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Iona Bain: Hello, I'm Iona Bain, and welcome back to A Little
Iona Bain: Bit Richer, the podcast where we break down big financial
Iona Bain: topics into digestible steps for your future. Now, today we
Iona Bain: are revisiting a topic that is essential for your long-
Iona Bain: term financial health, and that's individual savings accounts, aka ISAs.
Iona Bain: With new changes announced in the autumn budget regarding cash
Iona Bain: ISA limits, the ISA landscape is shifting. So we wanted
Iona Bain: to dive deeper into the different types available so that
Iona Bain: you can decide which one fits your current life stage.
Iona Bain: So whether you're saving for your first home or your
Iona Bain: next home, starting a family, or you're just trying to protect
Iona Bain: your hard- earned money from inflation, understanding these tax efficient
Iona Bain: wrappers is a total game- changer. And to help us
Iona Bain: do all this is Paula Hughes. Paula works in the
Iona Bain: ISA product team at L& G and so is very
Iona Bain: well placed to give us some insights on this particular
Iona Bain: topic. So Paula, to kick things off, I'm going to
Iona Bain: put you on the spot, but I think you can
Iona Bain: handle it. Can you explain why we should care about
Iona Bain: ISAs in 30 seconds or less? Are you ready?
Paula Hughes: I think so.
Iona Bain: You'll nail it.
Paula Hughes: First of all, we have to start with the fact
Paula Hughes: that they're tax- free, and that means that you can
Paula Hughes: have a tax- free interest on your savings if that applies
Paula Hughes: to you. And also as it grows, it's tax- free
Paula Hughes: growth as well. So no capital gains tax. There are
Paula Hughes: different types of ISAs for different needs, so hopefully people will
Paula Hughes: be able to see the one that suits those. And
Paula Hughes: I think finally, the earlier start, the better it is
Paula Hughes: as you have that compound effect of interest growing over time.
Iona Bain: Oh, you just did it.
Paula Hughes: Just did it. Great.
Iona Bain: Well done. So can you talk us through the main types of ISAs
Iona Bain: that are available and how you would know which one
Iona Bain: to choose?
Paula Hughes: Yeah. And it can be quite overwhelming because there's four
Paula Hughes: main types of ISA all with a slightly different own
Paula Hughes: rules as well. So if I try and break that
Paula Hughes: down as simply as possible. So the most common one
Paula Hughes: that people tend to know about is the cash ISA,
Paula Hughes: and that is for cash savings. The next one is
Paula Hughes: a stocks and shares ISA, and that's for investing. So
Paula Hughes: a stocks and shares ISA can take various different forms.
Paula Hughes: You can invest directly in the stock market, or you
Paula Hughes: can invest through investment funds, and the fund manager chooses
Paula Hughes: those stocks and shares for you. With a stocks and
Paula Hughes: shares ISA, any amount that grows in the fund is tax-
Paula Hughes: free. So those dividends don't have income tax and also
Paula Hughes: any growth is free of capital gains tax as well.
Iona Bain: Right.
Paula Hughes: So they're the first two main ones. They're available to
Paula Hughes: anybody in the UK who's over 18. And then we
Paula Hughes: have two other ISAs that are restricted to ages and specific
Paula Hughes: saving goals. The first one is a lifetime ISA, sometimes
Paula Hughes: called a LISA or a LISA, depending on how you want
Paula Hughes: to pronounce it. These are available to 18 to 39- year-
Paula Hughes: olds and they're for two specific saving goals. So firstly,
Paula Hughes: buying a home and secondly, retiring. The benefit of a
Paula Hughes: LISA is the government can also add a bonus for
Paula Hughes: you, but you should be aware that if you don't
Paula Hughes: save for one of those goals for a different reason, or
Paula Hughes: if you want your money out early, then you could
Paula Hughes: forfeit the bonus and also have a penalty included. So
Paula Hughes: that's something to watch out for with a LISA.
Iona Bain: Yeah, you've got to really commit to it.
