you open it, you will get access to a passbook, certificate, or online statement. You can easily manage your ISA account through home banking.

You can only have one Cash ISA, one Stocks and Shares ISA, and one Innovative Finance ISA in each tax year, which means that if you want to have two cash ISA, for instance, you will have to wait for the following tax year.

There is no minimum amount to start your investment journey through an ISA. Actually, you can even transfer just £1 to have an account opened.

Every investment company offering ISA charges an annual service fee as a percentage based on the total value of your portfolio. In addition to this fee, you will face stock and ETF trading commissions. You must simulate how much you expect to trade and the instruments used for that purpose.

You may find a provider with a relatively cheap annual service fee, but that fee loss may be compensated by higher commissions (share/ETFs dealing) or by making money off selling you other services.

As a side note, you are most likely not to pay a service fee on junior accounts, exchange-traded investments held in an Investment Account, or cash you hold. Always check this information beforehand with your provider!

Yes! If the provider goes bankrupt, you are protected under the Financial Services Compensation Scheme (FSCS). This protects your savings up to £85,000 per person, per institution.

Do not forget that the investment risk is not covered… The market may suffer wide fluctuations, which is part of the “rules”. That’s the very nature of investing. You may face upward or downward movements.

We believe that the Stocks and Shares ISAs are the ones investors will have a harder time figuring out what provider will be the best option for their needs. Given that, we summarise a list of options:

Online brokers:

Robo-advisors:

If you are looking to grow your money tax-efficiently, ISAs will definitely be a good option. The landscape for ISAs might initially be quite complex due to the number of options available. The reality is that once you start digging a little bit, you will realize that it is quite straightforward.

Always pay attention to the fees charged and the services provided (do you really need a platform that allows you to buy from 5,000 stocks? Are you happy with only ETFs?).

Our digital world has democratized the financial industry to such a degree that almost anyone can start to grow their capital, even with little knowledge!

Let us know in the comment section if you have any doubt! 🙂