What is an income ISA?
An income ISA is a way of using your ISA allowance that aims to provide you with a regular tax-efficient income payment on your investment or savings. Income may be paid on a quarterly, semi-annual or annual basis, so you can choose an option to suit your savings goals. Your ISA allowance for 2016/17 is £15,240 per person. You are permitted to invest all or part of this amount in an investment ISA, or part of this amount in a cash ISA and the remainder in stocks and shares.
What types of income ISA are available?
There is a wide range of income ISAs available. You can select income funds covering all major geographical regions of the world. You can choose income funds with different investment risk profiles and growth objectives, including income equity funds, bond funds, property funds, specialist funds, and cash funds Income ISAs offer you the flexibility to make the most of your ISA allowance in a way that suits you. You can choose from income funds that invest in equities or funds that invest in corporate bonds. If you're looking to earn an income from your investment then there is a wide range of income fund ISAs that can help you to reach your investment goals. Another option for those who are seeking income is a structured deposit plan. These are plans with a defined term, typically 3 to 6 years, which offer a rate of return that’s defined at the outset. The plans are usually linked to stock market performance.
A income ISA might suit you if:
- You want to use your ISA allowance to maximise your potential for income from your investments, especially at this time of low interest rates. The money you invest in an income ISA can offer the potential for tangible tax savings.
- You want to hold shares and increase your ISA amount over the long term - capital gains are 100% tax-free when held in an ISA.
- You're looking to invest for the medium to long term - investment-based ISA accounts generally perform better over time than cash-based accounts.
- You're saving with your retirement in mind. Many people use their yearly ISA allowance to invest in income-yielding plans - the result of which can generate a tax-free income during retirement. In fact, recent data shows that savers are now putting more money into ISAs than into pension schemes.
- You want to combine a straightforward, tax-free cash savings account with the benefit of regular income payments.
An income ISA might not suit you if:
- You're only saving for a short-term goal. Because the income on your ISA pays out at regular intervals - for example, once a year - you may miss out on the benefits of this if you withdraw earlier. If you do decide to use an income ISA for a short-term savings goal, make sure you choose one that pays out income at more frequent intervals, such as once every quarter.
- Your first priority is to establish an emergency fund that you can easily access if something unexpected occurs. In this case, an instant access cash ISA might be more suited to your requirements.
To view more options for stocks and shares fund ISAs see the Fair Investment Company Select 100.