Top ten ISA myths busted

Myth 1: ISAs are only for people with lots of money

One of the most popular ISA myths is that it’s not worth starting one if you don’t have much money. But that’s not the case. Some ISA providers will ask for a minimum contribution in return for a higher interest rate but, for most ISAs, there’s no minimum starting amount required.

Myth 2: Once I put my money into an ISA it’s locked in

Not necessarily. It’s true that some cash ISAs offer slightly better rates if you put money away for more than a year. However, with most cash ISAs, and almost all stocks and shares ISAs, you can withdraw whenever you want — but be sure to check the terms and conditions. Some providers may charge exit penalties to transfer or withdraw your money.

Myth 3: I can only have one ISA at a time

You can have as many ISAs as you want! Subject to your annual £20,000 ISA allowance, of course.

In terms of types of ISAs available, adults have five options:

• the cash ISA
• the stocks and shares ISA
• a special version of a cash ISA for house-buyers called the Help to Buy ISA
• for those aged 18-39, the Lifetime ISA, which can be either cash or stocks and shares
• the Innovative Finance ISA if you want to make peer-to-peer investments, but only a handful of firms are offering it so far.

You can open a new cash ISA, stocks and shares ISA and Innovative Finance ISA every tax year, however you can only ever have one Help to Buy ISA and one Lifetime ISA.

If you’re a child or you have a child, you can open a Junior ISA.

Once each new tax year starts on 6 April, you can choose to continue contributing to your existing ISAs, or open new ones. You can put your whole ISA allowance into one, or split it any way you choose between a few.

Myth 4: Once I’ve opened an ISA I can’t transfer it to another provider

You can transfer money from one ISA to another whenever you want. You can transfer between different types of ISAs. You can transfer between providers – and some providers offer incentives to those who move existing ISAs to them.

Making a transfer is as easy as filling out an online form with your new ISA provider – they’ll take care of the transfer, and you don’t need to notify your existing ISA provider. Plus, ISA transfers do not affect your annual ISA allowance.

Myth 5: ISAs are just for cash savings

ISA money can be kept in cash or invested in stocks and shares. According to HMRC, at the end of the 2016/17 tax year, the market value of adult ISA holdings was £585 billion split almost half-and-half between cash ISAs (46%) and stocks and shares ISAs (54%).

Myth 6: There’s no point getting an ISA when interest rates are so low

Interest rates on cash ISAs are low, but they sometimes beat interest rates in regular savings accounts. Furthermore, if you’re willing to take some risk with your money, investing in a stocks and shares ISA could offer inflation-beating returns. But remember that the value of your investments can fall.

Myth 7: I can’t use an ISA because I’m not a UK citizen

If you pay tax in the UK, you can also enjoy this tax exemption. So don’t miss out on it.

Myth 8: Stocks and shares ISAs are for seasoned investors

‘Stocks and shares ISA’ is a slightly confusing label. A stocks and shares ISA can, in fact, be invested in most things, from equities to corporate bonds, gilts to gold, unit trusts to wheat futures. Having a stocks and shares ISA doesn’t mean you need to keep tabs on the financial markets, however. Typically, with a stocks and shares ISA, your money will be invested in a fund that tracks a stock market or group of companies.

Myth 9: If I get a stocks and shares ISA I’ll have to do a tax return

Certainly not: that’s the joy of an ISA. All money in an ISA wrapper is exempt from income tax and capital gains tax – ISA money does not need to be shown on a tax return.

Myth 10: The end of the tax year is the best time to open an ISA

You can open an ISA any time during the tax year, and the earlier you do the better. Additionally, those who invest at the start of the tax year benefit from a whole year’s compounding interest or investment returns – so there are rewards to be had from starting early

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Tax treatment depends on your individual circumstances and may be subject to change in the future.