Paula Hughes: Absolutely. Then there's a junior ISA, which as it says
Paula Hughes: on the tin is for children's savings. And lastly, an
Paula Hughes: innovative finance ISA, which is difficult sometimes to say, but
Paula Hughes: that's more of a niche product and it's peer- to-
Paula Hughes: peer lending that comes with a higher risk. So quite
Paula Hughes: a lot of choice, I would say. And I think
Paula Hughes: to your first question really, how do you choose between
Paula Hughes: all of that? It's a personal decision, but I think
Paula Hughes: really you start off with thinking, what are you saving
Paula Hughes: for? What your savings goals? Over what time horizon? When
Paula Hughes: do you want access to your money? And how flexible
Paula Hughes: do you want that accessibility to be? And what kind
Paula Hughes: of risk do you want to take? Is it zero risk
Paula Hughes: or is it higher risk? So just think about the
Paula Hughes: types of risk, and that could be different risk for
Paula Hughes: different time horizons. If you're not sure and you just
Paula Hughes: want to save just because you've always thought you should
Paula Hughes: be saving for the future, then maybe choose something that's
Paula Hughes: got less restrictions on it and without any penalty if
Paula Hughes: you did need to get your money out sooner than
Paula Hughes: you might intend.
Iona Bain: That's a really helpful overview, Paula, because at first glance,
Iona Bain: the ISA family does seem a bit daunting, but actually
Iona Bain: you broke that down in a really, really easy to
Iona Bain: understand way. But how do you know which one to choose?
Paula Hughes: Just start small. And if you think about whether you
Paula Hughes: want to mix and match, maybe do a little bit
Paula Hughes: in cash, first of all, because cash is familiar to
Paula Hughes: lots of people. And as your confidence grows, think about
Paula Hughes: a stocks and shares ISA that does have lower risk
Paula Hughes: funds as well. So you can just start and as
Paula Hughes: your confidence grows, you can build as you go along.
Iona Bain: Always being aware that there is risk with stocks and
Iona Bain: shares ISAs.
Paula Hughes: Absolutely. Yes. Thank you for keeping me honest there. There
Paula Hughes: is a risk with stocks and shares ISA. So whilst investing
Paula Hughes: does have the potential and aligned to outperform cash, there
Paula Hughes: is a risk to stocks and shares ISA. It is
Paula Hughes: an investment. So I think that's a really good point
Paula Hughes: in terms of how you choose to think about your
Paula Hughes: savings horizons. So broadly speaking, cash is short- term savings,
Paula Hughes: so below five years. Stocks and shares ISA tends to
Paula Hughes: be medium to longer term savings, five years plus. And
Paula Hughes: the reason we say that is because it's invested in
Paula Hughes: stocks and shares, which goes up as well as down.
Paula Hughes: So hopefully you can ride out those fluctuations to have
Paula Hughes: an upward trend over the five years plus.
Iona Bain: That's good to know. And anyone who has a cash
Iona Bain: ISA, would they be paying tax on the interest that
Iona Bain: they earn anyway, even if they didn't have a cash ISA?
Paula Hughes: So not necessarily. It does depend how much you earn. So
Paula Hughes: if you're a basic rate taxpayer, you can have up to 1,
Paula Hughes: 000 pounds on interest, for a higher rate taxpayer that goes
Paula Hughes: down to 500 pounds. And if you've got an additional
Paula Hughes: taxpayer, it goes down to zero. So it does depend
Paula Hughes: really on how much you earn, but also if you think
Paula Hughes: about, for example, stocks and shares ISA, that could grow
Paula Hughes: over time to quite significant amounts. And you might find
Paula Hughes: yourself in a position where you might have to pay
Paula Hughes: capital gains tax. So everybody, I guess, is unique to
Paula Hughes: their own tax position.
Iona Bain: And interest rates are also really important, but you might
Iona Bain: not necessarily always get the best deals on cash ISAs
Iona Bain: compared to other types of savings. Is that right?
Paula Hughes: That's absolutely correct. Yes.
Iona Bain: And when it comes to deciding whether to take out
Iona Bain: a cash ISA, what should people be looking at? Because
Iona Bain: often interest rates play a big factor in people deciding where
Iona Bain: to put their savings.
Paula Hughes: There are so many cash savings account in the market, both
Paula Hughes: cash ISAs, and also just standard cash savings account as
Paula Hughes: well to look at all the different interest rates that
Paula Hughes: are payable and just make sure that you're getting the best
Paula Hughes: one for your money. So it's really important with any
Paula Hughes: savings vehicle, and this goes for stocks and shares, check
Paula Hughes: the fees, check the charges as well, because there are
Paula Hughes: some charges with stocks and shares ISA, and just do
Paula Hughes: a comparison to make sure that you're going to be
Paula Hughes: better off, I guess, from investing in these areas as
Paula Hughes: opposed to maybe some accounts that you might be leaving.
