Top 5 ISA myths, busted

Originally published at: Top 5 ISA myths, busted – InvestEngine blog

When it comes to investing for the long term, nothing can beat an Individual Savings Account (ISA) for its flexibility and tax-efficiency. Every year, investors can put up to £20,000 into an ISA portfolio and pay absolutely no tax on their earnings; it’s the reason that around 27 million people in the UK have an ISA. 

There are, however, a number of misconceptions about ISAs. For example, our recent research into people’s understanding of ISAs* found that two-thirds (68%) of holders were unaware that the current yearly limit is set at £20,000.

Misconceptions like this, as well as the idea that you need to be an experienced investor to use one to prevailing myths about their liquidity, are some common misunderstandings that hold some people back from investing. 

So, here are some of the most common ISA myths:

It’s difficult to withdraw cash from an ISA

A lot of people think that, when you invest money into an ISA, it’s locked away for a set period of time. When we asked people whether you could access the money you invest in ISAs, one in four said you couldn’t. 

While yes, some cash ISAs in particular will offer better rates if you agree to leave the cash for over a year, most ISAs will allow you to withdraw money whenever you need it. It might be advisable to leave your cash invested for certain periods of time, but there is often nothing stopping you from withdrawing chunks of cash in a pinch if you need it for an urgent or unforeseen expense – be sure to check your provider’s terms and conditions around this, though. 

With InvestEngine, for example, you can withdraw funds from your ISA portfolio at any time. Withdrawals take up to three working days (though many are quicker than this) and there is no charge for doing this. 

Transferring an ISA is a complicated process 

Moving an ISA from one place to another was once fairly complex, with various bits of paperwork needing to change hands for the cash to be moved. This perception is likely one of the reasons why two in five ISA holders – that’s around 11 million people – admit they still don’t switch providers when they see a better deal.  

Today, it could hardly be any easier. 

With most modern ISA providers, transferring an ISA is as simple as filling out a short online form. The provider will then handle the rest, in most cases. At InvestEngine, we recently introduced in-specie transfers, too, so you don’t even need to sell your assets as you move them onto our platform. This means not engaging with markets at all when you make the switch. 

You need experience to invest in an ISA

Two in five people told us that while they saw investing as good for their long-term savings goals, they were put off because it seems too complicated. 

Put simply, it no longer requires a professional with years of investing experience to put together an effective stocks and shares ISA portfolio. These days, ISA providers have made it as simple as creating an account, selecting some assets and investing, in just a few clicks. 

At InvestEngine, we offer a range of over 550 best-in-class ETFs, which help investors put together globally diversified, robust ISA portfolios in no time. For more info on the role of ETFs in portfolios, check out this article.

Also, opening a portfolio doesn’t mean you’ll need to be monitoring markets regularly or keeping up with the Financial Times. If you don’t have the time or inclination to want to manage your portfolio yourself, InvestEngine has a team of experienced portfolio managers who can take care of it on your behalf. 

ISAs are expensive

There’s a lingering misconception that ISAs come with a raft of fees that can eat away at an investor’s returns. Yes, many providers will charge a small fee, particularly if they’re managing the portfolio on the investor’s behalf, but this is the same for any type of investment. 

The reality is that ISAs are, in of themselves, free, and there are providers out there offering more and more competitive rates. At InvestEngine, for example, our DIY ISA portfolios are free of charge from our end – you’ll only pay the underlying ETF fees, which are small – and our managed accounts only cost 0.25% a year. It’s not inherently expensive to open and invest in an ISA, it just depends where you go. 

ISAs are just for cash savings

When a lot of people think about ISAs, they think about cash savings. This is, at least partly, down to the prevailing idea that cash is a relatively safe bet for savers. So yes, you can hold an ISA entirely made up of cash investments. The problem comes when inflation is high and cash rates can’t keep pace. While some fixed-term cash ISAs on the market right now are offering around 4% returns, this is still well below the current rate of inflation and a surefire way for savers to see the value of their money eroded. 

In reality, cash ISAs only account for 42% of the value of ISA holdings, despite the fact there are more of them. While stocks and shares ISAs come with more risk, they have scope to outperform their cash counterparts and therefore give investors the chance to see higher returns in the longer-term.

Plus, if you’re new to investing and don’t feel comfortable putting all your ISA savings into stocks and shares, you keep part of your savings in a cash ISA while also setting up a stocks & shares one. 

This is important, as over half (54%) of the people we spoke to were unsure if you could have a cash ISA and a stocks & shares ISA at the same time. The fact is you can, and because you can invest up to £20,000 each year and pay no tax on the returns on your investment it makes ISAs an ideal wrapper for stocks and shares, as well as cash. 

*Opinium, on behalf of InvestEngine, surveyed 2,000 UK adults between 10 February 2023 and 14 February 2023

Important information

Capital at risk. The value of your portfolio with InvestEngine can go down as well as up and you may get back less than you invest. ETF costs also apply.

This communication is provided for general information only and should not be construed as advice. If in doubt you may wish to consult a professional adviser for guidance.

Tax treatment depends on personal circumstances and is subject to change, and past performance is not a reliable indicator of future returns.