There’s no getting away from the fact that 2020 will be the year none of us forget in a hurry.
Into our everyday lives came the coronavirus, bringing uncertainty on a scale we’ve never experienced before. Many people saw their incomes either fall, as their jobs were furloughed, or disappear altogether as many businesses struggled.
With all this uncertainty, anyone with a savings cushion probably felt a little bit more confident. For those without a savings cushion, who still had money coming in, with far fewer opportunities to spend money, thoughts may have turned to saving. Standard Life customers actually put more money into their Individual Savings Accounts (ISAs) during the month of June than they have done for the previous three years.
If you’re now thinking of building a savings cushion for the unexpected or if your thoughts are turning again to some of the plans you put on hold – whether that’s holidays, weddings or house moves – now could be the time to consider your ISA options.
What can an ISA offer?
Simplicity, accessibility and flexibility – with different types available to suit different saving needs. What all types of ISAs have in common is that they’re tax efficient and you won’t normally pay tax on any gains you make.
There are cash ISAs and stocks & shares ISAs. A cash ISA lets you save in cash and earn interest. A stocks & shares ISA allows you to invest your money, which gives it the potential for a better rate of return (although this isn’t guaranteed).
One of the advantages ISAs can have over ordinary savings accounts is that you can save up to £20,000 a year. And you won’t pay any tax on the interest you receive if you have a cash ISA or any investment growth you get if you have a stocks & shares ISA. You also don’t pay any income tax when you take money out of an ISA.
Can you have cash and stocks & shares ISAs?
In a nutshell: yes, you can. As long as you keep below the £20,000 limit each year, you can split your savings over cash and stocks & shares ISAs.
They can have different rules about accessing your money. So, for example, you might have to agree to a notice period to get better rates on a cash ISA.
A general rule of thumb is that if you’re saving for shorter-term goals that are less than five years away, it could make sense to use a cash ISA.
If you’re planning further ahead, then a stocks & shares ISA may be a better option as there’s time for your investments to grow and potentially recover from any market setbacks. As with any investment, the value of a stocks & shares ISA can go down as well as up and it could be worth less than you paid in.
Shop around to beat inflation
With record low interest rates in the UK, there’s a risk of inflation eating into the value of your savings in real terms if you don’t find the right home for your money. So it’s more important than ever to think carefully and shop around. There’s more about how investing can help avoid the impact of inflation here.
You can find out about the different types of ISA available, including Lifetime ISAs and Junior ISAs, which can help you save towards a home or retirement, or for children, on the ISA page of the government’s website.
And our ISA calculator can give you an idea how much a stocks & shares ISA could be worth in the future.
Why save now?
Although lockdowns are beginning to ease, we all know we’re a long way from normal, and the possibility that we could have to lock down again in the months ahead is on everyone’s mind.
Many people are wondering if their businesses will recover, if their jobs will continue, if they’ll have as much money coming in every month as they did before lockdown. If you do have any money to spare at the moment, then it could be the ideal opportunity to boost your savings, to help you feel a bit more confident about the future.
Self-employed maths and physics tutor, Sam, who is 22, saw his income take a dramatic hit with lockdown: “I was just coming up to the really busy pre-exam season, when everyone is panicking and wanting lots of tutoring. I was fully booked for weeks. Then the schools closed, the exams were cancelled, and I went from 13 clients to two.
“Luckily, I still live with my parents and I was able to claim universal credit. But the experience was a shock. I already have a stocks and shares ISA with some money in it and now I’m focused on putting away as much as I can, with the aim to grow my savings. My clients are slowly coming back, and I’ve got a target amount to save to buy my own flat. I was quite careful with my money before the lockdown, but now I think I’m going to be really careful.”
There’s lots of information about what the impact of coronavirus means for your savings and investments in our Covid-19 Support section.
What to save for?
Many people saw their spending levels fall during lockdown. With no commuting, no nights out, no weekend trips, holidays or minibreaks, debit and credit cards got a rest (credit card spending fell by 50% at the start of lockdown) for those who didn’t see their income drop.
As lockdown eases, it looks as if many plans can start to become a reality once again. The wedding that had to be postponed could be happening next year. Cancelled holidays are being rebooked. You can once again make an appointment with the builders to discuss that extension or new kitchen. For all these reasons, it could make sense to consider your ISA options and start to build up your savings reserves once again.
Every £1 in an ISA can grow tax free. And with every additional £1, you can feel a little better cushioned against the unexpected.Set up a Stocks & Shares ISA
The value of your investments can go down as well as up and may be worth less than you paid in.
Laws and tax rules may change in the future. The information here is based on our understanding in August 2020. Your own circumstances also have an impact on tax treatment.