Iona Bain: So you mentioned about cash ISA limits before. In the
Iona Bain: autumn budget, there were some changes to those limits. Can
Iona Bain: you talk about that and why the government has decided
Iona Bain: to make those changes and what that might mean for people?
Paula Hughes: As an ISA geek, it's a really exciting time for ISAs
Paula Hughes: in April 2027. The limits are applying to the cash ISA,
Paula Hughes: as you say, and we are a nation of cash
Paula Hughes: savers. We love cash in the UK, which is great.
Paula Hughes: Cash is not a bad thing. It's absolutely got its
Paula Hughes: place. However, it's not maybe the best place to put
Paula Hughes: your money over the longer term, because obviously the effect
Paula Hughes: of inflation does downgrade the value, I guess, of cash
Paula Hughes: purchasing power over longer term. So the government obviously recognizes
Paula Hughes: this and wants to create a culture of investing in
Paula Hughes: the UK. And so it's made some changes to the
Paula Hughes: cash ISA allowance to try and encourage people to start
Paula Hughes: thinking about maybe investing in things like stocks and shares
Paula Hughes: ISA to complement their cash savings. So the changes they've
Paula Hughes: made are to the amount you can put in to
Paula Hughes: the cash ISA. It's probably worthwhile just spending a little
Paula Hughes: bit of time of where we are now and what
Paula Hughes: those changes are going to. So in terms of the
Paula Hughes: amount you can put in, you can put 20, 000 pound per person, per tax
Paula Hughes: share. So historically with a cash ISA and stocks and shares
Paula Hughes: ISA, you could put all your 20,000 pounds into the
Paula Hughes: cash ISA if you wanted to. Obviously it's a generous amount.
Paula Hughes: Most people don't have the 20,000 pounds to invest in
Paula Hughes: there, but if you have, that's great and you could
Paula Hughes: do that. What the government will be doing from April
Paula Hughes: 2027 for under 65s is limiting the amount you can
Paula Hughes: put within that 20,000 pound allowance into cash to 12, 000
Paula Hughes: pounds. And that's to encourage people to start thinking about
Paula Hughes: investing in the stocks and shares ISA.
Iona Bain: I see. So the change here is that if you
Iona Bain: had 20,000 pounds to put into a cash ISA, now
Iona Bain: you're limited to 12, 000 pounds, maybe, so the thinking goes,
Iona Bain: you'll put the other 8, 000 into a stocks and
Iona Bain: shares ISA.
Paula Hughes: Yes. That is the hypothesis. But of course, I think
Paula Hughes: along with that, it's really important to have lots of financial
Paula Hughes: education for people to understand a little bit more about
Paula Hughes: stocks and shares ISA, especially if it's the first time
Paula Hughes: that people have considered investing.
Iona Bain: Yeah, absolutely. And if somebody has a preference to save
Iona Bain: into cash rather than invest in stocks and shares, what
Iona Bain: would you say to them?
Paula Hughes: Cash is a really good savings vehicle and it's here
Paula Hughes: to stay. It's familiar with people. It gets people starting
Paula Hughes: saving, which is one of the big gaps in the
Paula Hughes: UK in terms of people saving for building financial resilience.
Paula Hughes: However, it's probably not the best place potentially to put
Paula Hughes: your money for the longer term. And that's because over
Paula Hughes: time, cash tends to not be able to keep up
Paula Hughes: with purchasing power because the effect of inflation. If you
Paula Hughes: think about 5, 10 years ago, the price of buying
Paula Hughes: a bar of chocolate even compared to now, but yeah,
Paula Hughes: cash does struggle to keep up with the purchasing power.
Paula Hughes: Whereas if you're investing, that does have the potential to
Paula Hughes: outperform cash because of the different places it invests in. However,
Paula Hughes: as you say, it can go up as well and
Paula Hughes: down, so it's not guaranteed, which is why we say you need
Paula Hughes: to think about it for five years plus to eke out
Paula Hughes: those market fluctuations. So I don't think it's a case of
Paula Hughes: cash or investing. I think it's a case of cash
Paula Hughes: and investing.
