What hides behind the word ISAs?
ISA or, in other words, an Individual Savings Account is a particular type of savings account that allows you to save or invest in ISAs a certain amount of money tax-free, determined every tax-year by the government (also known as ISA allowance).
However, there is one thing to consider… an annual ISA allowance cannot be accumulated.
If you don’t use it during the current tax year, it cannot be carried forward to the next one.
Keep in mind that transferring money annually into your ISA account results in saving a significant amount of money that has a tax-free status.
In today’s article, we want to tell you all about the types of ISA.
We will cover subsequently:
- Different types of ISA
- How do ISAs work?
- Who can open an ISA?
- Withdrawal restrictions
- Investing alternative – The Infinite Banking Concept
Available types of Individual Savings Account
We distinguish two main types of ISA: a cash ISA and a stocks and shares ISA. However, there are a variety of specialist ISAs to choose from.
Here below, we explained in a few words what each type of ISA is.
Cash ISA is similar to a normal savings account. Cash ISAs typically offer a low-interest rate – currently ranging between 0/8 percent and 1.2 percent.
There are usually stricter restrictions on how and when you can withdraw funds. There are two types of Cash ISAs:
Fixed-term Cash ISA
Most cash ISAs will offer you a fixed-term interest. If you withdraw funds before the end of your term, you may be facing early-withdrawal fees.
Cash ISAs typically offer a low-interest rate – currently ranging between 0/8 percent and 1.2 percent.
Instant Access Cash ISAs
Less common but sometimes available. You have immediate access to your funds and can withdraw and deposit them whenever you want.
Stocks and Shares ISAs
It is a different type of Individual Savings account. It is also known as Investment ISAs and works as an investment account – it lets you invest in the stock market.
However, due to the fact that your money is actively invested, the return is directly related to the market fluctuations. You could earn significantly more than a cash ISA, or you could lose everything. Unlike Cash ISAs, most investment ISAs will charge you a monthly or annual fee.
There are also some specialized ISA products available, such as the Junior ISA, Lifetime ISA, and Innovative Finance ISA.
Most of them are a tax-free envelope around a savings account with special rules governing how much you can deposit and when you can withdraw.
Junior ISAs, as the name suggests, are available to anyone under the age of 18. It means that any 16 year old with a lot of money to save can open both adult and junior accounts and take advantage of both allowances.
The money can be invested in cash or stocks and shares, just like in adult ISAs, but doesn’t provide instant access until age 18.
Or, in short words, LISA. Lifetime ISAs only allow you to deposit £4,000 of the annual ISA allowance, and the only times you can withdraw money without penalty are when you buy your first home or when you retire.
Innovative finance ISA
It allows you to invest in areas such as peer-to-peer lending, peer-to-business lending, and crowdfunding. The interest you earn is tax-free because it is held in a ‘tax-free wrapper.’
How do ISAs work?
If you live in the UK and are over the age of 16, you have the right to save a certain amount of money in an ISA each year. This is referred to as your ISA allowance.
Once your money is in an ISA, it cannot be taxed, regardless of how long it has been there.
However, remember that money held in any type of ISA is considered savings and thus may affect your entitlement to benefits.
How much tax can you save?
If you do not contribute more than your annual allowance, you will not pay income tax on money saved in an ISA. This applies to all types of taxpayers.
Basic Rate taxpayers
They can save up to 20% after exceeding their personal savings allowance.
Higher Rate taxpayers
They can save up to 40% after exceeding their personal savings allowance.
Additional Rate taxpayers
They can save up to 45%
Who can open an ISA?
In order to open a new ISA, you need to meet a few requirements.
- You must be at least 16 or 18 for stocks and shares ISA – it does not concern a Junior ISA.
- You must be a UK resident.
- You must have a national insurance number.
How many ISAs can you open?
In each tax year, you can only contribute to:
One cash ISA
One stock and shares ISA
One innovative finance ISA.
An ISA provider may offer higher interest rates on ISAs that only allow you to deposit your ISA allowance for the same tax year.
You can, however, contribute to new cash ISas, stocks and shares ISAs, etc., each tax year, leaving you with multiple ISA accounts.
Some banks and building societies will allow you to contribute to a second ISA during the same tax year, but only if both ISAs are held with them.
You can withdraw funds and reinvest them within the same tax year without affecting your ISA allowance. It is also possible to withdraw money from previous tax years and pay it back before the end of the tax year.
Any funds you attempt to reinvest will be deducted from your remaining ISA allowance. The payment will be rejected if you have exceeded your allowance for the tax year.
Invest different way – The Infinite Banking Concept
Infinite Banking allows you to imitate how a traditional bank operates and borrows money, but without the need to depend on a third party. You will be both a creditor and a lender.
Instead of borrowing from a bank, you borrow money against yourself and singlehandedly dictate cash flow while still allowing your whole life insurance policy to earn dividends (money) even though you are using that money elsewhere.
In other words, you build wealth while borrowing and repaying the money held in the cash value of your permanent life insurance policy.
One of the most significant advantages of the whole life insurance policy is that you will never have to deal with banking fees or interest rates on loans. As a policyholder, you can borrow money using your own policy’s cash value.
Using this borrowing setup, you would never have to borrow money from a bank again and instead would borrow for yourself (your whole life insurance policy) and pay yourself back over time. Thus, being your own bank.
The goal of Infinite Banking
The purpose of it is to duplicate the process as much as possible to build the value of your own bank. The duplication process happens by lending and repayment of money typically held in the cash value of a permanent life insurance policy.
Infinite Banking allows you to better work towards your individual and unique financial goals for yourself and your family and have control over your finances without dealing with banking fees or interest rates on loans.
Infinite Banking involves:
- Overfunding (with after-tax funds) a high cash value whole life insurance policy from a life insurance company
- Accumulation of Cash Value(tax-free) throughout the years you are a policyholder of your Whole Life insurance policy.
- Tax-Free Loans taken out against your whole life insurance policy’s cash value to use for your financial expenses.
By the process of borrowing for yourself, repaying, and so on – simply by being your own bank, you earn the financial freedom and control of your money.
Implementing this banking strategy into your life gives you much better control over your finances and helps you build wealth using the life insurance policy.
Reaching the end of the article, we are optimistic you now possess all of the required knowledge to manage your ISA. Moreover, that we enabled you to gain a new perspective on how to manage your finances.
Infinite Banking allows you to lead an independent and debt-free life while fulfilling your wishes. We hope we have helped you understand the concept of the infinite bank and gain a new perspective on how to control your own finances.
You can learn more about the Infinite Banking concept and how to become your own banker by enrolling in the Wealth Nation membership program. Choose financial freedom and own your own lifestyle!