Top 5 ISA myths, busted

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 12 million people pay into one every year.

There are, however, a number of misconceptions about ISAs. From the idea that you need to be an experienced investor to use one to prevailing myths about their liquidity, there 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. And, yes, some cash ISAs in particular will offer better rates if you agree to leave the cash for over a year.

However, 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 – 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 requesting them.

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. 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.

You need experience to invest in an ISA

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 investors. 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 – this is a surefire way for investors to lose money.

In reality, cash ISAs only account for 42% of ISA holdings, despite the fact there are more of them. Stocks and shares ISAs are inherently more risky, so they give investors the chance to see higher returns than their cash counterparts. Because you can invest up to £20,000 each year and pay no tax on the returns make ISAs an ideal wrapper for stocks and shares, as well as cash.

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*capital at risk, investments may go down as well as up