Iona Bain: Yeah.
Paula Hughes: So just do both of them because they both compliment
Paula Hughes: each other. Cash for the shorter term, investing for the
Paula Hughes: medium to longer term.
Iona Bain: Yeah. Team cash and team investing.
Paula Hughes: Yeah. And I tell you, Gen Z have got it right.
Paula Hughes: So it's about 40% of 18 to 25 year olds already holding
Paula Hughes: investments. So the power of social media for financial education
Paula Hughes: has really worked for a force of good there.
Iona Bain: Yeah. And starting young could really benefit them in the
Iona Bain: long term if they're already investing aged 18, 19, 20.
Paula Hughes: The earlier you start, like anything, the better it is.
Iona Bain: Yeah, that's definitely something to consider. Food for thought. Now
Iona Bain: we're coming into ISA season now. This is something that
Iona Bain: people might see in the media. They might wonder, what
Iona Bain: on earth is ISA season? It does not sound as
Iona Bain: fun as other types of seasons, but there are some
Iona Bain: smart things that people should do before the new tax
Iona Bain: year starts, especially when it comes to their ISA. Can
Iona Bain: you talk me through what those might be?
Paula Hughes: Yeah. So ISA season, as you say, which is really
Paula Hughes: exciting for people like me, but not necessarily as exciting
Paula Hughes: as other seasons like Christmas.
Iona Bain: Hey, look, maybe we can make it trendy and cool and fun
Iona Bain: and exciting.
Paula Hughes: That's exactly what I aim to try and do. Yeah.
Paula Hughes: So in terms of April being, I guess the important
Paula Hughes: date, as we said, if you are lucky enough to
Paula Hughes: be able to have 20,000 pounds of that allowance to invest,
Paula Hughes: then the clock does restart on the 6th of April.
Paula Hughes: So make sure that you do it before the 5th of
Paula Hughes: April, otherwise you will lose that allowance. So that's the
Paula Hughes: first part of why April is so important. But even
Paula Hughes: if you're not looking to invest 20, 000 pound, which the
Paula Hughes: majority of people don't, I think it's always good to
Paula Hughes: have a goal to look at your personal finances, certainly
Paula Hughes: for myself. Otherwise, it's one of those things that you
Paula Hughes: mean to do and you never quite get around to
Paula Hughes: it because there's always more exciting things to think about.
Paula Hughes: So in terms of April and ISA season, it's a
Paula Hughes: good time to think about starting to save. Just start
Paula Hughes: to invest. As we said, the earlier you start, the better
Paula Hughes: that can be over time. There's the thing called compound
Paula Hughes: interest, which is if you start investing now, not only
Paula Hughes: do you have tax- free interest in ISA on the amount
Paula Hughes: you invest, but also you have interest on that interest
Paula Hughes: as well. So start investing or saving. If you're already
Paula Hughes: doing it, think about increasing the amount you put in
Paula Hughes: just a little bit. You can increase from a pound,
Paula Hughes: 5 pounds. It doesn't have to be a lot. If
Paula Hughes: you've already done an ISA, great. Well done. Fantastic.
Iona Bain: Tick.
Paula Hughes: But just maybe think about reviewing the fees and the
Paula Hughes: charges in your ISA, because ISA products are changing all
Paula Hughes: the time. It could be that you might be better
Paula Hughes: off transferring to a different product with lower charges or
Paula Hughes: better interest rates, which means more money in your pocket.
Paula Hughes: A word of warning there though, if you do look
Paula Hughes: at transferring, make sure you do it between the providers
Paula Hughes: rather than take the money out and then put the
Paula Hughes: money into another product. The reason for that is if
Paula Hughes: you do it between providers, you don't use your allowance.
Paula Hughes: If you take it out and put it in of yourself,
Paula Hughes: it goes towards your 20,000 pound allowance. So if you're going
Paula Hughes: to move money, ask the providers to do that between
Paula Hughes: themselves, not taking the money out and reinvesting.
Iona Bain: You don't touch it yourself.
Paula Hughes: Don't touch it yourself.
Iona Bain: You let them take care of it.
Paula Hughes: Absolutely. Absolutely.
Iona Bain: And can you just quickly talk us through the different
Iona Bain: options available if you're interested in taking out a stocks
Iona Bain: and shares ISA?
