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How Can ISAs Protect Savings?

If you’re looking for an efficient savings vehicle that is simple to understand and will shelter your hard-earned cash then ISAs are a good option to consider.

You can save as much or as little as you like – as long as you stick to your annual allowance, and over time build a substantial savings pot to be put towards a rainy day fund, say, property purchase, or retirement.

Slotting spare cash into an ISA protects your savings by keeping it out of the taxman’s hands. This is the primary benefit of using these savings wrappers – as your investment will accumulate value without being liable to income or capital gains tax – unlike other savings accounts. The eligibility to invest in an ISA will depend on your individual circumstances, and all tax rules may change in the future.

Saving through the stock market

Coping with the highs and lows of the stock market can prove tough – but by saving on a regular basis you can reduce your risk and protect your cash from the taxman.

Over time, stocks and shares ISAs may provide greater long-term growth than cash ISAs – and you have greater choice of what to include in them. Diversifying your investments is simple using stocks and shares ISAs, as you can slot anything in these wrappers from shares to property – or funds that include a wide range of stocks to spread risk.

The maximum that can be saved into a stocks and shares ISA is £10,680 this tax year, rising to £11,280 from April 6. However, these allowances are reduced by anything that is already saved into a cash ISA.

As stocks and shares investments rise in value, the tax-efficient status of ISA wrappers becomes more beneficial as the amount of CGT you might be liable for increases if you were to encash the fund.

Saving monthly to cope with highs and lows

Regular savings can smooth the rollercoaster stock market ride, to help protect your investment. This is called pound cost averaging. It enables investors to smooth the highs and lows of stock market investing and therefore reduce any fear that market volatility will wipe out gains.

How it works is simple. If share prices are rising one month, your contributions buy fewer fund units, but then you may also have one month when you buy at the bottom of the market, when share prices are cheap - so those same contributions buy more units.

Pound cost averaging works most effectively in volatile markets, when you’re getting regular opportunities to buy relatively cheaply – and over time could see your investment significantly boosted.

By making regular savings into a stocks and shares ISA you no longer have to fear which way the stock market will move next. After all, the biggest risk for lump sum ISA investors is that they make their annual investment at the top of the market, and the following week share prices fall and see their investment reduced. The value of investments can go down as well as up and you may get back less than you invested.

Saving towards retirement

If you withdraw funds from your ISA you can’t replace that portion of your allowance, and you’ll lose the tax benefits going forward for that slice of your savings. So this protects savers in another way – from themselves! As they’re more likely to leave their cash in place to accumulate over time, safe in the knowledge that it’s not locked up until retirement like pensions. Therefore, if the need arises, you can access your money held in an ISA to pay for an unexpected bill.

Of course, you don’t have to use ISAs to fund retirement. The beauty of these wrappers is their flexible nature, alongside their protective benefits – so don’t delay, make sure you use your annual allowance.

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