Stop believing these five ISA myths

The value of your investments and the income you receive from them can go up and down, and you may get back less than you invest. Any examples are for illustration purposes only. ISA eligibility and tax rules apply.

We’re on a mission to build up the UK’s ISA confidence. That means clearing up all those half understandings, misconceptions and general question marks around stocks and shares individual savings accounts (ISAs). Here are five of the most common ISA myths out there, along with a few reality checks to set the record straight.

Reality: The ISA is just the outer shell; you might hear it called a ‘tax wrapper’ too. It makes sense because all it does is wrap your investments and make them tax efficient (you don’t pay UK tax on any gains you make inside an ISA). So, there’s nothing risky or risk-free about the account itself, rather it depends on the mix of assets you invest in and that’s up to you. That means it’s a good idea to get familiar with how to start investing, the benefits of diversification and what we actually mean by investment risk, before you start.

If you’re used to cash savings or cash ISAs, you might not have thought about investment risk or volatility before and it’s true that you step onto the risk ladder when you invest. With that risk comes potential return, though, and it’s worth remembering that hoarding cash comes with its own perils, namely the risk of your savings growing at a slower rate than the prices are rising in the shops, or inflation risk.

Reality: Nope, it isn’t. Sometimes people confuse ISAs with pensions - that’s understandable as both are tax-efficient accounts. But, whereas you can only withdraw money from your pension when you reach a certain age (currently 55, rising to 57 from 2028) you can sell an investment and take the money out of your stocks and shares ISA whenever you like. Just keep in mind that the most basic building block of long-term investing, compound interest, works better the longer you leave it. Ideally, investors would hold their asset for at least five years in a bid to iron out any short-term ups and downs but that doesn’t stop you accessing your investments when it suits you. Just be aware that investments naturally move up and down over time and you might get back less than you invest - that’s why time and compounding are such crucial parts of the equation.

Reality: You really don’t but our Freedom to Invest survey shows just how many people have this wrong in their heads. On average, respondents thought we all need £2,383 to get started yet, with Robinhood, you can invest in a stocks and shares ISA with just $1.

Part of that is down to the beauty of fractional shares. Rather than having to buy a whole share in a company, which may cost hundreds or thousands of dollars, you can buy a fraction of one with your $1. It gives you the flexibility to invest as much as you want in the companies you believe in, or get your toes wet without committing to an entire share. Since you’re not locked into purchasing full shares, you can diversify your portfolio with smaller amounts of money too.

Reality: Ah, so close. You can put up to £20,000 into your stocks and shares ISA each tax year (6 April to 5 April), which you can then use to invest. It’s ‘use it or lose it’ meaning that £20,000 allowance starts afresh each April and there’s no limit to how much growth you’re allowed to achieve tax efficiently. There are ISA millionaires out there who have tipped into the two-comma club thanks to a mix of consistently adding to their stocks and shares ISAs each tax year and achieving growth on their investments.

Even if you don’t join the ISA milli club, the whole point is that everything inside the account is allowed to grow free of UK tax, with a new allowance landing every year. So, remember that £20,000 figure refers to how much you can put in each tax year, not how much growth your investments are allowed to achieve.

Reality: You don’t need to scour balance sheets before bed or watch Bloomberg over breakfast to use a stocks and shares ISA. To open your account, you need to be 18 or over and a UK resident for tax purposes. Crown employees and members of the armed forces living abroad are also eligible. That’s it - no expertise required.

Remember, you don’t need to fill up your £20,000 allowance each tax year or try to unearth the next world-changing stock. You can use a stocks and shares ISA in a way that suits you, your saving and investing habits, financial goals and attitude towards risk.

Despite all the mysterious misconceptions, stocks and shares ISAs are actually pretty straightforward. They’re one of the most helpful tools for long-term investors and you don’t need a PhD or secret handshake to kick yours off. Just remember their job is to provide a layer of tax efficiency for your investments and if that’s something you think could help, a stocks and shares ISA might be worth exploring.

Important information

When investing, your capital is at risk. The value of your investments, and the income you receive from them, can go down as well as up and you may get back less than you invest. Forecasts aren’t a reliable guide to future results or returns.

Make sure to do your own research on what investments are right for you before investing or consider seeking expert financial advice. Please note that this article is meant for information and does not constitute any financial advice. This is not an offer, recommendation, inducement or invitation to buy, sell, or hold any securities, or to engage in any investment activity or strategy.

Robinhood doesn’t provide tax advice. You should seek advice if you have any questions regarding the impact your investments will have on your income tax and tax filing requirements.