Paula Hughes: So you do have options in terms of the types
Paula Hughes: of stocks and shares ISA you want as well. So you can
Paula Hughes: either choose to invest directly into the stock market where
Paula Hughes: you choose individual company funds and stocks and shares, or
Paula Hughes: you can invest via something called an investment fund where
Paula Hughes: the fund manager chooses underlying stocks and shares for you.
Paula Hughes: So it really depends how involved you want to be
Paula Hughes: in choosing those underlying investments, or if you just want to
Paula Hughes: leave it to an investment fund manager to do that
Paula Hughes: picking for you.
Iona Bain: So let's just chat briefly about myths surrounding ISAs and
Iona Bain: investing. And these might put people off. Let's try and
Iona Bain: bust some of those myths.
Paula Hughes: I think the first one really is that you need
Paula Hughes: a lot of money to start investing, and that is
Paula Hughes: not the case. So for most stocks and shares ISAs,
Paula Hughes: they start from about 20 pounds a month. There are
Paula Hughes: some that start lower than that, but that's broadly the
Paula Hughes: amount that they start from. And you can stop, start,
Paula Hughes: add to that whenever you want. So it's pretty flexible.
Paula Hughes: So it's not as if once you start, you're committed to
Paula Hughes: that forever and a day, you've got the flexibility to
Paula Hughes: do that. Obviously we say thinking about it as a five- year plus
Paula Hughes: horizon, but you can get your money out with most
Paula Hughes: stocks and shares ISAs without penalties. And that's another myth
Paula Hughes: that once you start, you're not going to be able to get your
Paula Hughes: money out for five years. You can, we just say,
Paula Hughes: just be aware that if you take your money out
Paula Hughes: and the stock market's down, that your value might have
Paula Hughes: gone down at that point.
Iona Bain: Right. Yeah.
Paula Hughes: I think another myth as well is that you need
Paula Hughes: to be almost like a wolf of Wall Street to
Paula Hughes: know everything about investing. Again, that's not true. There are
Paula Hughes: lots of guidance out there. There are funds that help
Paula Hughes: you choose the risk you want to take, and this
Paula Hughes: is the fund for you to support you along that
Paula Hughes: journey. And finally, a really important myth that people have is the 20,
Paula Hughes: 000 pounds figure. It tends to get confused, I think,
Paula Hughes: with value and contribution. So lots of people think, " I've
Paula Hughes: already got 20,000 pounds in my ISA now. That's it.
Paula Hughes: I can't pay into another ISA because I've hit the
Paula Hughes: limit." The limit is the amount you put in. So
Paula Hughes: your value of your ISA has nothing to do with that 20,
Paula Hughes: 000. It could go up and up and up infinitum.
Paula Hughes: It's just the amount that you put in per tax
Paula Hughes: year as opposed to the value.
Iona Bain: So this has been really enlightening. I think people will,
Iona Bain: if they're like me, want to go and have a
Iona Bain: cup of tea or a cup of coffee to think
Iona Bain: about what we've been discussing today. So whilst they wait
Iona Bain: for the kettle to boil, what is one thing that
Iona Bain: people can do to get started with their ISAs?
Paula Hughes: I would say the earlier you start, the better it is
Paula Hughes: from that compound interest we said. So growth upon growth
Paula Hughes: upon growth. And just get started. It's not complicated at
Paula Hughes: all. You can start from as little as five pounds
Paula Hughes: a month if you're looking at cash ISAs or maybe
Paula Hughes: 20 pounds a month for stocks and shares. So get
Paula Hughes: started. You can always stop. Take that first bold move.
Iona Bain: Couldn't have put it better myself. Paula, thank you so much.
Paula Hughes: Thank you.
Iona Bain: Well, that's all we've got time for today. I hope
Iona Bain: that that cleared up some of the myths around ISAs
Iona Bain: and inspired you to get stuck in. If you enjoyed
Iona Bain: this episode, why not share the podcast and help others
Iona Bain: get a little bit richer too? Next time, we have
Iona Bain: a special two- part series all about investing, how to
Iona Bain: start, how to manage your emotions, and how to grow
Iona Bain: your money for the long- term with friend of the
Iona Bain: show, Emilie Bellet from The Wallet Podcast. This podcast is
Iona Bain: brought to you by L& G. You can keep up
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Iona Bain: next time, see you soon and thanks for listening and watching.