why put funds in ISA ?

Eco_Miser

EdGasket wrote: »

The downside of a S&S ISA as I see it is that when you sell something you either have to let the money sit there uninvested and earning no interest, take it out and lose ISA status, or reinvest it.

You've now got a fourth option: transfer it to a cash ISA and let it sit there earning 1-2% interest.

Gadfium

Its also worth remembering that whilst interest rates are probably not going to increase in the short term (probably well into next year), they will rise at some point. Any cash held in an ISA now will be sheltered from tax on interest forever (or, at least until the gubermint bins ISAs). So while you won't earn much in the way of interest today, you are protecting any possible future interest from tax. Worth considering if you want to hold cash in the long term.

Archi_Bald

Gadfium wrote: »

Its also worth remembering that whilst interest rates are probably not going to increase in the short term (probably well into next year), they will rise at some point.

Or they may never rise by any significant amount again. Japan has had 0% rates for 20 odd years, why shouldn't we, too. Switzerland has been having negative rates for a few month now. Why shouldn't we, too.

http://www.telegraph.co.uk/finance/comment/jeremy-warner/11373011/Sadly-for-all-our-futures-cheap-money-is-here-to-stay.-Just-get-used-to-it.html

But we are at risk of getting side-tracked - this thread is about investments, not savings.

talexuser

Excellent article which confirms my opinion that the periodic talk of rates rising soon is just so much cr*p. After six years, it's incredible people still fall for it.

jem16

happyhero wrote: »

I understand that I would pay tax taking income as a pension but you get a 20% boost going in which can be grown to be more.

A common misconception.

As a basic rate taxpayer getting 20% relief, the only gain is in the tax-free lump sum as the remaining 75% is taxed at 20%.

masonic

jem16 wrote: »

A common misconception.

As a basic rate taxpayer getting 20% relief, the only gain is in the tax-free lump sum as the remaining 75% is taxed at 20%.

Well not necessarily the whole 75%. It depends what is left of the pensioner's personal allowance after other income is taken into account. Anyone stopping work prior to the commencement of their state pension could potentially receive considerably more than tax free than the 25% lump sum and may well be able to receive some tax free even thereafter.

TheTracker

jem16 wrote: »

A common misconception.

As a basic rate taxpayer getting 20% relief, the only gain is in the tax-free lump sum as the remaining 75% is taxed at 20%.

... for withdrawals above the annual tax free allowance. And you get the compounding of that deferred 20ish% being invested. [Edit: not true after Jem16s explanation]. But I agree with the sentiment, the talk of 20% "free money" is a pet peeve.

jem16

masonic wrote: »

Well not necessarily the whole 75%. It depends what is left of the pensioner's personal allowance after other income is taken into account. Anyone stopping work prior to the commencement of their state pension could potentially receive considerably more than tax free than the 25% lump sum and may well be able to receive some tax free even thereafter.

Agreed - really depends on the individual.

TheTracker wrote: »

... for withdrawals above the annual tax free allowance. And you get the compounding of that deferred 20ish% being invested. But I agree with the sentiment, the talk of 20% "free money" is a pet peeve.

There is no compounding effect from the 20% tax relief as you will pay more tax on the compounded growth which is what I meant with the common misconception.

For example;

£80 invested into an ISA with growth at 5%pa for 10 years would give £130
- no tax to pay.

£80 invested into a pension plus £20 tax relief gives £100. After 10 years at 5%pa growth that is now £163.

If all of that £163 is taxable at 20% you will have £130.40 net.

The difference is probably down to rounding in the calculations for the compound growth.

masonic

jem16 wrote: »

There is no compounding effect from the 20% tax relief as you will pay more tax on the compounded growth which is what I meant with the common misconception.

Yes, agreed.

Probably the simplest way to consider this is that [(Contrib / 0.8) x Growth] x 0.8 = Contrib x Growth
i.e. the tax relief and tax deducted after growth cancel out

TheTracker

masonic wrote: »

Yes, agreed.

Probably the simplest way to consider this is that [(Contrib / 0.8) x Growth] x 0.8 = Contrib x Growth
i.e. the tax relief and tax deducted after growth cancel out

Yes indeed but the tax relief is on the full contribution and the tax deducted only on a portion of contribution x growth. Anyway I'm the last to defend the power of the 20%, I dislike the free money overhyping as I said.